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The Preservation of Substantive Consolidation

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The remedy of substantive consolidation allows a bankruptcy court to pool the assets and liabilities of two or more related entities to satisfy all creditor claims1 when the facts of a particular case dictate that consolidation is the best method of ensuring that all creditors of the merged entities are treated equitably.2 Because substantive consolidation often consummates a redistribution of wealth, creditors of the more solvent estate are the losers in substantive consolidation inasmuch as the assets of the more solvent estate—that would otherwise be used to satisfy their claims—are diluted by the joinder of the relatively meager assets and large amount of debt associated with the less-solvent estate.3 Because there can be substantial losers when entities are substantively consolidated, courts have traditionally held that substantive consolidation should only be used sparingly,4 and only after "a searching inquiry to insure that consolidation yields benefits offsetting any harm it inflicts on objecting parties."5

Substantive consolidation is based strictly on equity, and there are no statutorily prescribed standards. In the absence of set standards, courts have developed various guidelines, all of which turn on the facts of a particular case.6 Because the remedy of substantive consolidation is not explicitly authorized by the Bankruptcy Code, and because it is a strictly equitable doctrine, it has come under attack in recent years as being an unauthorized remedy on the grounds that it was not likely part of existing equity jurisprudence at the time of the Judiciary Act of 1789.7 Thus, as some commentators have argued, without any congressional authority authorizing a deviation from ancient equity jurisprudence, a bankruptcy court has no authority to order substantive consolidation.8

This article examines the ability of a bankruptcy court to substantively consolidate two or more estates.9 First, the article examines the Supreme Court's holding in Grupo Mexicano de Desarrollo SA v. Alliance Bond Fund Inc.,10 which reaffirmed the long-standing precedent that courts of equity are limited to granting the types of equitable relief that were available at the time of the Judiciary Act of 1789. Grupo Mexicano is used by commentators to argue against the remedy of substantive consolidation. Grupo Mexicano is used in this article to introduce the counterpoint that ancient equitable remedies are flexibly interpreted in the modern era and that the remedy of substantive consolidation is not an unwarranted departure from traditional equity jurisdiction. Additionally, apart from the flexible nature of equitable remedies, this article examines the two other commonly understood foundations for substantive consolidation—§105(a) of the Code and Rule 1015 of the Federal Rules of Bankruptcy Procedure. Finally, this article addresses the argument that a grant of substantive consolidation effectively rewrites portions of the Code.

The Supreme Court's Decision in Grupo Mexicano

Before Grupo Mexicano was ever decided, the U.S. Supreme Court had long recognized the propriety of the equitable doctrine of substantive consolidation.11 Given the long-standing judicial precedent for the authorization of substantive consolidation, it seems unlikely that Grupo Mexicano—a case that did not even mention substantive consolidation—could serve as a sound basis for stating that a bankruptcy court has no power to employ that equitable doctrine.

The Supreme Court's decision in Grupo Mexicano is ostensibly an obloquy to the jurisprudential backing of the equitable doctrine of substantive consolidation inasmuch as the doctrine has no explicit congressional sanction and there exists a high degree of doubt that substantive consolidation—which generally involves the overlay of multiple tiers of corporate structures—was employed as an equitable tool before 1789.12 The argument that Grupo Mexicano now forecloses a bankruptcy court's ability to order substantive consolidation, however, is not convincing and is not supported by the Supreme Court's ruling in Grupo Mexicano itself. Indeed, the underlying premise of Grupo Mexicano—that courts of equity are limited to granting the types of equitable relief that were available in 1789—is not new to the law, and the decision did nothing to alter existing jurisprudence.13 If prior tribunals were wrong to affirm the bankruptcy court's power to order substantive consolidation, then they were wrong ab initio—not because of the Supreme Court's ruling in Grupo Mexicano, which merely restated the rule.

