After filing the largest real estate bankruptcy case in history last April, General Growth Properties (GGP) has identified substantive consolidation of its special purpose entities (SPEs) as a real possibility in its proceedings.

A Moody’s Investors Service report released yesterday said that the possibility came up at a hearing to extend the ‘exclusive period’ for GGP to design its own reorganization plan. After asking for another six months, GGP explained the need for more time was for the necessary analysis of each of the hundreds of SPEs that are involved in its Chapter 11 proceedings.

GGP argued that each SPE must be evaluated in relation to the status of its surrounding SPEs, possibly creating the need for the development of ‘laddered’ extensions, which means that an individual SPE’s mortgage extensions must take into account what is happening with the other SPE’s mortgage extensions.

According to the Moody's report, a lawyer for Metropolitan Life Insurance said that GGP’s papers “point toward an argument that either assumes or insinuates that some form of [substantive] consolidation was taking place.”

“Counsel for Met Life got up here and seemed very obsessed about substantive consolidation… it was not in our papers," the GGP lawyer responded. "We did, however, say we need to assess the inter-relationships of the debtors. Substantive consolidation is not a black or white thing. One of the things we’re looking at is whether there are some sub-groups that should be appropriately substantively consolidated. We have not reached any conclusions on that at this point.”

Judge Allen Gropper granted the six-month extension request. He backed GGP’s argument that the 166 property filings are not simple single-asset real estate cases, and therefore cannot be evaluated as such. He ruled that each filing is both independently important as well as integrated parts of the overall bankruptcy filing.

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