## United States Bankruptcy Appellate Panel FOR THE EIGHTH CIRCUIT

________________ 07-6006ND

________________ Midwest Agri Development Corp., *
* Debtor. *
* Kip M. Kaler, * Appeal from the United States * Bankruptcy Court for the Trustee - Appellant, * District of North Dakota
* v. * Midwest Ag Services, Inc., *
* Claimant - Appellee. *

_________________ Submitted: May 15, 2007 Filed: June 8, 2007

_________________ FEDERMAN, VENTERS, and McDONALD, Bankruptcy Judges FEDERMAN, Bankruptcy Judge Debtor Midwest Agri Development Co rp. (MAD) was an investment holding company and the parent corporation of several subsidiaries, including Midwest Ag Services, Inc. (MASI). MAD was the sole shareholder of its subsidiaries. As the holding company, MAD took out loans on behalf of the subsidiaries, paid each of their major expenses, and billed th e loans and amounts to the subsidiaries at year-end. MAD also intermingled the subsidiaries’ a ssets throughout the year. For example, if2 one of the subsidiaries need ed the use of a truck, a nd another subsidiary had one available, MAD took the truck from the second subsidiary and gave it to the first, noting the transfer on the books at the end of the year. Or, in some cases, MAD took out loans on behalf of one subsidiary, but shared the loan proceeds with others. As a result, MAD and the various subsidiaries owed each other significant amounts of money at any given time.

Most of the subsidiaries ceased operations by mid-2002. MASI was the last subsidiary operating, and closed its opera tions sometime in late 2002 or early 2003. MAD filed a Chapter 11 bankruptcy petiti on in September 2002, and converted to Chapter 7 on January 24, 2003. At that point, MAD’s Trus tee took steps to dissolve all of the subsidiaries, except MASI, whic h the MAD Trustee placed into a Chapter 7 bankruptcy proceeding on February 21, 2003. As to the subsidiaries other than MASI, the MAD Trustee liquidated their a ssets, resulting in net proceeds of over $274,000, which the MAD Trustee retained for the MAD estate. MASI’s bankruptcy trustee filed a Proof of Claim in MAD’s case on April 30, 2003. In its amended claim, MASI asserted a claim of $1,197,194.27, based on the total amount of services performed, money loaned, a nd money due to MASI from MAD, as well as from the other subsidiaries.

The MAD Trustee objected to MASI’s cl aim because, in sum, although the companies’ accounting records showed thatMASI was owed a net amount of money by some combination of MAD and the other subsidiaries, the books did not show specifically which of those entities owed MA SI any particular amount of that money. Also, the books did not show whether MASI itself owed any of those entities money. An accountant employed by the MAD and MASI trustees testified that, given the manner in which MAD and the subsidiaries kept their books over the years, there would essentially be no way to determine the individual amounts that each subsidiary owed to the others. The M AD Trustee asserted that, th erefore, MASI’s claim could1 First Nat’l Bank of Olathe v. Pontow (In re Pontow), 111 F.3d 604, 609 (8th Cir. 1997); Sholdan v. Dietz (In re Sholdan), 108 F.3d 886, 888 (8th Cir. 1997); Fed. R. Bankr. P. 8013.

2 Anderson v. Bessemer City , 470 U.S. 564, 573, 105 S.Ct. 1504, 1511, 84 L.Ed.2d 518 (1985).

3 See 2 Collier on Bankruptcy ¶ 105.09[ 2][a], pp. 105-91 (Lawrence P. King, et al. , 15 thed. rev. 1999) (“Perhaps the most common group of additional elements whose presence will result in an order for substantive consolidation is poor or nonexistent record keeping of, or commingling of, separate assets

3 not exceed the net amount that MAD itself owedto all the subsidiaries as of January 31, 2003, which MAD’s records showed to be $42,182.51.

The Court allowed MASI’s claim fo r $894,476.02, which was the net amount owed to it by all of the entities as of January 31, 2002 (whi ch was $951,014), less certain expenses attributable to MASI fo r fiscal year 2002 ($56,537.98). In allowing MASI’s claim against MAD, the Bankruptcy C ourt held that, since MAD received the proceeds from the liquidation of those othe r subsidiaries, and since MASI was owed something by some combination of those subs idiaries, it would be fair and equitable to allow the entire claim agains t MAD. The MAD Trustee appeals.