Before turning to the distinguishing substantive principles of Grupo Mexicano, it should be noted that the facts of Grupo Mexicano are easily distinguishable from the bankruptcy process, and from the procedures and goals of substantive consolidation. In the case itself, the Supreme Court determined that a district court lacked authority to issue a preliminary injunction preventing Grupo Mexicano from disposing of assets, pending a determination on a contract claim for money damages, because the district court could not award an equitable remedy that was theretofore unknown to equity jurisprudence.14 Central to the Supreme Court's conclusion was the fact that the creditor had never obtained a judgment before attempting to freeze Grupo Mexicano's assets,15 and that courts of equity traditionally did not interfere with a non-bankrupt debtor's disposition of property at the instance of a nonjudgment creditor.16 Allowing an injunction without a judgment on a contract claim was the equivalent of crafting a "nuclear weapon" in equity jurisprudence, and the remedy was too susceptible to gross creditor abuse.17

Factually, application of the holding in Grupo Mexicano in the bankruptcy context is problematic for several reasons. In bankruptcy, a debtor admits to the validity and amount of numerous debts in the debtor's bankruptcy schedules. If a debt is not scheduled, scheduled incorrectly or scheduled as contingent, the creditor can file a proof of claim, which is presumed valid when filed.18 The mere act of filing for bankruptcy is a voluntary act by a debtor to submit the debtor's nonexempt assets to creditors. Thus, the critical element in Grupo Mexicano—the absence of a valid judgment—does not easily correlate into bankruptcy practice because the debtor in bankruptcy generally either admits to owing a debt or agrees to the amount owed as asserted by a creditor in a proof of claim.19

Additionally, the Supreme Court's concern in Grupo Mexicano—that allowing a pre-judgement injunction would be too susceptible to creditor abuse of the non-bankrupt debtor—has no application in bankruptcy. After a debtor files a bankruptcy petition, an estate is created,20 all creditor actions attempting to enforce a debt are automatically stayed,21 and in chapter 7 proceedings, a trustee is appointed to administer the estate with a statutory mandate to collect and reduce to money the property of the estate consistent with the best interests of the parties in interest.22 With the inherent debtor protections in the Code, concerns over gross creditor abuse of process are significantly diminished. In short, the concerns over the equitable remedy crafted by the district court in Grupo Mexicano do not easily correlate to the bankruptcy process, much less a motion for substantive consolidation. The Supreme Court was concerned about creditor abuse of a debtor, but in substantive consolidation the adverse parties are often both unsecured creditors. Apart from some egalitarian, eleemosynary motive, the debtor often has little or no interest in how much each unsecured creditor will receive from an insolvent estate when the debtor has already voluntarily surrendered all nonexempt property to the bankruptcy trustee for distribution to creditors.

More importantly, however, Grupo Mexicano is substantively distinguishable. As explained by Grupo Mexicano itself, equitable remedies are flexible based on the broad boundaries of traditional equitable practice:

We do not question the proposition that equity is flexible, but in the federal system, at least, that flexibility is confined within the broad boundaries of traditional equitable relief. To accord a type of relief that has never been available before—and especially (as here) a type of relief that has been specifically disclaimed by long-standing judicial precedent—is to invoke a "default rule"...not of flexibility but of omnipotence. When there are indeed new conditions that might call for a wrenching departure from past practice, Congress is in a much better position than we, both to perceive them and to design the appropriate remedy. Despite the dissent's allusion to the "increasing complexities of modern business relations"...and to the bygone "age of slow-moving capital and comparatively immobile wealth"...we suspect there is absolutely nothing new about debtors' trying to avoid paying their debts or seeking to favor some creditors over others—or even about their seeking to achieve these ends through "sophisticated ...strategies" .... The law of fraudulent conveyances and bankruptcy was developed to prevent such conduct; an equitable power to restrict a debtor's use of his unencumbered property before judgment was not.

Grupo Mexicano, 527 U.S. at 322.

