The final part of this legal analysis series takes a look at the arguments being submitted before the Court next week by the creditors, with respect to having various SPE's (and hence malls) removed from inclusion in GGP's Chapter 11 filing. This gives the other side of the case, and hence an opportunity to assess how convincing this and their chances of overturning the earlier decision really are.
This article focuses on the case being proposed by MetLife, and the investment fund Clarion Capital, which are two of the group of secured creditors being heard on Wednesday 17 June by Judge Gropper. Examing the various arguments proposed by the creditors:
1. Chapter 11 cases not filed 'in good faith' - the specific loans in question were all current and not in default. Upon closer examination, the creditor's claims around the filing are unconvincing in this respect. As GGP's defence team state in their response, calling it 'woefully inadequate' in establishing the burden of proof, I agree having reviewed everything they have put forward.
The creditors give evidence from previous claims to back them up throughout of course, and suggest that GGP is ineligible in this case, due to it being financially healthy and not insolvent:
"..given the enormous powers a chapter 11 debtor is given by virtue of the automatic stay, the exclusive right to file a plan, and the ability to discharge debts, these powers should be limited only to those facing financial stress."
If all GGP's problems due the credit market turmoil of the last 9 months do not equate to financial stress then I am not sure what does! The creditors then go on to cite the recent court ruling that has allowed a construction company to file a lien against General Growth to recoup owed construction costs, despite being in Chapter 11. In that case, the court stated:
"They [GGP] do not need a litigation respite, as do many chapter 11 debtors... Nor are they financially troubled debtors that seek in good faith to avoid a preclusive judgment in State court that would prejudice legitimate efforts to preserve value for the benefit of all of their creditors."
Insolvency is not a requisite for filing Chapter 11 anyway, as the creditors admit. The above Court ruling is quite different from establishing bad faith and I see nothing that suggests proof that GGP are doing anything other than attempting to sort out their problems. The only point worthy of consideration is below, although it is more than debatable that this is an abuse of Chapter 11, since it is precisely what the legal code is there to do - facilitate the move out of bankruptcy:
"The Debtors’ use of chapter 11 as a sword to obtain a tactical advantage in any negotiations to extend the Loan, when such Loan was not in default and does not mature until a year and five months after the Petition Date, is an abuse of chapter 11 that the good faith requirement is designed to prevent."
2. Loans in question were not due to mature for a significant period of time - as such there was "no present need [for] the.. debtors to file for relief under Chapter 11 of the Bankruptcy Code." Additionally MetLife claim that GGP "did not contact MetLife, one of the largest insurance company providers of real estate capital, about a loan extension prior to the Petition Date."
This point has been refuted in evidence submitted by GGP, regarding widespread creditor unwillingness to discuss extensions on all but loans due imminently. This cites that in some cases GGP were even refused the names of underlying creditors to contact. Thus, GGP may in this case have not been able to identify who to contact - either way, this point is secondary in the context of point 4 below.
3. The malls in question do not have any other significant creditors - thus GGP will not be able to cramdown a plan over the Lenders' objections.
This is a particularly weak point; citing dimissal of this SPE because it is primarily comprises a single lender, hence there is no advantage in Chapter 11 inclusions since GGP will still have to fully service them and negotiate with a single lender.
That again is refuted by the evidence submitted by GGP regarding how unwilling many lenders were to renegotiate loan terms and extensions pre-Chapter 11. It also ties back to the point that individually, lenders act within their own interests, which are not directly aligned with those of the company, other creditors (especially unsecured), shareholders or wider credit markets.
This Providence Journal article also suggests MetLife argued that GGP's attempt to 'cramdown' a wholesale reorganization plan for its mall properties will "hurt the insurer's financial interests." I do not see how that can be argued, nor have I found this point being made in the court submissions.
