In Re. General Growth Properties, Inc.

United States Bankruptcy Court, S.D. New York
62 Collier Bankr. Cas. 2d 279, 2009 Bankr. LEXIS 2127, 409 B.R. 43 (2009)

ELI5:

Rule of Law:

A Chapter 11 bankruptcy petition filed by a solvent subsidiary of a larger, financially distressed corporate group is not filed in bad faith when the decision is based on a reasonable business judgment considering the financial realities and restructuring needs of the integrated group as a whole.

Facts:

General Growth Properties, Inc. (GGP) was the parent of an integrated group of approximately 750 entities, primarily involved in owning and managing over 200 shopping centers.
The GGP Group's business model relied on refinancing large, short-to-medium term mortgage loans that had significant balloon payments at maturity.
In the latter half of 2008, a severe crisis in the credit markets, particularly the commercial mortgage-backed securities (CMBS) market, made it nearly impossible for the GGP Group to refinance its maturing debts.
Many of the project-level subsidiaries (the "Subject Debtors") were structured as Special Purpose Entities (SPEs) intended to be "bankruptcy-remote" to isolate their financial health from affiliates.
Despite the group-wide crisis, many individual Subject Debtors remained cash-flow positive and were not in default, with some of their loans not maturing for several years.
Faced with billions in maturing debt across the enterprise that it could not refinance, GGP's management, after extensive analysis with financial and legal advisors, determined a coordinated Chapter 11 restructuring was necessary to preserve the value of the entire group.
Shortly before the bankruptcy filing, GGP replaced the original "independent managers" on several SPE boards with new managers who had experience in complex restructurings.
On April 16, 2009, 360 entities within the GGP Group, including the Subject Debtors, collectively filed voluntary petitions for Chapter 11 bankruptcy.

Procedural Posture:

General Growth Properties, Inc. and 387 of its subsidiaries (the "Debtors") filed voluntary petitions for Chapter 11 bankruptcy in the U.S. Bankruptcy Court for the Southern District of New York.
Several secured lenders, including ING Clarion, Helios, and Metropolitan Life Insurance Company (the "Movants"), subsequently filed motions to dismiss the Chapter 11 cases of certain specific subsidiaries (the "Subject Debtors").
The Movants argued for dismissal primarily on the grounds that the Subject Debtors' bankruptcy petitions were filed in bad faith.
ING Clarion also contended that one Subject Debtor, Lancaster Trust, was ineligible to be a debtor under the Bankruptcy Code.
The Debtors and the Official Committee of Unsecured Creditors filed objections to the motions to dismiss.
The Bankruptcy Court consolidated the motions and held a hearing to consider the arguments for dismissal.

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Issue:

Does a solvent subsidiary's Chapter 11 filing, made in anticipation of future debt maturities and based on the financial distress of its parent and the broader corporate group, constitute a bad faith filing that warrants dismissal?

Opinions:

Majority - Gropper, J.

No. A solvent subsidiary's Chapter 11 filing, made in anticipation of future debt maturities and based on the financial distress of its parent and the broader corporate group, does not constitute a bad faith filing warranting dismissal. The court found that the Bankruptcy Code does not require insolvency or a specific degree of financial distress to file a petition, and a debtor is not required to wait until it is on the brink of financial collapse. Given the unprecedented and non-speculative collapse of the credit markets, it was a reasonable business judgment for the Debtors to conclude that they would be unable to refinance billions of dollars in debt coming due in the near future. The court held that it is appropriate to consider the financial interests of the corporate group as a whole, not just the individual filing entity, when assessing the good faith of a filing, especially in an operationally and financially integrated enterprise. Furthermore, under Delaware law, directors of a solvent corporation owe fiduciary duties to the corporation and its shareholders, meaning the independent managers of the SPEs were permitted, and likely required, to consider the interests of the parent company and the overall group. The surreptitious replacement of the independent managers and the failure to negotiate with lenders pre-petition were not acts of subjective bad faith under these circumstances.

Analysis:

This decision is a landmark in corporate bankruptcy, significantly shaping the application of the "good faith" filing doctrine to large, complex corporate enterprises. It validates a holistic, group-wide approach to restructuring, pushing back against a rigid, entity-by-entity analysis that lenders preferred. The ruling clarifies that the duties of independent managers in solvent Special Purpose Entities (SPEs) extend to the shareholders (the parent company), limiting the effectiveness of SPEs as truly "bankruptcy-remote" structures. This precedent encourages financially distressed but complex companies to seek Chapter 11 protection strategically and early to preserve enterprise value, rather than waiting for a disorderly, value-destroying series of individual defaults.

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