While pre-judgment attachment on a claim for money damages was not a traditional equitable remedy, equity has long recognized doctrines analogous to substantive consolidation. For example, equity jurisprudence has long permitted a court to "pierce the veil" of an organization to allow creditors to satisfy claims not only from the organization, but from the individuals comprising that organization.23 As illustrated, the factors courts consider when deciding to pierce the corporate veil are substantially similar to the factors a court considers when ordering substantive consolidation.24 Thus, the remedy of equitable consolidation—even if explicitly unknown before 1789—is rooted within the boundaries of accepted equitable remedies existing at the time of the Judiciary Act of 1789.25 Unlike the pre-judgment attachment in Grupo Mexicano, the remedy of substantive consolidation is not a "nuclear weapon" newly introduced to equity practice under an omnipotent power, but is, at most, a refinement of the traditional rules of equity that is necessary to comport with modern-day corporate realities. In short, even if substantive consolidation was an explicitly unknown remedy in 1789, that does not lead to the deduction that the concept is such a drastic departure from accepted equitable remedies to preclude its use in the modern era.

Section 105(a) of the Code

Understanding the basis of equity jurisprudence, and the flexible interpretation of those doctrines in the modern era is, in itself, a sufficient basis for a bankruptcy court to determine that it has the equitable power to order substantive consolidation. A bankruptcy court's power to do so, however, is further fortified by the fact that bankruptcy courts are more than just traditional courts of equity applying equity jurisprudence as it existed in 1789. As stated by the Supreme Court in Sampsell,26 "the power of the bankruptcy court to subordinate claims or adjudicate equities arising out of the relationship between several creditors is complete." As was implicit in the reasoning of Grupo Mexicano itself, the Code was promulgated by Congress as an expansion of past equity practice.27 The parameters for that expansion are outlined in the Code, and while substantive consolidation is not an express provision in Title 11, substantive consolidation is consonant with the Code's policies of treating similarly situated creditors similarly,28 equitably subordinating claims29 and in providing for parity of distributions from the estate to those creditors.30

Congress's explicit grant of equitable power to bankruptcy courts is found in §105(a) of the Code, which provides that a court "may issue any order...necessary or appropriate to carry out the provisions of [the Code]."31 While the statutory language uses the term "provisions" and not the term "purposes" in administering the Code,32 failing to interpret the provisions of the Code without regard to its underlying purposes is, at best, ill-advised.33 Standing alone, however, the statutory mandate in §105(a) is partially diluted inasmuch as §105(a) generally may only be used in furtherance of another specific provision of the Code and, by itself, it does not create any substantive rights.34 Indeed, §105(a) is generally regarded as not authorizing "the bankruptcy courts to create substantive rights otherwise unavailable under applicable law"35 and it is not to be construed as "a roving commission to do equity."36 But while §105(a) of the Code is not a "roving commission to do equity," neither should it be tied so strictly to another provision of the Code and interpreted so narrowly as to write §105(a) out of the Code altogether.37 Furthermore, while a court's power may be at its strongest under §105(a) when the court is coupling §105(a) with another explicit statute in the Code, and at its weakest when §105(a) is sought to be used in contravention of another explicit statutory provision, an order of substantive consolidation—although not explicitly authorized by statute—is not in contravention of and does not enervate any other specific provision of the Code.38

In fact, depending on the circumstances of an individual case, §105(a) may be coupled with another provision of the Code to effect substantive consolidation. For example, when a trustee seeks to substantively consolidate two entities on the basis that the corporate affairs of two entities are too intermingled for efficient administration, §105(a) of the Code39 may be invoked in furtherance of the trustee's duty in §704 to close the estate expeditiously, and to examine and object to proofs of claim.40

Federal Rule of Bankruptcy Procedure 1015

Proponents of substantive consolidation often point to Rule 1015 as a basis for a court's authority to order substantive consolidation. Importantly, Rule 1015 is procedural and not substantive in nature. As issued by the Supreme Court (not by Congress), Rule 1015 provides:

(b) Cases involving two or more related debtors. If...two or more petitions are pending in the same court by or against...(4) a debtor and an affiliate, the court may order a joint administration of the estates. Prior to entering an order, the court shall give consideration to protecting creditors of different estates against potential conflicts of interest...
Fed. R. Bankr. P. 1015(b).

