Opinion ID: 562372
Heading Depth: 2
Heading Rank: 2

Heading: Substantive Consolidation in This Case

Text: 23 The bankruptcy court in this case found the existence of a number of factors, from which it concluded that substantive consolidation was warranted: 24 (1) Ownership is common. 25 (2) Both entities used the same employees and the same physical facilities. Employees were paid only by one entity, although they performed services for both. 26 (3) Funds were transferred from one entity to another. 27 (4) One entity paid unsecured debts of the other. 28 (5) Although the relationship between the two entities was set forth in written lease agreements, substantial defaults in performance of those agreements had no effect on the existing and continuing interrelationships. 29 (6) Confusion exists among creditors regarding the question of which entity owns which assets. 30 (7) It appears that, absent substantive consolidation, the majority of the creditors will receive only a small portion of their claims, while the equity interest holders may receive a substantial distribution. 31 In re Gainesville P-H Properties, Inc., 106 B.R. 304, 306 (Bankr.M.D.Fla.1989). While appellants contest the significance of many of these findings with respect to substantive consolidation because of the particular facts of this case, they challenge as clearly erroneous only the last factor. They point out that, based on the total amount of administrative and priority claims filed in both cases (which, under the relevant provisions of the bankruptcy code, must be paid before unsecured creditors receive a distribution), there is no chance that the unsecured creditors will receive a distribution even if the bankruptcy estates are consolidated. But the bankruptcy court did not limit this finding to unsecured creditors; given the claim-to-asset ratio in the GPH case and the testimony at the hearing on the motion for consolidation, 15 it seems likely that many of GPH's creditors with administrative claims will receive only a small portion of their administrative claims. Appellants also contend that, even without consolidation, there is no chance that SMA's equity holders will receive a distribution because there is a total of approximately $12,000,000 in administrative and unsecured claims which have been filed that would have to be satisfied before SMA's equity holders would receive a distribution. Put differently, the $12,000,000 in claims would have to be reduced to a sum less than $861,205 before a distribution to equity holders would be possible. Still, at the hearing, the bankruptcy trustee testified that, in the SMA case, the possibility exists that some money would be available to return to the Debtor equity holders possibly, depending upon objection to claims etcetera and whether those claims are allowed; that is, the amount of claims in the SMA case may be decreased because of challenges to the claims. Thus, at this point, it is impossible to say that the bankruptcy court's findings were clearly erroneous. 32 We still have to determine whether the bankruptcy court and the district court correctly ordered substantive consolidation. We have to determine whether consolidation yields benefits offsetting the harms it inflicts on objecting parties, In re Auto-train, 810 F.2d at 276, using the Auto-train analysis. 33 We believe that the bankruptcy trustee, as the proponent of substantive consolidation, presented sufficient evidence on the common identity of the debtor entities and on the harm to be avoided or benefit to be realized from consolidation to establish a prima facie case for consolidation. That there is substantial identity between the entities to be consolidated is undisputed: appellants concede this point in their brief. 16 Appellants' real challenge would seem to be to the second part of the prima facie case: did the proponent of consolidation present evidence sufficient to meet his burden of proof that consolidation is necessary to avoid some harm or to realize some benefit? We believe that the answer to this question is yes. The evidence presented in the hearing held by the bankruptcy court indicates that there are several possible harms to be avoided or benefits to be realized from consolidation relating to the treatment of GPH creditors as compared to SMA creditors. First, King testified that GPH had probably paid some of SMA's unsecured obligations without being contractually obligated to do so, and the bankruptcy court apparently found likewise. Consolidation will help see to it that GPH's creditors are not harmed by such transactions for which GPH received no consideration. Consolidation will also lessen the harm being done to creditors, such as Specialty Roofing and Waterproofing, who did not know that the ownership and management functions involved in the operation of the various motels involved had been separated and that one entity held the fee simple title to, and leasehold interests in, these motels and another entity operated them--creditors who, in effect, relied on the combined credit of both entities in dealing with one of the entities. In addition, consolidation will benefit GPH creditors (administrative and priority creditors) because a larger portion of each of their claims will be paid than if consolidation did not occur--both because their claims would be paid from the larger pool of assets resulting from consolidation and because substantive consolidation eliminates claims that either debtor has against the other. 34 Because the trustee, as proponent of consolidation, established a prima facie case for substantive consolidation, it was incumbent on the appellants to show that (1) they relied solely on SMA's separate credit; and (2) they will be prejudiced by substantive consolidation. While we acknowledge that they have shown that they will be prejudiced by substantive consolidation, we do not believe that appellants have established that they relied solely on SMA's separate credit in dealing with SMA. Appellants point to two pieces of evidence which, they contend, prove that they relied on the separate credit of SMA: (1) the testimony by Georgia King that both GPH and SMA held themselves out to the public and to their creditors as separate corporations and (2) the fact that Eastgroup pursued a court fight over the identity of the tenant in the lease contracts with Eastgroup and that the bankruptcy and district courts held that SMA was the tenant. 17 That GPH and SMA may have, in general, held themselves out to the public and to their creditors as separate corporations does not mean that appellants did not rely on the credit of both corporations. Nor does Eastgroup's litigation over the identity of its tenant satisfy its burden. That litigation only proves that Eastgroup's tenant was SMA; it proves nothing about whether Eastgroup relied on SMA's separate credit in deciding to deal with SMA. 18 Because appellants failed to prove that they relied on the separate credit of SMA in deciding to deal with it, they have failed to carry their burden of proof and their appeal must fail.