Being negatively financially impacted cannot be realistically argued as a motion to dismiss, beyond it 'hurting' MetLife and other creditors ability to negotiate: they do not wish to be forced to the table without holding all the cards. However all are having their loans fully serviced by GGP throughout the period at pre-bankruptcy rates, thus in theory should not lose out at all financially.
4. Chapter 11 were not filed with any reorganisational purpose - "the Debtors filed bankruptcy to improve their negotiating position by increasing the pressure on the lenders to accept refinancing terms."
Here is the reality of this entire dispute, and the primary reason for arguing for their inclusion is to obtain leverage in efforts to extend the maturity of loans. The rest is largely window dressing, and this is directly opposed by General Growth's claim of operating a centralized business model. I do not hold much credence with GGP's claim in this respect, but it can be very effectively argued and elaborated upon on the day in court, without creditors being able to disprove it.
The heart of the argument is that the creditors will continue to be fully serviced and do not lose out, whilst GGP gain the useful leverage from an automatic stay, and can utilise additional cashflow from the assets while enhancing their ability to restructure and negotiate loans.
Ultimately Judge Gropper has already indicated willingness to agree with the need for keeping GGP's "centralized business model" in tact, and for considering this case in the wider context rather than just those of some self-interested lenders. I see nothing submitted to the Court by MetLife or the creditors that will change that decision, and expect a favourable ruling for GGP next week.
Addendum to original post: late yesterday Wells Fargo issued this direct response to GGP's defence. Here they reiterate the original two points that prove 'bad faith' (inclusion of an SPE that generates sufficient capital to service its creditors, and inclusion of loans not imminently due to mature is unnecessary).
Additional points raised:
- Wells Fargo cite the US government actions and potential expansion of TALF as an unknown, and that should have been relied upon by GGP as a reason to hold off declaring Chapter 11 and certainly including subsidiaries - a bizarre argument that will be rejected.
- The Debtors [GGP] "brazenly replaced their Independent Managers on the eve of their bankruptcy filing in order to obtain a unanimous vote in favour of the bankruptcy filing."
- SPE Operating Agreements require the Independent Managers "consider only the interests of Subsidiary Debtors and, therefore, are precluded from considering the needs or concerns of any entity other than the Subsidiary Debtors."
- GGP's claim that the SPE's were essential as part of the GGP 'family' filings is "completely undercut by the fact that numerous affiliates of the Subsidiary Debtors were not placed into bankruptcy."
Key points here are that General Growth's actions in replacing directors was legal - it is expressly allowed under the terms of the CMBS contracts - and that although filing Chapter 11 is in the wider interest, it is intended for a positive reorganisational purpose that would benefit the entity too, so is therefore not 'bad faith' as interpreted in the spirit of the law.
The final argument around not all subsidiaries being included is the most interesting point, and refers to the joint ventures and other such subsidiaries not able to be placed into Chapter 11. This provides a strong argument against GGP's slightly dubious 'centralized business model' excuse, so it will be interesting seeing how this impacts the Court's decision. I see this as the main factor that could swing a decision against GGP next week.
The latter point is expanded upon by citing that GGP's explanation of the filings being "done to maximize the value for all stakeholders, including the employees, lenders, vendors and equity" is untrue, and instead were "solely for the purpose of maximizing the value of equity." That is correct, although it is arguable that employees, lenders and vendors will also benefit at a collective level from the GGP group having a greater ability to restructure.
In summary, I think the key issue around good versus bad faith is that (as quoted in Wells Fargo's submission), this is "a balancing process between the interests of debtors and creditors which characterizes so many provisions of the bankruptcy laws and is necessary to legitimize the delay and costs imposed upon parties to a bankruptcy."
In other words - was the decision to include GGP subsidiaries in Chapter 11 in the best interests of debtors and creditors, and does that legitimize the delay and costs? The previous Court ruling suggests that this decision has already been made, and in that context despite creditors whinging about it being unfair, it will not be overturned given that the 'cost' to them is actually only in terms of their leverage when negotiating with GGP during restructuring.