The 1983 Advisory Committee Notes to Fed. R. Bankr. P. 1015 emphasize that the Rule does not deal with substantive consolidation of estates involving two or more separate debtors; rather, the Advisory Committee opines that substantive consolidation of separate debtor estates may be appropriate "as when the affairs of an individual and a corporation are so intermingled that the court cannot separate their assets and liabilities." The Advisory Committee also states that while substantive consolidation is neither authorized nor prohibited by Rule 1015, the propriety of such an order would depend on the substantive considerations and on how consolidation would affect the rights of creditors.

Importantly, any power of a bankruptcy court to order substantive consolidation stemming from the Federal Rules of Bankruptcy Procedure does not equate to a substantive mandate; rather, the Rules are prescribed by the Supreme Court and do not "abridge, enlarge or modify any substantive right."41 Thus, Rule 1015 only provides a permissive environment in which a court is not precluded from utilizing a procedural process necessary to effectuate substantive consolidation, provided that the court already has the power to make such an order. Accordingly, Rule 1015 is not in itself a source of substantive court power.42

"Rewriting the Code"

Opponents of substantive consolidation argue that an order of substantive consolidation effectively rewrites §§302 and 541(a) out of the Code43 and effectively alters the language of Federal Rule of Bankruptcy Procedure 1015. These arguments are without merit.

Section 302 of the Code concerns a decision by married debtors to file a joint petition, and it allows the court to determine the extent to which, if any, the estates of spouses should be consolidated.44 Presumably, the mere state of connubiality and the inevitable concomitant intermingling of the paraphernal and marital financial affairs led Congress to explicitly provide that separate estates could be combined in a single pool to pay creditors.45 Consolidation under §302 is designed primarily for ease of administration.46 No such presumptions would be appropriate for corporate debtors, especially considering that a fundamental purpose of having separate corporate structures is to limit liability. Even under the doctrine of expressio unius est exclusio alterius,47 §302 only applies to the commencement of a joint case by the filing of a bankruptcy petition; nothing in the language of §302 prevents a motion or an action after the commencement of separate cases to substantively consolidate a debtor with another entity.

Likewise, nothing about substantive consolidation rewrites §541(a) of the Code. Section 541(a) concerns property of the individual debtor estate; an order granting substantive consolidation does not add to or subtract from the property of the estate unless the corporate veil is also pierced. Substantive consolidation simply pools assets and liabilities of several different estates for the benefit of creditors; the property of any one of the consolidated estates is unchanging. Finally, as stated in the 1983 Advisory Committee notes to Federal Rule of Bankruptcy Procedure 1015, that Rule neither authorizes nor prohibits substantive consolidation, and any argument that an order of substantive consolidation rewrites Rule 1015 is equivocal inasmuch as concluding that a court does not have the power to order substantive consolidation also rewrites the Rule.

Conclusion

The holding of Grupo Mexicano, which narrowly involves the issuance of preliminary injunctions pursuant to Federal Rule of Civil Procedure 65, is not directed at a bankruptcy court's power to grant substantive consolidation. To the extent that Grupo Mexicano is applicable to a motion or action for substantive consolidation, its concerns over creditor abuse and limiting a court's equitable powers to those existing at the time of the enactment of the Judiciary Act of 1789 are inapplicable; the Code provides numerous protections to debtors against creditor abuses, and the Bankruptcy Act of 1898, and the presently enacted Code of 1978, as amended, constitute congressional expansion of the equitable jurisprudence existing in 1789. Furthermore, under the flexible approach to interpreting equitable remedies, substantive consolidation fits within the traditional boundaries of equitable relief inasmuch as it is closely analogous to veil-piercing type theories. Substantive consolidation is simply not a type of relief that has never been available before, much less one that is contrary to long-standing precedent. In sum, while detractors may argue that nothing in the Code allows substantive consolidation in chapter 7 cases, the antithetical is also true—nothing in the Code prevents it.


