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Bankruptcy Courts Lack Authority to Involuntarily Substantively Consolidate Debtor with Nonprofit Non-Debtor

By: Eileen Ornousky

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

           Although bankruptcy courts have broad equitable powers, including the power to substantively consolidate debtors, these powers cannot be used to circumvent other sections of the Bankruptcy Code. Substantive consolidation pools separate legal entities’ assets and liabilities and allows each entity’s liability to be satisfied out of the common pool of assets.[1] In In re Archdiocese of Saint Paul and Minneapolis,[2] the United States Bankruptcy Court for the District of Minnesota held that it lacked the authority to substantively consolidate the debtor Archdiocese with over 200 Catholic nonprofit, non-debtor entities.[3] Additionally, the Court stated that even if it had the authority to do so, the Archdiocese and the other entities were not sufficiently interrelated to warrant consolidation.[4]

           The Archdiocese of Saint Paul and Minneapolis filed a chapter 11 petition on January 16, 2015 to address liability stemming from sexual abuse claims.[5] Thereafter, the official committee of unsecured creditors moved to substantively consolidate the debtor with over 200 Catholic nonprofit, non-debtor entities.[6] Under Section 105 of the United States Bankruptcy Code, bankruptcy courts are granted broad equitable powers, including the power to consolidate.[7] In this instance, the bankruptcy court refused to consolidate because to do so would violate Section 303(a),[8] which provides that a court cannot force “a corporation that is not a moneyed, business, or commercial corporation,” including eleemosynary institutions such as the non-debtor Catholic churches, into bankruptcy.[9]

           The Court noted that even if it had the power to consolidate the Archdiocese with the other Catholic entities, it would not in this instance because there was insufficient evidence to conclude that a consolidation was warranted.[10] Generally, substantive consolidation is warranted where the debtor and targeted entities are so interrelated that consolidation is necessary and the benefits of consolidation outweigh the potential harm.[11] In Archdiocese of Saint Paul and Minneapolis, the committee argued that the archdiocese “exercised control” over the other 200 entities generally and that the liabilities of the debtor and the other entities were inextricably intertwined, purportedly demonstrated because most sexual abuse lawsuits against specific entities also identified the debtor as a defendant.[12] The Court rejected the committee’s arguments, finding that although the Catholic Church’s hierarchical structure does exercise control over the non-debtor entities, the entities were legally separate and distinct.[13] Additionally, the Court held that there was significant potential harm to other creditors because consolidation could prejudice creditors of the non-debtors who have no sexual abuse allegations pending.[14]

           Archdiocese of Saint Paul and Minneapolis highlights the court’s reluctance to substantively consolidate debtor and non-debtor entities. The Court could have rested its decision on Section 303(a)’s prohibition against forcing non-profit entities into bankruptcy.[15] However, the Court further noted that even if it could substantively consolidate the Archdiocese and the non-debtor entities it would decline to do so under these circumstances.[16] The Court made clear that it would not substantively consolidate debtor and non-debtor entities unless the creditor could show that the entities were interrelated such that they were “inextricably intertwined.”[17] Here, alleging that the debtor “exercises control” over the non-debtors was insufficient.[18] Consequently, a creditor who is moving for substantive consolidation must meet the burden of alleging facts that relate to each and every entity that they seek to consolidate and show that the finances of each particular entity is so “confusingly intertwined that it is impossible to separate them.”[19]



[1] See In re Archdiocese of Saint Paul and Minneapolis, 553 B.R. 693, 701 (Bankr. D. Minn. 2016); See also William L. Norton, Jr., Norton Bankruptcy Law and Practice § 21:3 (Thomson Reuters, 3d ed. 2016).

[2] In re Archdiocese of Saint Paul and Minneapolis, 553 B.R. 693 (Bankr. D. Minn. 2016).

[3] See Id. at 696.

[4] See Id. at 701–04.

[5] See id. at 696; see also Archdiocese of Saint Paul and Minneapolis Reorganization, http://information.archspm.org (last visited September 18, 2016).

[6] See In re Archdiocese of Saint Paul and Minneapolis, 553 B.R. at 696.

[7] See 11 U.S.C. § 105(a); see also In re Archdiocese of Saint Paul and Minneapolis, 553 B.R. at 700.

[8] See 11 U.S.C. § 303(a); see also In re Archdiocese of Saint Paul and Minneapolis, 553 B.R. at 701.

[9] See In re Archdiocese of Saint Paul and Minneapolis, 553 B.R. at 700-01 (defining eleemosynary institutions as those related to charity and not-for-profit). 

[10] See Id.

[11] See Id. 701–02.

[12] See Id. 702–03.

[13] See Id. at 703.

[14] See Id. at 704.

[15] See Id. at 700–01.

[16] See Id. at 702–04.

[17] See Id. at 703.

[18] See Id. at 702.

[19] See Id. at 703.