Judge may rule at end of June on General Growth malls

By Ilaina Jonas

NEW YORK, June 17 (Reuters) - A federal judge overseeing the bankruptcy of General Growth Properties Inc (GGWPQ.PK) may not decide until at least the end of the month whether to allow some of the property owner's malls from bankruptcy, in a case that is being closely watched by the securitized lending industry.

During a lengthy hearing on Wednesday, ING Capital Loan Services LLC, the special servicer for nine loans on eight malls, and Helios AMC LLC asked Judge Gropper to strip the properties from the case, the largest real estate failure in U.S. bankruptcy history.

Helios, is the special servicer for loans on Faneuil Hall Marketplace in Boston and Saint Louis Galleria LLC and wants them out of bankruptcy. Special servicers oversee troubled commercial mortgage loans that have been securitized into commercial mortgage-backed securities (CMBS). They argue that the malls were improperly swept into bankruptcy and that General Growth did not do enough negotiation to lengthen the loans or get waivers that would keep the malls out of bankruptcy.

General Growth said its malls were very profitable but the company was a victim of the credit crisis that left it unable to refinance its maturing debt.

The entities in bankruptcy were facing $24 billion of debt, about $15 billion of which consisted of commercial mortgage-backed securities.

Next week insurer MetLife Inc (MET.N) is scheduled for a hearing to request that the properties it has loans against also be dismissed from bankruptcy. The judge is expected to rule sometime after that hearing Wednesday.

The remainder of General Growth's other 200 or so malls are joint ventures and are not in bankruptcy, nor is the General Growth's management company.

Most of the properties were current on their loan payments when General Growth filed for Chapter 11 bankruptcy protection in Manhattan in April and swept 166 of its malls along with it.

"If you do not have a need to reorganize, then you are not entitled to the benefits of Chapter 11," said attorney Todd Meyers, of Kilpatrick Stockton, which is representing ING. "You must have a present need to reorganize. We think the filing is for the benefit of the parent and their constituencies,"

Chicago-based General Growth set up each mall as a special purpose entity -- a separate company -- that protected General Growth from each of the malls' obligations. Each SPE was be governed by independent directors, and each entity's cash was to be managed separately. They were intended to be "bankruptcy remote."

The organization left the parent company off the hook if the SPE defaulted on its mortgage. Lenders, on the other hand, did not have to be concerned with the parent company's financial affairs. But General Growth's inclusion of the SPEs into the bankruptcy has drummed into the financial industry that the agreements were bankruptcy remote, not bankruptcy proof, as Gropper said on Wednesday.

The entities in bankruptcy were facing $24 billion of debt, about $15 billion of which consisted of commercial mortgage-backed securities.

"This is the most important decision in the doctrine of good faith," Meyers said. "It's going to be a guide to debtors and lenders on how they finance."

The company said that it filed as a family because the malls are part of an integrated company, whose size allows the malls to benefit through better lease deals and lower expenses.

Tom Nolan, General Growth president and chief operating officer, said the company tried every avenue to refinance its loans and was "frustrated" by the unresponsiveness of the master and special servicers. The company tried late last year to put together its own property-based bond deal with the help of Goldman Sachs and Morgan Stanley. But that was scuttled by the collapse of the credit markets after Lehman Brothers Holding Co's bankruptcy. (Reporting by Ilaina Jonas; Editing by Marguerita Choy)