Footnotes

1 More precisely, the pooled assets satisfy the unsecured and undersecured creditors of the consolidated estates because a secured creditor is entitled to the value of its lien or interest in its collateral notwithstanding an order of substantive consolidation. Dewsnup v. Timm, 502 U.S. 410, 420 (1992) (stating that a creditor's valid liens will survive bankruptcy unaffected unless the Code clearly permits modification); Farrey v. Sanderfoot, 500 U.S. 291, 297 (1991) ("ordinarily, liens and other secured interests survive bankruptcy"). Return to article

2 Eastgroup Properties v. Southern Motel Association Ltd., 935 F.2d 245, 248 (11th Cir. 1991); Union Savings Bank v. Augie/Restivo Baking Co. (In re Augie/Restivo Baking Co.), 860 F.2d 515, 518 (2nd Cir. 1988); In re Affiliated Foods Inc., 249 B.R. 770, 775 (Bankr. W.D. Mo. 2000). Return to article

3 Flora Mir Candy Corp. v. R.S. Dickson & Co., 432 F.2d 1060, 1062-63 (2nd Cir. 1970). Return to article

4 Chemical Bank of New York Trust Co. v. Kheel, 369 F.2d 845, 847 (2nd Cir. 1966). Return to article

5 In re Murray Industries Inc., 119 B.R. 820, 829 (Bankr. M.D. Fla. 1990). See, also, FDIC v. Colonial Realty Co., 966 F.2d 57 (2nd Cir. 1992) ("only through a searching review of the record, on a case-by-case basis, can a court ensure that substantive consolidation effects its sole aim: fairness to all creditors"). Return to article

6 2 Collier on Bankruptcy, ¶105.09[2], pp. 105-88 to 105-89 (Alan N. Resnick & Henry J. Somers eds., 15th ed. rev. 2004). Since substantive consolidation is not a statutorily prescribed remedy and since it is intimately tied to the particular facts of a case, numerous tests and analogies are used by courts in determining whether substantive consolidation is appropriate in a given circumstance. Some factors courts consider are those commonly used in alter-ego or veil-piercing actions. In re Tureaud, 45 B.R. 658, 662 (Bankr. N.D. Okla. 1985), aff'd., 59 B.R. 973 (N.D. Okla. 1986). State law criteria used to pierce a corporate veil is of limited value, however, because those criteria are generally focused on negating the limited liability afforded to a corporation; the focus of substantive consolidation is fundamentally different inasmuch as the court is focused on the equitable treatment of all creditors. FDIC v. Colonial Realty Co., 966 F.2d 57, 61 (2nd Cir. 1992). Not surprisingly, courts have reconfigured the criteria used to pierce the corporate veil. The factors employed by one bankruptcy court consist of the:

