It is highly unusual under any circumstances for the owners of a super regional mall to file for bankruptcy protection in order to stave off foreclosure. That is what the owners of the 1.1 million-square-foot West Oaks Mall in Houston did last week.

And while the bankruptcy case involving such a high-profile mall is interesting on its own merits, it also complicates the proposed reorganization of another major bankruptcy case started last spring. That case involves about 340 real estate investors caught in the middle of 1031 tax exchanges who stand to lose upwards of $150 million. Their money was to be held in escrow accounts for when they came back to conclude the back-end purchase of their tax-free exchange. When that time came, the money was gone.

Now, one of the largest of those assets that creditors had hoped could be used to recoup some of their money is untouchable.

IPofA West Oaks Mall LP, IPofA West Oaks LeaseCo LP and IPofA WOM Master LeaseCo LP (collectively, the "West Oaks Debtors"), filed voluntary petitions under chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the Eastern District of Virginia, Richmond Division, last week.

The West Oaks Debtors are directly and/or indirectly owned and/or controlled by Edward H. Okun, a controversial investor who also controls several 1031 qualified intermediaries under the umbrella firm of The 1031 Tax Group LLC that are also currently tied up in bankruptcy proceedings.

Not only does the West Oaks Mall bankruptcy filing jeopardize a proposed settlement in those cases, it also could be a violation of a stipulation ordered by the bankruptcy court in June in the 1031 Tax Group case not to "sell, pledge, transfer or encumber" the mall.

The West Oak Debtors' filings came just prior to a threatened non-judicial foreclosure sale scheduled for last week by the West Oaks Mall by GCCFC 2006-GG7 Westheimer Mall, LLC, the secured lender for the property.

The property is collateral for a loan secured in a commercial mortgage-backed security (CMBS) referred to as Greenwich Capital 2006-GG7. The West Oak Debtors own a 506,500-square-foot portion of the mall not owned or controlled by the malls anchors, which include the 250,000-square-foot Foley's and 227,600-square-foot Dillard's.

In addition, anchors Sears and Steve & Barry's University Sportswear lease their space, with Sears's 102,000-square-foot lease expiring in August 2010 and Steve & Barrys' 75,000-square-foot lease expiring in January 2013.

As of Sept. 6, the loan on the mall had an outstanding loan exposure of more than $88 million, according to CMBS documents. There had been no repayment on the loan since May 2007, around the time Okun's other entities filed for bankruptcy court protection.

The mall was last appraised in April 2006 at $109.8 million. The mall generated net operating income of $6.57 million on revenue of $12.31 million in 2006.

The West Oaks Mall was a linchpin in the proposed reorganization financing of the 1031 Tax Group, a Richmond, VA-based, consolidated group of 16 qualified intermediaries for deferred like-kind property exchanges.

The plan proposed in that case called for unsecured creditors to receive $142 million from a loan or loans of up to $300 million to be made to Okun. The debt would be secured by Okun's various real estate and personal assets. Okun, through various entities, also controls another 12 investment properties with an estimated value of more than $60 million. He also controls four personal residences with an estimated value of about $19.5 million, nearly 20 automobiles, including four Indy racecars, two Lamborghinis, a Bentley and a Rolls Royce; three airplanes, a helicopter and eight boats.

That 1031 reorganization deal has other problems besides the bankruptcy filing of the West Oaks Mall.

CoStar Group has learned that JPS Capital, which had agreed to arrange the loans to Okun and his various companies, now has backed away from the deal as proposed, according to lawyers involved in the case. JPS' decision apparently came prior to the bankruptcy filing of West Oaks Mall.

JPS also has apparently tried to offer alternative terms to complete a deal, terms that have been rejected by advisors to the creditors' group.

"JPS issued a $300 million term sheet to Edward Okun on June 20, 2007, based upon representations made by Mr. Okun as to the value of his assets," said Joel G. Shapiro, principal of JPS Capital Partners. "After performing due diligence it became apparent that the values represented to JPS could not be verified. Based on the values that we were able to verify, JPS issued a commitment to Okun for $148.625 million on Oct. 8, 2007. This commitment provided Okun, and by extension the creditors, with $20 million at closing and with the ability to receive up to an additional $125 million over the ensuing 24 months, through profit participation as the assets are liquidated. This is a plan designed to maximize value for the Estate and its creditors, given the values of the underlying collateral."

A hearing on the proposed reorganization plan that was scheduled for next week has been called off. Last week, CoStar reported that many creditors in the case were skeptical of the plan to begin with. See Investors Still Ensnared in 1031 Exchange Collapses.

They are even more skeptical now.

Said one creditor who was becoming more and more frustrated and angry about the 1031 case, Okun's "toys and assets are continuing to get diluted." And that prospect means less and less dollars for the creditors.