General Growth wins key ruling in Chapter 11 case

Crain's Chicago Business reports:

A U.S. bankruptcy judge ruled Tuesday that several subsidiaries of bankrupt mall operator General Growth Properties Inc. should be allowed to stay in Chapter 11, despite lender claims that the cases were ineligible for bankruptcy protection.

In an opinion closely watched in the credit markets, Judge Allan Gropper ruled that those seeking to have the cases dismissed because they claimed they were filed in "bad faith" were simply inconvenienced by the Chapter 11 filings and that "inconvenience to a secured creditor is not a reason to dismiss a Chapter 11 case."

Judge Gropper's decision has been greatly anticipated by investors in securitized assets, amid concerns that allowing General Growth to include its subsidiaries in the bankruptcy opens the possibility that the companies could be reorganized in a way that may provide a disturbing precedent to thousands of other asset securitizations.

Investors who have stakes in securitized assets have often based their investments on the notion that by borrowing against commercial real estate and other assets, the borrowers would be "legally isolated" from external events at a parent company or other units. In commercial mortgage-backed securities, there has often been an expectation that securitized assets were special-purpose entities that would be "bankruptcy remote."

You'll want to read the whole thing. This is an important story because General Growth is the second biggest property mall owner in the Unites States.