  1. degree of difficulty in segregating and ascertaining individual assets and liabilities,
  2. presence or absence of consolidated financial statements,
  3. profitability of consolidation at a single physical location,
  4. commingling of assets and business functions,
  5. unity of interests and ownership between the various corporate entities,
  6. existence of parent and inter-corporate guarantees on loans, and
  7. transfer of assets without formal observance of corporate formalities.
In re Vecco Constr. Industries, 4 B.R. 407, 410 (Bankr. E.D. Va. 1980). More recent cases, while acknowledging the factors set forth above, have given greater consideration to a balancing of the prejudices for and against substantive consolidation. See, e.g., Eastgroup Properties, 935 F.2d at 249-50. In the case of In re Snider Bros. Inc., 18 B.R. 230, 234 (Bankr. D. Mass. 1982), the court characterized the analysis as weighing "the economic prejudice of continued debtor separateness versus the economic prejudice of consolidation." Id. Courts utilizing this approach have permitted consolidation when the following factors are present:
  1. There is a substantial identity of the entities to be consolidated.
  2. There is either a necessity for consolidation or a harm to be prevented or a benefit to be gained by consolidation.
  3. The objecting creditor did not rely on the separate credit of one or more of the entities and would thus not be prejudiced by consolidation.
  4. The demonstrated benefits of consolidation counterbalance or heavily outweigh the harm to the objector.
Id. See, also, Eastgroup Properties, supra; 2 Collier on Bankruptcy ¶105.09[2][b] at 105-94 to 105-96. The Eighth Circuit Court of Appeals has opted for what appears to be a combination of the two general approaches described above. In First National Bank of El Dorado v. Giller (In re Giller), 962 F.2d 796 (8th Cir. 1992), the court stated that "factors to consider when deciding whether substantive consolidation is appropriate include (1) the necessity of consolidation due to the interrelationship among the debtors, (2) whether the benefits of consolidation outweigh the harm to creditors and (3) prejudice resulting from not consolidating the debtors." Id. at 799. The Eighth Circuit's use of the word "include" indicates that the court's contemplation that other factors, such as those set out above, may be considered by the bankruptcy court in ordering substantive consolidation; indeed, many of the factors enumerated above are but subsets of the three general factors listed by the court in Giller. Furthermore, Giller specifically encourages a weighing of the benefits of consolidation versus the prejudice of not consolidating the debtors. To that end, the bankruptcy court has the power to avoid prejudice to an innocent party and "to order less-than-complete substantive consolidation, or to place conditions on the substantive consolidation." In re Jetter, 171 B.R. 1015, 1016-17 (Bankr. W.D. Mo. 1995). Return to article

7 "Maxwell Tucker, Grupo Mexicano and the Death of Substantive Consolidation," 8 Am. Bankr. Inst. L. Rev. 427 (2000). Return to article

8 Id. Return to article

9 For purposes of simplicity, this article focuses on the substantive consolidation of chapter 7 cases. A conclusion that substantive consolidation applies in chapter 7 cases carries even more weight in chapter 11 cases on the basis that §1123(a)(5)(C) provides that a chapter 11 plan may provide for the merger or consolidation of the debtor with one or more entities. 11 U.S.C. §1123(a)(5)(C). See, e.g., In re American Homepatient Inc., 298 B.R. 152, 165 (Bankr. M.D. Tenn. 2003) (finding that a bankruptcy court retains the power to substantively consolidate chapter 11 cases); In re Stone & Webster Inc., 286 B.R. 532, 537 (Bankr. D. Del. 2002) (same). Return to article

10 527 U.S. 308 (1999). Return to article

11 See, e.g., Sampsell v. Imperial Paper & Color Corp., 313 U.S. 215, 218-19 (1941) (substantively consolidating the bankruptcy estate of an individual bankrupt with a nondebtor corporation using veil-piercing-type theories). See, also, Chemical Bank New York Trust Co. v. Kheel, 369 F.2d 845, 846-47 (2nd Cir. 1966) (concluding that an order substantively consolidating eight liquidating companies under chapter X of the Bankruptcy Act was within the power of the bankruptcy court when the inter-company affairs were hopelessly intermingled). See, also, Alexander v. Compton (In re Bonham), 229 F.3d 750, 763-65 (9th Cir. 2000) (substantively consolidating a chapter 7 debtor's estate with nondebtor entities); Woburn Associates v. Kahn (In re Hemingway Transport Inc.), 954 F.2d 1, 4 (1st Cir. 1992) (noting that the bankruptcy court granted substantive consolidation of chapter 7 cases after they were converted from chapter 11); Eastgroup Properties v. Southern Motel Assoc. Ltd. (In re Southern Motel Assoc. Ltd.), 935 F.2d 245, 248 (11th Cir. 1991) (approving the substantive consolidation of chapter 7 cases based on the bankruptcy court's inherent equitable power). Return to article

