Assuming that there is no immediate need for new cash, chapter 11 has the potential to be an owner-controlled process, from the commencement of a voluntary case to being in sole control of the decision to sell assets under Section 363 of the Bankruptcy Code. This control, for at least some time, even provides the owner with the exclusive right to file a reorganization plan which may reinstate or impair and potentially cramdown debt, particularly over-secured debt. In response, lenders have sought to limit their risk of bankruptcy, through isolating their borrower, as well as their collateral, from business operations. The clash of these two perspectives is the focal point of a recent decision, General Growth Properties.1
Major commercial real estate developers, notably REITs, have been increasingly characterized by a complex labyrinth of subsidiaries, each of which relies on “project-specific” mortgage financing. In theory, this structure enables developers to access capital, often on a non-recourse basis, because the project benefits from the skill, capital and services of a large developer, but the credit risk focuses upon a particular development, its progress and prospects, independent of the success or failure of the developer’s other projects. With the advent of CMBS, CLOs and CDOs, commercial real estate financing continues, if not accelerates, the trend towards complex structures relying upon special purpose entities, often with governance and “bankruptcy remote” protections, such as independent directors or managers, to underscore isolating the insolvency risk to the particular SPE or project, and insulating the financing from insolvency in affiliated projects.
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