Bankruptcy Ruling May Breach CMBS Trust Structure: Moody's
A US Bankruptcy Court judge ruled late last week to grant the debtor access to names of certificate-holders of a $4.1bn commercial mortgage-backed security (CMBS) trust, according to weekly market commentary by Moody's Investors Service. The Extended Stay Hotel (ESH) chain, which filed for bankruptcy in June, requested the securitization trust holding legal title to the $4.1bn of mortgages on 680 hotels provide the names to help ESH in developing its reorganization plan. The bankruptcy judge said the procedural ruling aimed to let ESH determine which certificate holders are "in the driver's seat in the bus and who are the passengers," according to Moody's. The ruling to grant a "routine" discovery motion and allow ESH access to the list of names means individual certificateholders might appear in court to plead their cases. Moody's noted it cautioned in June this scenario might lead to "free-for-all financing" as certificate-holders plead their own cases, bypassing the natural filtering process of the trustee and servicers. Because of the implications, Moody's said at the time any judge would be unlikely to pursue that option. "However, times change, and so do views," said Daniel Rubock, a senior vice president at Moody's and author of the commentary. Discovery rights remain broad, the judge noted in his ruling, and a procedural ruling does not necessitate a similar ruling on a more substantive motion regarding who may appear in court to argue individual economic interests. "Judge [James] Peck may return to his initial skepticism and rule on later substantive motions the way all market participants, even the certificateholders now attempting opportunistically to bypass the trust structure, thought the rules would work when the ESH transaction went out the door," Rubock said. "Or me may not, and we may need to rethink how robust many structures are -- from trusts to participants -- under the extreme tests to come." Write to Diana Golobay.