Law Times

March 8, 2010

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Law TiMes • March 8, 2010 Something old, something new in throne speech Conservatives are reviving their crime agenda. This is the fifth time around for them in four years. They often don't pass their I crime legislation. They just talk about it and blame Liberals for being soft on crime. Then, they start the process one more time. By closing down Parliament two months ago, 18 of Prime Minister Stephen Harper's 20 crime bills went into the hopper for one reason or another. It's like the Bill Murray mov- ie Groundhog Day, where the same thing keeps happening over and over. That's until they finally break the spell. The throne speech last week an- nounced that every one of the dis- carded criminal justice bills will be back again. That's great. We can all talk about crime once more. Who needs American TV police shows when we've got Harper? Still, he actually found some new stuff to keep lawyers busy this coming season. A line in the throne speech, for example, declared "life means life." No, it's not a law on abor- tion. Harper knows better. Instead, it means life sentences for multiple murderers. There was no explanation, but insiders say 25-year sentences would no longer apply for those convicted of more than one murder. There are about half a dozen each year. Another interesting proposal would provide cash for the families of murder victims. But there's one problem: the money would come out of the employment insurance fund, not the Justice Department. So the workers and employ- ers who contribute to EI end up paying for the victims of murder- ers. As it is, only about a third of workers making contributions are eligible to collect benefits. Now, a handful of others will be if a family member gets murdered. Still, with about 600 homicides happening in Canada each year, it won't be that much of a drain on the fund. There is debate over the is- sue, however. Harper is think- ing of only 15 weeks of benefits for victims' families. The Bloc Québécois has been asking for a full year of EI payments. Another bill would give time off to workers in federally regu- lated sectors, such as banks and broadcasting, whose families are crime victims. The catch? It's un- paid leave. At least you get your job back after you get over what's happened to your family. In addition, that old victim sur- charge that comes up in the courts is going to become mandatory. Call it a tax on the bad guys. Lots of luck collecting it, your honour. The speech also promises that to ensure swift justice, the government will introduce leg- islation "to improve criminal procedures to cut the number t was Groundhog Day in Ottawa again last week. Following prorogation, the The Hill By Richard Cleroux of long, drawn-out trials." Judges have been at their wits' end for years over the length of some proceedings. The situation can be so bad that they've resorted to throwing cases out of court. Still, cutting "the number" of long and drawn-out cases seems to indicate the changes would af- fect some trials more than others. Of course, the usual "feel-good" crime bills are back again, includ- ing longer sentences for youth "who commit serious and violent crimes." That's always a popular bill with angry old men. Legislation requiring harsher punishments for white-collar criminals, some of whom get away with serving only a sixth of their sentences, is also on again. It would take only about six in minutes the Commons to wipe out that one-sixth provision, which is just a few words long. But why rush something that you can milk for another year? That old drug bill that the op- position managed to amend will be back in its original form, the throne speech promised. That's the one with the part about how a pound of marijuana — about five plants — is enough to have you convicted as a drug trafficker for up to seven years. The Harper government figures people can't smoke that much dope, so they must be a drug pusher. The opposition will fiercely op- pose the quantity clause, meaning it will likely be back in another Harper throne speech. Once again, the government promises to abolish parole for violent offenders instead of letting them live in what the throne speech called "the luxu- ry of home." How many violent offenders do you know who live in such luxury? With manda- tory sentencing like that, do we really need judges? There's something good dealing with crime in the throne speech that has nothing to do with lon- ger sentences. It isn't even a new law. The government promises to get police to work harder on unsolved cases of murdered and missing aboriginal women. When you have to present a throne speech after a month of extra holidays and you don't have much money to spend, promising all sorts of crime legislation is a good way to spend an hour in the Senate even if it's mostly rehash. At the same time, it does help keep lawyers busy. LT Richard Cleroux is a freelance re- porter and columnist on Parliament Hill. His e-mail address is richard cleroux@rogers.com. COMMENT PAGE 7 The face of substantive consolidation W hisper "General Growth Proper- ties" to the lawyers closest to you, and odds are they will immedi- ately describe to you the recently announced US$10-billion competing hostile takeover bids launched by Simon Property Group Inc. and Canada's Brookfield Asset Management Inc. for General Growth Properties Inc. that are making headlines in news- papers around the world. By any measure, $10 billion is a lot of money, and one can- not be blamed for being openly jealous at the mergers-and-acquisitions lawyers with this retainer. Equally enamoured with the takeover bid and the sheer size of the resulting en- terprise, but for altogether different reasons, will be the lawyers for those industry players who will find themselves opposite the resulting conglom- erate — competing shopping-centre developers, property managers, retail tenants of every stripe and size, and maybe even antitrust types — all fretting over the thought of a business environ- ment where such a huge juggernaut ends up controlling more than a third of the prime retail real estate in the United States. Yes, Virginia, size matters. Unlike their M&A, leasing, and competi- tion