## Facts

- Four interrelated, commonly owned corporations (the debtor corporations) filed Chapter 11 bankruptcy cases.
- The debtor corporations sought substantive consolidation of their assets and liabilities to enable formulation of a reorganization plan.
- The debtor corporations presented testimony from an accountant regarding their accounting practices and financial structure.
- The accountant testified that the debtor corporations’ accounting was performed together and that the businesses did not maintain a reliable, separate accounting of each corporation’s assets and liabilities.
- The debtor corporations had guaranteed loans made to each other, further mixing their financial obligations.
- The accountant stated that an audit to separate the assets and liabilities of each corporation—if possible at all—would be prohibitively expensive and time-consuming.
- The accountant also testified that consolidation would benefit creditors as a whole by avoiding the cost and delay of attempting to sort out entity-by-entity ownership and liability.
- Two creditors objected to consolidation but did not present evidence that consolidation would disadvantage them.

## Issues

1. May a bankruptcy court order substantive consolidation of related Chapter 11 debtors when their financial records and obligations are commingled and separating them would be prohibitively costly or impracticable?
2. Should substantive consolidation be denied when objecting creditors offer no evidence that consolidation will cause them specific economic harm or that they relied on any debtor’s separateness?

## Decision

- The court granted the debtor corporations’ motion for substantive consolidation.
- The court accepted the accountant’s testimony that the debtor corporations’ accounting and obligations were so interwoven that separating the estates would be prohibitively expensive and time-consuming, and might not be feasible.
- The court treated consolidation as beneficial to the creditor body because it avoided the expense and delay associated with attempting to allocate assets and liabilities among the separate entities.
- The court noted that the two objecting creditors presented no evidence that consolidation would materially prejudice them.

## Legal Principles

- Substantive consolidation is an equitable remedy available in bankruptcy to combine the assets and liabilities of affiliated debtors and treat them as a single estate for plan and distribution purposes.
- Consolidation may be appropriate when the debtors’ books, records, and financial affairs are commingled such that separating assets and liabilities would impose excessive cost and delay or may not be reliably achievable.
- In assessing consolidation, courts consider whether consolidation will benefit creditors as a group by reducing administrative expense and avoiding prolonged disputes over intercompany transactions and guarantees.
- Objections to consolidation carry more weight when supported by evidence of concrete prejudice, such as a demonstrated reduction in expected recovery or proof that a creditor extended credit in reliance on a particular debtor’s separate identity.

## Conclusion

The court ordered substantive consolidation of four commonly owned Chapter 11 debtor corporations because their accounting and financial obligations (including intercompany guarantees) were maintained on a combined basis, making separation prohibitively expensive and time-consuming, and because the objecting creditors failed to show that consolidation would cause them specific economic harm.


In re Commercial Envelope Manufacturing Co., 3 Bankr. Ct. Dec. 647 (1977)