We review findings of fact for cl ear error, and le gal conclusions de novo. 1 A finding is clearly erroneous when the review ing court is “left with the definite and firm conviction that a mistake has been committed.” 2

In cases involving significant amounts of debt between related companies, and difficult accounting questions resulting from suchtransfers, courts are often asked to substantively consolidate the related companie s, so that creditors of all of them can make claims against the combined assets. Substantive consolidation is appropriate where the intercompany claims are impossible to determin e, or where the accounting expense in doing so would be prohibitive. 3 Alternatively, piercing the corporate veil(particularly cash and other liquid a ssets) and liabilities and inter-affiliate transactions, whether by design or otherwis e, that makes it prohibitively expensive or impossible to sort out the proper a llocation of assets and liabilities.”). See also, e.g., In re Augie/Restivo Baking Co. , 860 F.2d 515 (2 ndCir. 1988) (holding that substantive consolidation should be allo wed (a) when the creditors dealt with separate entities as a single economic un it and did not rely on the company’s separate identity, or (b) when the detangli ng of the intertwined companies is either impossible or costly); In re Affiliated Foods, Inc. , 249 B.R. 770, 779-80 (Bankr. W.D. Mo. 2000) (ordering substantive consolidation in part because “it would be extremely difficult, if not impossible, to separate the financial statements and affairs of the corporate entities”).

4 See, e.g., Butler Machinery, Inc. v. Haugen ( In re Haugen Constr. Servs., Inc. ), 104 B.R. 1013 (D. N.D. 1989) (concluding th at sole shareholder and another of shareholder’s corporations could be he ld jointly liable for debtor-corporation’s debts under veil piercing / alter ego theori es, in part because the businesses were operated as a single pool of assets and the entities paid each other’s expenses); Simek v. Erdman ( In re Erdman ), 236 B.R. 904, 911-12 (Bankr. D. N.D. 1999) (discussing veil piercing under North Dakota law).

4 is sometimes an appropriate mechanism for reaching a subsidiary’s funds in the hands of a parent when the entities’ a ssets and liabilities are commingled. 4 For reasons which are not clear, no party has asked the Bankruptcy Court for substantive consolidation or veil piercing here.

In any event, the Bankruptcy Court in this case held that MAD should nevertheless be responsible for the debts of the other subsidiaries to MASI because MAD was holding the proceeds from the liquida tion of those subsidiaries. However, MAD is only entitled to those proceeds – as the owner of the other subsidiaries – if it has first properly dissolved those subsidiaries.

In the Affidavit he submitted to the Bankruptcy Court in support of his objection to MASI’s claim, the MAD Trust ee stated that he dissolved the other5 N.D. Cent. Code. § 10-19.1-110

.

6 N.D. Cent. Code § 10-19.1-110(1)(b).

5 subsidiaries in accordance with § 10-19.1-110 of the North Dakota statutes. 5 That section provides that the notice of disso lution must be published in accordance with certain requirements, and by “[g]iving written notice to known creditors and claimants pursuant to subsection 35 of section 10-19.1-01.” 6 At oral argument on appeal, the MAD Trustee admitted that, even though he had lists of vendors with whom the various subsidiaries had done business, he did not send notice of the dissolution to those creditors. The Bankruptcy Court did not make any finding as to whether the MAD Trustee complied with the applicable dissolution statutes. If the MAD Trustee did not comply, then the funds being heldby him as MAD’s Trustee should be made available to all creditors of the dissolved subsidiaries, not just MASI. Conversely, if the MAD Trustee did properly dissolve the s ubsidiaries, then only those creditors who properly filed claims in the respective disso lutions are entitled to share in the funds, and then only to the extent that those f unds came from the subsidiaries indebted to such creditors.

The Bankruptcy Court concluded that M AD is responsible for the debts of its subsidiaries to MASI, but the Court came to that conclusion without first determining whether those subsidiaries had been prop erly dissolved under North Dakota law. Since liquidation of these companies was not done through substantive consolidation, and entitlement to a distribution from the proceed s of the subsidiaries’ assets therefore flows from the question of wh ether the subsidiaries were properly dissolved under North Dakota law, we conclude that the Ba nkruptcy Court erred in failing to make a determination on that issue.

On remand, the Bankruptcy Court shoul d determine whether the MAD Trustee complied with applicable North Dakota law in dissolving the subsidiaries. If so, the Court should then determine whether MASI or any other creditors retain claims6 against the proceeds now being held by M AD. If the dissolution process followed by the Trustee did not comply with North Dakota law, and thus did not eliminate such claims, then the Court should determine whether the dissolution proceeds now held by the MAD Trustee should be made available to the creditors of those subsidiaries, either within the bankruptcy proceeding or by simply returning the funds to such subsidiaries. And, finally, the Court s hould consider whether, given the time and expense involved in sorting out the debts of the subsidiaries, it should not either (i) allow the MAD Trustee to place some or all of the other subsidiaries into bankruptcy and substantively consolidate the cases; or (ii) allow MASI to pi erce the corporate veil as to the other subsidiaries which MA SI believes owed it m oney, thereby giving MASI a claim against MAD for the debt owed to MASI from those other subsidiaries, as well as the debt owed to it by MAD directly.

The Order allowing MASI’s claim is REVERSED and REMANDED for further findings in accordance with this opinion.

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