colleagues, a small subset of lawyers who practise real estate lending, structured financ- ing (well, what's left of them anyway), and bankruptcy will associate General Growth with something potentially far more insidious. To understand exactly what General Growth means to this corner of the bar, it's first useful to consider how, especially in the United States, commercial real estate portfolios are typically structured. Large portfolios of income-produc- ing properties most often belong to so-called special-purpose entities — subsidiary limited-li- ability companies created on an as-needed basis to hold a particular property. Typically, there's one special-purpose entity for every shopping centre or office building in the portfolio. This fastidious compartmentalization of ownership aims to define, contain, and ulti- mately isolate the business and legal risk asso- ciated with each project and create a financial structure that would allow for property-specif- ic borrowing. Underpinning all of this was the fundamental belief that each of these entities was truly bankruptcy remote. That is, if the parent company or one or more sister entities became insolvent, the resulting bankruptcy wouldn't affect those special-purpose entities that were otherwise solvent based on their own performance. At the same time, lenders to the solvent companies could continue to rely on the cash flows from their properties exclusively for servicing their mortgages. As a result, lenders were said to be "ring-fenced" off from the economic woes of any other en- tity in the broader corporate family. General Growth was typical of the real es- tate empires structured in this manner, own- ing or operating a portfolio of almost 200 shopping centres spread out over 44 states together with some office buildings and even a smattering of residential properties. When the General Growth parent corporation filed for Chapter 11 bankruptcy in a series of vol- untary filings in the spring of 2009, it did so with an aggregate property-level secured debt of almost $19 billion spread throughout the companies in the portfolio. More to the point, while the corporate parent and many of the special-purpose entities were technical- ly insolvent, a good number of them were still well above water and fully performing. Some of them, in fact, were doing quite well. Instead of seeking bankruptcy protection for the corporate parent and the sickly special- purpose entities, General Growth, in effect, www.lawtimesnews.com The Dirt By Jeffrey W. Lem stapled its entire organizational chart to the back of its filing (and for those of you who think they have seen some hefty organization- al charts in your time, consider that General Growth's document listed approximately 750 entities) and in doing so bankrupted the entire corporate family. Those lend- ers with security over per- forming sites clearly thought their individual properties were fully ring-fenced, bank- ruptcy remote, and still cash- flow positive. On a more troubling note, once included in the parent company's bankruptcy filing, the cash spun off from the healthy special-purpose entities was swept up and consolidated at the parent-company level, irrespective of so-called lock boxes, rent assignments, and similar cash- control mechanisms thought to have been in place and effective at the property level. The New York bankruptcy court carefully acknowledged that some of the companies func- tioned as special-purpose entities. How was it, then, that all of them went into bankruptcy in the first place, and how did the rents from each site get swept into a centralized cash-management system to serve the corporate parent's debt? Regardless of how it happened, the initial reaction of the U.S. mortgage lending bar was very visceral and nearly unanimous. As one colourful commentator put it, the bankrupt- cy of otherwise fully solvent companies and the court-ordered sweep and consolidation of the incoming rents to service corporate-level debt "shakes the foundations of the commer- cial real estate market and the financing docu- ments that hold it up." Robin Schwill, a partner in the financial restructuring and insolvency practice at Da- vies Ward Phillips & Vineberg LLP, notes the bankruptcy court that allowed the consolidated "family filing" of General Growth was careful to characterize the cash-sweep mechanism as noth- ing more than a "procedural consolidation," and expressly not a substantive consolidation, of the disparate proceedings within the company. Some observers, however, view this characterization skeptically, finding the court-ordered cash sweep and the collateralization of such cash as security for debtor-in-possession financing to be disturb- ingly akin to a de facto substantive consolidation. Doug Klaassen, a partner at Stikeman El- liott LLP and probably one of the foremost commercial mortgage-back securities lawyers in Canada, notes "the fact that financially solvent [companies] were included in the bankruptcy of General Growth throws into doubt the useful- ness of [special-purpose entities] in real estate fi- nancing from that perspective, for sure." Still, he stops short of finding that the case throws open the Pandora's box of substantive consolidation. He notes as well that the special-purpose entity structure is uncommon in Canada. With the prospect of imminent repayment in full concurrent with a successful takeover bid, even the most vociferous objectors to the General Growth court-sanctioned "family fil- ing" and subsequent cash sweep have now fallen eerily silent. This isn't surprising, of course. The $10-billion offer is enough to pay off all of the secured and unsecured creditors of General Growth, so presumably history will either forget the peculiarities of its bankruptcy filing or dis- miss it as yet another "no harm, no foul" anom- aly. Either way, General Growth has given us a taste of what substantive consolidation might look like even if the court refused to acknowl- edge it as such. I, for one, have seen the face of the enemy and, frankly, I am frightened. LT Jeffrey W. Lem is a partner in the real estate group at Davies Ward Phillips & Vineberg LLP. His e-mail address is jlem@dwpv.com.

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