Samantha J. Rothman and Professors Douglas Baird and Joseph Pagliari Jr. discuss how the General Growth bankruptcy case has impacted SPEs, in theory and in practice.

1. Monday, November 16, 2015 1:36 PM ET
5 years later, General Growth bankruptcy case still resonates
By Tom Yeatts
It has been five years since General Growth Properties Inc. exited bankruptcy protection, and though the sting of that case — the largest bankruptcy ever
by a mall operator — has faded somewhat with the other trauma of the recession, the General Growth case continues to pique conversation in academic
and legal circles.
In re General Growth Properties Inc. was extraordinary not only for the size and name brand of the company involved but also for how the bankruptcy
judge orchestrated an effective reorganization, particularly apropos of the so-called special-purpose entities, or SPEs, that held most of General Growth's
properties.
"From a layperson's perspective, General Growth is General Growth," Douglas Baird, professor of law at The University of Chicago Law School, told SNL.
"But from a lawyer's perspective, it wasn't just one bankruptcy. It was in fact dozens of bankruptcies."
The General Growth case was similar to other large corporate bankruptcies in that the court was grappling with the financial issues of a whole corporate
family — a gaggle of legal entities, not, as might be presumed, one large one. Some of those entities were in good financial health, and some were not. But
there was an even deeper paradox in the General Growth case, and therein lies its significance: None of the SPEs under the General Growth umbrella were
meant to be a part of the company's bankruptcy process in the first place, given that bankruptcy law, technically, deals with discrete legal entities. The fact
that they ultimately were roped into the process continues to be a source of fascination among lawyers and academics.
"One of the things I've always liked about bankruptcy, and still like about it, is that bankruptcy, as a court of equity, always allows for flexibility," Samantha
Rothman, a leveraged finance and restructuring lawyer with King & Spalding LLP in New York, told SNL. "It's always flexible."
Special-purpose, or "bankruptcy-remote," entities have been around for years, and they are a popular tool still, particularly in the real estate realm, Rothman
said. Borrowers use them in financing deals to isolate and shield the asset or assets behind a particular loan from the default risk of the parent company and
its affiliates. When set up this way, the borrower obtains cheaper financing, and the lender mitigates its risk — or so was thought before General Growth's
run through the bankruptcy court.
"Basically up until the General Growth bankruptcy, most borrowers and lenders thought that these bankruptcy-remote entities were essentially bankruptcy
proof," Joseph Pagliari Jr., a real estate professor at The University of Chicago Booth School of Business, told SNL.
An SPE typically has at least one independent director tasked exclusively with looking after the entity's interests. But the General Growth case showed that,
under certain circumstances, the interests of the corporate family, or corporate group, are paramount. In other words, under certain circumstances,
bankruptcy-remote provisions can be called into question against the appeals of the independent directors.
Article
Source: SNL Financial | Page 1 of 3

2. In General Growth's case, Judge Allan
Gropper allowed well-capitalized,
solvent SPEs to file for bankruptcy and
allowed those entities' relative financial
health to buoy the broader restructuring
endeavor. Moreover, Gropper allowed
that General Growth's 11th-hour
maneuvers to replace some independent
directors who might have opposed filing
bankruptcy petitions — even those with
solid real estate experience — were
made in good faith.
To this day, legal professionals and
scholars still banter about how the
General Growth case has impacted
SPEs, in theory and in practice. The
perceived role of the entities'
independent directors has undoubtedly
changed. Before the General Growth
debacle, according to Baird, the SPEs'
independent directors were tasked with
little beyond making sure bankruptcy
petitions were never filed.
"It was thought that these entities would
never end up in bankruptcy, because
your independent directors had to
support it. And it was assumed that the
independent directors knew that they
were supposed to do the right thing and
never file," Baird said. "But the legal
change that's come along since then is,
now these independent directors
perceive themselves as having
independent fiduciary duties … and are
not nearly as compliant as creditors used
to think they were."
Rothman similarly pointed out that in the
last five years, companies have sought
to more tightly delineate the fiduciary
duties of independent directors and to
clarify other previous gray areas, like
when and under what circumstances
the directors can be replaced.
She noted that SPEs are still very
common and that the true effects of the
case will have to wait for another
bankruptcy in a "similarly dire economic
climate." Until a judge rules again, no one
knows for sure how effective the new
provisions truly are.
In re General Growth Properties Inc. has
been a driving force in other industry
debates in the last five years. During and
after the financial crisis, when the credit
markets were seized up, REITs
deleveraged en masse. Through that
ongoing conversation about the dangers
of high leverage, General Growth's
served as a cautionary tale, a case
study prominent research outfits like
Green Street Advisors could hold up as
a warning against carrying high debt and
maintaining a crowded, lopsided maturity
schedule.
Pagliari said the General Growth case
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Source: SNL Financial | Page 2 of 3

3. also illustrates the relative dangers of
relying too much on CMBS lenders. In
that respect, fellow marquee mall REIT
Simon Property Group Inc. served as a
foil. While most of General Growth's debt in the lead-up to its credit crisis was held by CMBS lenders, most of Simon's debt was held by portfolio lenders
and life insurance companies.
"The point of that is, when there was the downturn, and the refinancing markets were essentially closed up, there was someone for Simon to talk to about
refinancing its indebtedness," he said. "If that required modification of a loan term, or Simon to contribute more capital — whatever it was — ultimately that
got worked out."
With CMBS lending, a company is dealing, in a way, with a "faceless, nameless" creditor, and a company loses its "one-to-one relationship" with that body,
Pagliari said. As its troubles mounted, General Growth sent more than 150 letters to its lenders asking for a collective meeting to weigh proposals to
refinance its debt in a manner favorable to both it and its lenders, but the company's entreaties were met with little to no response.
"GGP would probably argue, with the benefit of hindsight, that their default was not one triggered by their inability to cover debt service, but rather their
inability to refinance loans that were coming due," he said. "Those are two different things."
Indeed, in Pagliari's mind, one of the judge's main motivations to move to override bankruptcy-remote provisions was likely this apparent stubbornness on the
part of General Growth's lenders. "Nobody showed up to the table," he said.
General Growth declined to comment for this story.
In his basic bankruptcy classes, Baird still teaches the General Growth case, which he said brought the concept of the corporate family to the fore in
conversations among judges, lawyers and scholars.
"It's not just real estate," he said. "I think everyone now understands that, to really understand large bankruptcies, we need to understand corporate groups.
This has become a focal point of discussion."
Baird argues that corporate groups are "here to stay."
"Bankruptcy operates only on legal entities, not on the corporate group itself — at least on paper. That presents a set of problems. Another way to put it is:
In many earlier cases, people just glossed over the fact you had different legal entities. Now people are just much more aware that there are different
entities with different interests and different creditor groups."
King & Spalding's Rothman expressed uncertainty about what lessons from the General Growth case will hold in coming years, but she indicated that the
special protection lenders previously thought they had with bankruptcy-remote provisions may continue to be compromised in similar cases. Moreover,
arguments that a SPE's bankruptcy petition was filed in bad faith may always falter before the larger endeavor to right the finances of the corporate family
that has been determined to be, in its way, too big to fail.
"The reality is, no matter how extensive the efforts are to draft special-purpose entity provisions in a way that aligns with the law as it is today," she said,
"you'll always face the risk of the corporate family doctrine."
Article
Source: SNL Financial | Page 3 of 3