Chapter VII, B. Other Business Entities

• Jurisdiction: United States

B. Other Business Entities

1. Partnerships

While the factors cited by courts and commentators are usually phrased in a corporate context, the factors set forth for corporations appear equally relevant and have been applied in cases involving partnerships. For example, in In re Hedged-Investments Associates, an adversary proceeding was commenced by the chapter 7 trustee seeking to recover certain fraudulent transfers.²³⁵ The trustee moved to consolidate the bankruptcy cases of three limited partnerships and one corporation that allegedly had been created and used on a fluid basis by the general partner to perpetuate a Ponzi scheme.²³⁶ The trustee ultimately amended the substantive consolidation motion to remove the corporation, and only sought consolidation of the limited partnerships.²³⁷ The court stated, however, that there was "no logical reason why the corporate case ... was not also substantively consolidated with the cases for the limited partnerships for purposes of bankruptcy."²³⁸ While this comment was made in dicta, it indicates a clear openness of the court to permit the consolidation of partnerships with other business entities.

Some courts, however, have questioned their ability to order substantive consolidation of a debtor with a nondebtor partnership. For example, in In re DRW Property, the court stated that it was "unaware of any statutory or common law authority to substantively consolidate debtor and non-debtor partnerships," concluding that the "non-debtor partnerships are certainly well outside of the scope of this Court's jurisdiction."²³⁹ Likewise, the court in In re Alpha & Omega Realty Inc. determined that a debtor corporation could not be consolidated with a nondebtor-affiliated partnership.²⁴⁰ However, other courts have found it within their equitable powers to order the consolidation of debtors with nondebtor partnerships.²⁴¹ For more information on the limitations on substantively consolidating debtors with non-debtors, see Chapter VIII.

2. LLCs

More recently, courts have determined that these factors should apply as well to limited liability companies. For example, in In re The Lodge at Big Sky, the bankruptcy court permitted the substantive consolidation of two affiliated, single-member limited liability companies.²⁴² The authors are not aware of any court denying a motion for substantive consolidation solely on the basis that one of the entities that the movant wishes to consolidate is a limited liability company. Indeed, in...