## Facts

- Two separate wholesale bakeries operated independently: Augie’s Baking Company, Ltd. (financed by Union Savings Bank) and Restivo Brothers Bakers, Inc. (financed by Manufacturers Hanover Trust Company (MHTC)).
- From 1983–1984, Union loaned about $2.4 million to Augie’s, secured by (1) a mortgage on Augie’s Central Islip real property and (2) security interests in Augie’s inventory, equipment, and receivables.
- In late 1984, Augie’s and Restivo executed a stock-for-stock transaction: Restivo acquired all of Augie’s stock in exchange for 50% of Restivo’s stock.
- Despite operational combination, Augie’s real property and equipment were not legally transferred; Augie’s remained the titled owner and was not dissolved.
- After January 1, 1985, Restivo changed its name to Augie/Restivo Baking Company, Ltd.; manufacturing operations were centralized at Augie’s plant, and the combined operation used a single set of books and issued financial statements as Augie/Restivo.
- After the combination, MHTC extended additional credit to Augie/Restivo and obtained a guarantee from Augie’s, including a subordinated mortgage on Augie’s real property.
- In 1986, Augie/Restivo and then Augie’s filed separate Chapter 11 cases; the debtors sought substantive consolidation of the two estates.
- Union objected, asserting consolidation would dilute or eliminate the priority it had bargained for in Augie’s collateral.

## Issues

1. Whether substantive consolidation was proper when a secured creditor extended credit in reliance on one debtor’s separate identity and collateral.
2. Whether operational integration and common bookkeeping justified consolidation absent proof that the estates were so entangled that separating them was impracticable or prohibitively costly.
3. Whether consolidation could be used to reallocate value among creditor groups, benefiting later lenders who knew the entities remained legally distinct.

## Decision

- The Second Circuit reversed the order granting substantive consolidation and remanded.
- The court held consolidation was not warranted because Union relied on Augie’s separate credit and collateral, and consolidation would impair Union’s rights.
- The court further held the record did not show entanglement so severe that untangling assets and liabilities was impossible or would consume the estates.

## Legal Principles

- Substantive consolidation is an equitable remedy to be used sparingly and only when justified by creditor expectations or administrative necessity.
- Two core inquiries govern substantive consolidation:
  - Whether creditors dealt with the entities as a single economic unit and did not rely on their separate identity in extending credit.
  - Whether the debtors’ affairs are so entangled that consolidation benefits all creditors because separation is impossible or so costly that it threatens any recovery.
- Operational integration (e.g., shared facilities, single books, consolidated financial statements) does not alone justify consolidation when separateness remained legally meaningful and creditors relied on it.
- Consolidation should not be used to alter prepetition priorities and redistribute value from creditors who relied on separateness to those who knowingly lent despite the separate corporate structure.

## Conclusion

The Second Circuit rejected substantive consolidation because Union’s secured lending rested on Augie’s separate identity and collateral, and the estates were not shown to be inextricably commingled; consolidation would have operated primarily as an inequitable change in creditor priorities rather than a necessary administrative remedy.


In re Augie/Restivo Baking Co., 860 F.2d 515 (2d Cir. 1988)