Chapter VII, C. Individuals and Business Entities

• Jurisdiction: United States

C. Individuals and Business Entities

Courts generally apply the same substantive consolidation standard in cases seeking the consolidation of the estates of individual debtors with those of other debtor or nondebtor business entities as they do when analyzing whether consolidation is warranted between entities. The case law does not make a distinction between individual and entity debtors for purposes of the substantive consolidation analysis. For instance, in Bonham, the Ninth Circuit held that the multi-factor test propounded by the Augie/Restivo court applies in the context of an individual debtor and a nondebtor entity.²⁴⁴ In cases where courts have ordered the consolidation of an entity with an individual debtor's estate, a number of the same factors that would have warranted consolidation of two entities have been present.²⁴⁵ Therefore, the substantive consolidation standards described above are equally applicable to cases involving individuals as they are to entities.

For example, in In re Tureaud, the trustee sought to substantively consolidate the estates of seven different corporations with that of an individual debtor.²⁴⁶ The court was willing to consolidate the assets of the various affiliated corporations with the individual debtor because it was "abundantly clear" that the corporations "were, in fact, the alter ego of the debtor"²⁴⁷ The court explained that the debtor had used the assets of the various corporations "as his own" and operated together with them "as one economic unit" and "were subject to the complete direction and control" of the debtor.²⁴⁸ Therefore, it made no difference to the court that the debtor was an individual and the estates with which the debtor was consolidated were nondebtor corporations, because ultimately the court considered them all to be acting as one entity.

Other courts have allowed the conditional consolidation of an individual's estate with affiliated business entities. For example, in In re Creditors Service Corp., the court ordered the substantive consolidation of multiple corporations with that of an individual who had managed them.²⁴⁹ However, the court limited the consolidation of the individual's assets with those of the corporations "precluding the liquidation of what were [the individual's] personal assets until all of what were the entities' assets [had] been administered."²⁵⁰ The court explained that the restriction was "imposed on the theory that the business-related assets, after claims...