Recently, Professor Joshua P. Fershee posted a very interesting observation on the Business Law Prof Blog.  

Professor Fershee comments on a legal concept called the "single enterprise" theory, and on references to this concept by the US Supreme Court in a decision published by it this past summer (Goodyear Dunlop Tires Operations, S.A. v. Brown, 131 S.Ct. 2846 [2011]).

Briefly, this concept or theory treats affiliated entity structures as a "single" organization or enterprise when their business is so intertwined or connected that they should be viewed as a "single enterprise."  Consequently, the legal distinctions or separateness is disregarded, or "pierced."  In legal talk, disregarding (or ignoring) a legal entity is called "piercing the corporate veil" – as in pushing the entity curtain or veil aside and exposing the owner hiding behind it.

While the US Supreme Court did NOT rely upon or apply the single enterprise theory in its decision, Professor Fershee finds the reference troubling.  "Scholars have argued that courts embrace veil piercing too easily, and I think that’s often true. Here, even in denying the claim, the Supreme Court reinforced that is the rule. (emphasis added)"

I agree:

  • By discussing the concept without giving guidance on the proper use of it (or without commenting that use of it is the exception and not the rule), the Court encourages the legal profession and the courts to explore the use of it

This includes possibly using it to attack or question mortgage finance structures that utilize a special purpose or single purpose borrower.  (This covers billions of dollars of commercial mortgage debt.)

This borrower structure often is called a "SPV" or an "SPE.  It is a structure that goes to the heart of, or at least is a vital organ in, a common commercial mortgage debt structure used by portfolio lenders (typically, life insurance companies) and securitized lenders (CMBS).   (Again, billions of dollars of commercial mortgage debt.)

The SPE structure is intended to make the borrower entity "bankruptcy remote," so that it will be "remote" (or unlikely) that the borrower will go into bankruptcy, or that the assets of the borrower will be dragged into the bankruptcy of its owner.  A bankruptcy, of course, will delay (or possibly even alter) payments to the mortgage lender, and would not allow the lender to exercise its remedies (such as foreclosure). (Here’s a glossary of common terms.)

The "single enterprise" theory came into play early in the General Growth Properties bankruptcy case.  However, the case was resolved without fully developing or addressing this doctrine.

The American Bankruptcy Institute, however, recognized the continuing "life" of the single enterprise theory in its paper covering early proceedings in the case:  "As commentators have stated, in the end, the General Growth decision on the lenders’ motions to dismiss stands for two major propositions as it relates to commercial real estate loan documents: bankruptcy remote is not bankruptcy proof, and the financial condition of the enterprise is at least equally as appropriate a consideration as is the financial health of any single member of that enterprise in reaching a determination on filing a Chapter 11 case. (emphasis added)"

If Professor Fershee is correct, the Supreme Court will have us tangling with the viability of the SPE structure in the near future.

If you have any comments or other information, please post below.