## Facts

- General Growth Properties, Inc. (GGP), a large REIT, and many affiliates filed Chapter 11 petitions during the 2008–2009 credit crisis; cases were jointly administered.
- A subset of project-level affiliates (the “Subject Debtors”) were special-purpose entities (SPEs) that owned single properties financed by mortgage debt, often with “bankruptcy-remote” separateness covenants.
- Many SPE operating agreements required independent managers/directors to approve a bankruptcy filing and to consider the interests of the SPE and the enterprise and creditors.
- Although several Subject Debtors were current on mortgage payments and some loans were not imminently due, GGP faced major near-term maturities and was unable to refinance in frozen credit markets, creating severe liquidity constraints across the enterprise.
- Before filing, GGP replaced certain independent managers at the SPE level; the new managers authorized Chapter 11 filings as part of a coordinated restructuring.
- Secured lenders and special servicers moved to dismiss certain Subject Debtors’ Chapter 11 cases, asserting bad faith because the entities were solvent, performing, and structured to be bankruptcy remote.
- Lenders also sought dismissal of Lancaster Trust’s case, arguing it was not an eligible debtor because it was a passive title-holding trust.
- Debtors and the official committee of unsecured creditors opposed dismissal, asserting a valid reorganization purpose and enterprise-level necessity for coordinated Chapter 11 relief.

## Issues

1. Whether the Subject Debtors’ Chapter 11 petitions should be dismissed for bad faith under 11 U.S.C. § 1112(b) where many were solvent, current on debt service, and organized as bankruptcy-remote SPEs with no immediate maturities.
2. Whether good faith should be assessed solely on an entity-by-entity basis, or may consider the financial distress and restructuring needs of the integrated corporate group.
3. Whether Lancaster Trust qualified as a “business trust” eligible to be a debtor under the Bankruptcy Code.

## Decision

- The court denied the motions to dismiss the Subject Debtors’ Chapter 11 cases.
- The court held the filings were not in bad faith under § 1112(b) because they served a legitimate reorganization purpose in response to genuine enterprise-wide distress and refinancing risk.
- The court held good-faith analysis could consider the integrated nature of GGP’s operations and the threat posed by the group’s impending maturities, even if particular project entities were current on payments.
- The court rejected the argument that bankruptcy-remote structuring or lender expectations barred access to Chapter 11 relief.
- The court held Lancaster Trust was a “business trust” eligible to be a debtor because it engaged in profit-oriented activities (including borrowing, leasing, and receiving income), not merely holding bare title.

## Legal Principles

- A Chapter 11 case may be dismissed for bad faith under § 1112(b), but the inquiry is fact-intensive and not governed by a rigid test.
- A debtor need not wait until default, maturity, or completion of creditor negotiations to seek Chapter 11 relief; filings may address looming financial problems that threaten continued operations.
- Current payment status and apparent solvency at the subsidiary level do not, by themselves, preclude a good-faith filing where enterprise-wide distress and refinancing constraints jeopardize the group.
- Bankruptcy-remote SPE covenants and creditor structuring expectations do not override the Bankruptcy Code or categorically bar an SPE’s Chapter 11 filing; courts may consider enterprise interdependence and value preservation.
- Replacing independent managers shortly before filing does not alone establish bad faith; the question is whether the filing decision was informed and pursued a legitimate reorganization purpose consistent with governing duties.
- Eligibility of a trust entity turns on substance: a trust that conducts business-like, income-producing activities may qualify as a “business trust” eligible for bankruptcy relief.

## Conclusion

The bankruptcy court refused to dismiss the Chapter 11 cases of GGP’s project-level SPEs, holding that the petitions served a legitimate reorganization purpose in the context of enterprise-wide refinancing distress, and it further held that a property-holding trust that conducted profit-oriented operations qualified as an eligible business trust.


In re Gen. Growth Props., Inc., 409 B.R. 43 (Bankr. S.D.N.Y. 2009)