CMBS Certificateholders Shut Out


THE ABILITY OF INVESTORS in commercial mortgage backed securities (CMBS) to participate directly in a borrower’s restructuring was recently curtailed by a New York bankruptcy court, raising a number of practical restructuring considerations for distressed borrowers, special servicers and CMBS investors.

While it is clear that a CMBS trust itself has standing as a “party in interest” under §1109(b) of Title 11 of the United States Code (Bankruptcy Code) to participate in a borrower’s bankruptcy proceeding, prior to the decision of the court in In re Innkeepers USA Trust, 1 the question of whether a certificateholder in a CMBS pool was a “party  interest” had not been specifically decided.

In Innkeepers, the court ruled that certain certificateholders in two CMBS pools holding the debtors’ loans were not parties in interest pursuant to §1109(b) of the Bankruptcy Code, and thus did not have standing before the court to object to the debtors’ motion for an order approving proposed bidding procedures. While no court previously had determined this precise issue, the Innkeepers court found persuasive and closely analogous decisions by other courts holding that parties with only an indirect (or derivative) connection to a debtor (such as a creditor of a creditor) were not parties in interest for purposes of participating in bankruptcy proceedings…