12 The author is not convinced that traditional equity jurisprudence lacked any type of related doctrine. See infra, footnote 25. Return to article

13 See Atlas Life Insurance Co. v. W. I. Southern Inc., 306 U.S. 563, 568 (1939) ("[T]he 'jurisdiction' thus conferred...is an authority to administer in equity suits the principles of the system of judicial remedies which had been devised and was being administered by the English Court of Chancery at the time of the separation of the two countries."). Return to article

14 Grupo Mexicano, 527 U.S. at 333. Return to article

15 Id. at 321. Return to article

16 Id. at 319-20. Return to article

17 Id. at 329, 332. Return to article

18 Fed. R. Bankr. P. 3001(f) (stating that a proof of claim is prima facie evidence of the validity and amount of the claim). Return to article

19 If a proof of claim is disputed, then the Bankruptcy Rules provide an orderly process for adjudicating the amount and validity of the claim. Fed. R. Bankr. P. 3007, 7001, 9014. Even in the absence of a resolution of a disputed proof of claim, the bankruptcy court is empowered to estimate the amount of the claim if its contingent and unliquidated nature would unduly delay the administration of a case. 11 U.S.C. §502(c). Return to article

20 §541. Return to article

21 §362(a). Return to article

22 §704(1). Return to article

23 See Cooke, William, The Bankrupt Laws at I: 240 (4th ed. 1799) ("[D]ebts, whether sole or joint, ought to be paid out of the bankrupt's estate, which is comprised of his separate estate, and of his moiety on the joint estate, and therefore [the partnership creditor] should come in pari passu with the separate creditors.") (discussing Ex parte Haydon, June 1785, and Ex parte Hodgson, 2 Brown Chancery Cases 5 (1785)). Thus, a partnership creditor was able to effectively substantively consolidate both the partnership estate and the estate of one of the individual partners to satisfy its claim at a time when established law provided that a partner's separate creditors took priority in a partner's non-partnership assets on the basis that a commission in bankruptcy was an execution for all creditors. Maxwell Tucker, in his article "Grupo Mexicano and the Death of Substantive Consolidation," 8 Am. Bankr. Inst. L. Rev. at 431, apparently recognizes the validity of consolidation in alter ego-type claims. Tucker states: "So long as the federal courts follow state corporate law "alter ego" principles to a creditor's request to consolidate one corporation into another, the Grupo Mexicano limitation upon the exercise of federal equitable powers as discussed herein is not invoked." Id. Return to article

24 See, supra, footnote 8. Return to article

25 See, supra, footnote 25. See, also, 27A Am. Jur. 2d Equity §§111, 115 (instructing that "equity will not suffer a wrong to be without a remedy" and that under the maxim that equity is equality, equity treats all members of a class as being on equal footing and will impose burdens and distribute rights without preference). Indeed, unjust, disparate treatment based on the unique circumstances of a particular case is often the knell of unsecured creditors in seeking substantive consolidation. Return to article

26 313 U.S. at 219. Return to article

27 Grupo Mexicano, 527 U.S. 322. Return to article

28 11 U.S.C. §726 (explaining how property of the estate is to be distributed). Return to article

