Special Purpose Entities After General Growth 1:45 p.m. - 3:15 p.m. October 15, 2009

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Roland McKinney
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1 2009 ANNUAL MEETING AND EDUCATION CONFERENCE American College of Investment Counsel New York, NY Special Purpose Entities After General Growth 1:45 p.m. - 3:15 p.m. October 15, 2009 Nancy A. Mitchell Greenberg Traurig, LLP (Moderator) Lorie R. Beers KPMG Corporate Finance Richard F. Hahn Debevoise & Plimpton LLP Lisa M. Sloan Greenberg Traurig, LLP

2 General Growth Properties: Are Bankruptcy- Remote Entities in Fact Bankruptcy- Remote? Richard F. Hahn October 15, 2009 Background General Growth is a publicly held real estate investment trust that owns or manages more than 200 shopping centers across the country On April 16, 2009, General Growth and most of its domestic subsidiaries, including 166 bankruptcy-remote special purpose entities (SPEs), filed voluntary bankruptcy petitions On May 14, 2009, the bankruptcy court entered cash management and debtor-in-possession financing (DIP) orders authorizing General Growth to access cash collateral generated by the shopping malls owned by the SPEs 2

3 Motions to Dismiss Lenders to approximately 20 SPEs filed motions seeking dismissal of their borrower s bankruptcy cases on the grounds that the bankruptcy filings were in bad faith Lenders principal arguments: The cases were filed prematurely because the SPEs were not in any immediate financial distress The SPEs failed to negotiate with the lenders prior to filing for bankruptcy General Growth replaced the independent managers of the SPEs with new managers on the eve of bankruptcy 3 Decision On August 11, 2009, the bankruptcy judge presiding over the case, Judge Allan L. Gropper, issued a decision denying the motions to dismiss Judge Gropper applied a two-prong test used in the Second Circuit which looks to Objective futility in pursuing a bankruptcy filing Bad faith in filing the petition 4

4 Objective Bad Faith: Prematurity Although the SPEs were current on debt service and none of the loans had a maturity prior to March 2010, Judge Gropper found that the SPEs were in varying degrees of financial distress due to Cross defaults to other financings Guarantees of other financings High loan-to-value ratios Uncertainty as to the prospects for refinancing Judge declined to establish an arbitrary rule that a debtor cannot file a Chapter 11 petition if the debt it is seeking to restructure is not due within one, two or three years 5 Family Filing Standard Citing decisions in U.I.P Engineered Products and Mirant, Judge Gropper applied a family filing standard Whether to file a Chapter 11 petition can be based in good faith on considerations of the [corporate] group as well as the interests of the individual debtor Making frequent reference to General Growth s reliance on cash flow from the SPEs, Judge placed greater emphasis on the importance of the subsidiaries to the health of the bankrupt parent than on the benefits flowing to the subsidiaries from the relationship 6

5 Fiduciary Duties of Directors and Managers of LLCs In fact, Judge Gropper held that the directors and managers of the SPEs were obligated to consider the interests of General Growth in determining whether to authorize a bankruptcy filing Cited Delaware corporate law providing that the directors of a solvent corporation have fiduciary duties to the corporation s shareholders Discounted the modification to the fiduciary duties of directors and managers in the SPEs operating agreements pursuant to of the Delaware Limited Liability Company Act 7 Subjective Bad Faith Judge Gropper also rejected the argument that the SPEs bad faith was demonstrated by their Failure to negotiate with their lenders prior to filing bankruptcy petitions Replacement of independent directors and managers on the eve of the bankruptcy filings 8

6 Substantive Consolidation Judge Gropper stressed that the decision did not substantively consolidate the SPEs with General Growth The fundamental protections that the Movants negotiated and that the SPE structure represents are still in place 9

Akerman Practice Update

Akerman Practice Update FINANCIAL INSTITUTIONS August 2009 GGP Bankruptcy: Bankruptcy Remote Does Not Mean Bankruptcy Proof Joseph V. Gatti joseph.gatti@ dallas DENVER FT. LAUDERDALE JACKSONVILLE LOS ANGELES