Certificateholder Does Not Have "Party In Interest" Standing To Be Heard On Innkeepers' Bidding Procedures Motion

In In re Innkeepers USA Trust, Case No. 10-13800 (Bankr. S.D.N.Y. April 1, 2011), the United States Bankruptcy Court for the Southern District of New York made it clear that (i) for a party to have standing to be heard in a bankruptcy case, it needs privity or another relationship with the debtor such that its rights can be enforced against the debtor, and (ii) a certificateholder will not have standing unless the conditions precedent to the "no action" clause of the servicing agreement with its special servicer are satisfied.

The preliminary issue before the Court was whether an owner of certificated interests in a fixed rate loan (the "Certificateholder") had standing to be heard on the debtor's motion to approve bidding procedures in connection with the sponsorship and funding of the debtors' chapter 11 plan of reorganization (the "Motion"). The Certificateholder asserted that its status of holding various interests in the debtors' cases – namely its preferred shares, its $10 million interest in one of the debtors' two postpetition debtor in possession loans, and its certificated interests in the fixed rate loan¹ – conferred various rights on it as a party in interest sufficient to allow it to participate and be heard in the debtors' cases on any issue, including with respect to the hearing on the Motion. The Court held that because the Certificateholder held beneficial interests in the REMICs that owned the fixed rate loan, it was merely an investor in a creditor and not the debtor; therefore, it did not have standing to be heard on the Motion in its capacity as a Certificateholder.²

In reaching its conclusion, the court noted that (i) the court in Bank of America, N.A. v. PCV ST Owner L.P., Case No. 10-1178 (S.D.N.Y.) ("Stuytown") summarily denied the same Certificateholder's motion to intervene when it attempted to circumvent a pooling and servicing agreement in order to challenge or override the actions of a CMBS special servicer, (ii) the Certificateholder had no privity or other relationship with the debtors that would confer upon it standing to be heard because in a securitization, the investors' relationship is with the special purpose vehicle holding the assets and the right to payment comes from the cash generated by the assets, not from the debtor as the originator of the assets itself, which comports with the Second Circuit ruling in Kyrs v. Official Comm. Of Unsecured Creditors of Refco, Inc. (in re Refco), 505 F.3d 109 (2d Cir. 2007), that a creditor of a creditor is not a "party in interest" within the meaning of section 1109(b) of the Bankruptcy Code, and (iii) the Certificateholder was contractually bound by the "no action" clause of the servicing agreement and none of the conditions precedent to "action" had been met such that the Certificateholder was entitled to circumvent the special servicer and be afforded independent standing to be heard on the Motion.

Notwithstanding that the Court's ruling with respect to standing was based entirely on controlling law as well as the applicable language of the servicing agreement, the Court stated:

"Granting standing to a certificateholder would not only override the terms of the [servicing agreement] and alter the bargained-for terms and risks investors undertook when they bought certificated interests in the [f]ixed [r]ate [l]oan, but it would also encourage and embolden other certificateholders to hire their own counsel to challenge the special servicer's authority and to advance their own individual and conflicting pecuniary interests. This would dramatically alter the CMBS landscape and render the delegation to a special servicer meaningless."

The Court sought to avoid such a scenario because it would otherwise potentially cause chaos in the already-tumultuous CMBS market.

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¹ The fixed rate loan, which was collateralized by certain of the debtors' properties, was evidenced by two replacement notes. The debtors' prepetition lenders under the fixed rate loan transferred their interests in the notes to the trustees for two separate trusts.  Each of the trusts is a real estate mortgage investment trust conduit (a "REMIC").

² The Certificateholder did have standing to be heard in its capacity as a holder of preferred shares and as a postpetition lender.

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