29 11 U.S.C. §510 (allowing a court to subordinate, for purposes of distribution, all or part of an allowed claim to that of another allowed claim under the principles of equitable subordination notwithstanding the statutory guidelines for distribution of estate assets). While some similarities between equitable subordination and substantive consolidation exist inasmuch as certain creditors lose a more advantageous position vis-a-vis another creditor, a motion for substantive consolidation is sometimes dubbed "egalitarian subordination" despite the obvious oxymoron, inasmuch as substantive consolidation leads to equal economic rights against the consolidated estates among the class of unsecured creditors. Although the focus of this article is on chapter 7 cases, it should be noted that in the context of a chapter 11 case, 11 U.S.C. §1123(a)(5)(C) specifically provides that a chapter 11 plan may provide for the "merger or consolidation of the debtor with one or more persons." Return to article

30 Begier v. IRS, 496 U.S. 53, 58 (1990) ("Equality of distribution among creditors is a central policy of the Code.") Often the pleas of the unsecured creditors of the less-solvent estate are that they would receive a smaller distribution than the creditors of the more solvent estate when both sets of creditors should be entitled to parity of distribution under the unique facts of the case. Return to article

31 11 U.S.C. §105(a). Return to article

32 Schwartz v. Aquatic Dev. Group Inc. (In re Aquatic Dev. Group Inc.), 352 F.3d 671, 680 (2nd Cir. 2003) ("While perhaps expansive, '[t]he equitable power conferred on the bankruptcy court by §105(a) is the power to exercise equity in carrying out the provisions of the Code,' not the broader power to invoke equity 'to further the purposes of the Code generally, or otherwise to do the right thing.'" (quoting United States v. Sutton, 786 F.2d 1305, 1308 (5th Cir. 1986)). Return to article

33 Even when a statute is clear, a court should look to the legislative history to determine if Congress expressed a legislative intention contrary to the plain language of the statute. Consumer Product Safety Commission v. GTE Sylvania Inc., 447 U.S. 102, 108 (1980). Statutory ambiguity is often resolved by resorting to the legislative history. Barnhill v. Johnson, 503 U.S. 393, 401 (1992). Additionally, a court is empowered to ignore the plain language of a statute when the plain language would produce an "absurd" result. Maryland State Dep't. of Educ. v. U.S. Dep't. of Veterans Affairs, 98 F.3d 165, 169 (4th Cir. 1996) ("For this exception to apply, however, the absurdity 'must be so gross as to shock the general moral or common sense...there must be something to make plain...that the letter of the statute is not to prevail.'") (citation omitted). Return to article

34 Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 206 (1988) ("[W]hatever equitable powers remain in the bankruptcy courts must and can only be exercised within the confines of the Code."). Return to article

35 United States v. Sutton, 786 F.2d 1305, 1308 (5th Cir. 1986). Return to article

36 Id. Return to article

37 Barron v. Texas Guaranteed Student Loan Corp. (In re Barron), 264 B.R. 833, 844 (Bankr. E.D. Tex. 2001) ("While a bankruptcy court must always exercise due caution to insure that its equitable powers are being exercised even-handedly and in a manner consistent with the provisions of the Code, the scope of that restriction should not be exaggerated to the point at which bankruptcy courts feel powerless to act unless a party can present a specific textual quotation which precisely identifies the availability of a specific remedy.") (citation omitted). Return to article

38 See, infra, Part D. Return to article

39 11 U.S.C. §105(a). Return to article

40 §704(1) and (5). Return to article

41 28 U.S.C. §2705. Return to article

42 In re Mobile Steel Co., 563 F.2d 692 (5th Cir. 1977). Return to article

43 11 U.S.C. §§301, 541(a). Return to article

44 §302(a-b). Return to article

45 Senate Report No. 95-989. Return to article

46 Id. Return to article

47 The inclusion of one expression is an implicit exclusion of other expressions. Hartford Underwriters Insurance Co. v. Magna Bank NA (In re Hen House Interstate Inc.), 177 F.3d 719, 723 (8th Cir. 1999), aff'd. sub. nom, Hartford Underwriters Ins. Co. v. Union Planters Bank NA, 530 U.S. 1 (2000). Return to article

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Friday, July 1, 2005

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