UPDATE 1-Judge lets General Growth units stay in bankruptcy

NEW YORK Aug 11 (Reuters) - A U.S. bankruptcy judge ruled on Tuesday that several subsidiaries of bankrupt mall operator General Growth Properties GGWPQ.PK should be allowed to stay in Chapter 11, despite lender claims that the cases were ineligible for bankruptcy.

In a 47-page 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."

But Judge Gropper's decision could pave the way for General Growth to seek "consolidation" of its subsidiaries, and treat some of its units as a single debtor, overriding their status as separate companies.

Chicago-based General Growth, the second-largest U.S. mall operator, sought bankruptcy protection in April after the credit crunch choked off financing for commercial property mortgages, challenging the company as it confronted maturities on billions of dollars in loans.

The company's filing had shocked credit market analysts by including some three quarters of General Growth's 200-plus shopping mall subsidiaries in its filing, even though many of the mall subsidiaries were "separate companies" in good shape and turning profits.

During a lengthy hearing in June, ING Capital Loan Services LLC, the special servicer for nine loans on eight General Growth malls, and Helios AMC LLC had asked Judge Gropper to strip the properties from the case.

The firms argued that General Growth did not do enough negotiation to lengthen its loans or get waivers that would have kept the malls out of bankruptcy. Helios is the special servicer for loans General Growth has on the Faneuil Hall Marketplace in Boston and Saint Louis Galleria, and like ING oversees troubled commercial mortgage loans that have been securitized into commercial mortgage-backed securities.

Judge Gropper had said at the June hearing that agreements that are "bankruptcy remote" may not necessarily be bankruptcy proof.

General Growth's chief executive, Adam Metz, said in a statement on Tuesday that the company was "pleased with the court's decision" and would look forward to moving ahead with the rest of its restructuring plan.

The bankruptcy case is In re: General Growth Properties Inc, U.S. Bankruptcy Court, Southern District of New York, No. 09-11977. (Reporting by Emily Chasan; Editing by Gary Hill)