Chapter I, A. What Is It?

• Jurisdiction: United States

A. What Is It?

Substantive consolidation is a judicially created doctrine arising from the general equity powers granted to bankruptcy courts. Under the doctrine of substantive consolidation, a bankruptcy court may, in appropriate circumstances, consolidate the assets and liabilities of different entities and treat them as one consolidated entity for purposes of the bankruptcy proceeding.

Case law generally recognizes that substantive consolidation is an extraordinary remedy vitally affecting substantive rights, which due to the potential inequities caused should rarely be granted.¹ Courts have consistently found that the power should be used sparingly and that the evidence supporting consolidation should be carefully scrutinized even in the absence of opposition.² Nevertheless, the majority of courts have agreed that substantive consolidation is available to consolidate two or more debtors,³ and some courts have permitted the consolidation of a debtor with nondebtors.⁴ Indeed, by some accounts, "substantive consolidation of debtors in bankruptcy is widely accepted and ... growing in prominence."⁵

Because substantive consolidation is a judicially created remedy, courts have formulated a variety of tests in analyzing whether it is appropriate. While these tests share some common themes, they are different enough to require a distinct analysis depending on the circuit, or even the district, where the bankruptcy case is pending. Most circuits have adopted their own tests, but in a few circuits, the test to be applied varies by district. Even in jurisdictions where a test is well-established, the substantive consolidation inquiry is highly fact-specific. As a result, precedents in this area are of "little value," thereby requiring the substantive consolidation analysis to be made on a case-by-case basis.⁶ For a list of substantive consolidation standards by district — at least those districts where published decisions are available — see Appendix B.

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Notes:

^[1] See, e.g., In re Lease-A-Fleet Inc., 141 B.R. 869, 872-73 (Bankr. E.D. Pa. 1992).

^[2] See, e.g., Wells Fargo Bank v. Sommers (In re Amco Ins.), 444 F.3d 690, 696-97, n.5 (5th Cir. 2006); In re Augie/Restivo Baking Co., 860 F.2d 515 (2d Cir. 1988); Talcott v. Wharton (In re Cont'l Vending Mach. Corp.), 517 F.2d 997, 1001 (2d Cir. 1975); In re Lewellyn, 26 B.R. 246, 251 (Bankr. S.D. Iowa 1982) (citing Chem. Bank New York Trust Co. v. Kheel, 369 F.2d 845 (2d Cir. 1966)).

^[3] In re S & G Fin. Servs....