## Facts

- A group of payday-loan businesses controlled by Doris Nelson operated as a Ponzi scheme, raising about $135 million from roughly 650 investors with promised returns of 40–60%.
- Nelson divided operations among many entities, including LLS America, LLC (principal operating entity), D&D & Associates, LLC (a related real-estate holding entity owned by Nelson’s husband), and Team Spirit America, LLC (TSA), along with other affiliates.
- Nelson moved funds among entities without reliable records, including withdrawing funds from LLS America and TSA and routing them to D&D to finance purchase and renovation of a Spokane, Washington building used by the businesses.
- Investors commonly used form promissory notes naming a “Little Loan Shoppe” borrower and permitting the borrower to use funds in LLS America or other later-created companies, while disclaiming automatic liability of those other companies.
- In state-court litigation after the collapse, D&D was found to function as Nelson’s agent or partner and was held responsible for certain loan repayments tied to funds originating from LLS America and TSA.
- LLS America and D&D filed separate Chapter 11 cases; a Chapter 11 trustee sought substantive consolidation of the two debtor estates with eleven non-debtor affiliates (including TSA), citing pervasive commingling and inability to reliably separate assets and liabilities by entity.
- The bankruptcy court ordered nunc pro tunc substantive consolidation for purposes of marshalling assets and making a single pro rata distribution; LLS America and TSA appealed.

## Issues

1. What legal standard governs substantive consolidation of affiliated entities, including non-debtors, in a Chapter 11 case.
2. Whether the record of commingling, common control, and inadequate records supported a finding that the entities’ affairs were sufficiently entangled to justify consolidation.
3. Whether consolidation unfairly prejudiced creditors who claimed reliance on entity separateness, and whether any harm outweighed the benefits of consolidation.
4. Whether the bankruptcy court could rely on examiner findings and related state-court determinations when ordering consolidation.

## Decision

- The Bankruptcy Appellate Panel affirmed the bankruptcy court’s order granting nunc pro tunc substantive consolidation.
- The Panel concluded the bankruptcy court applied an appropriate substantive-consolidation framework and that the evidence supported consolidation.
- The Panel upheld consolidation of the two debtor estates and the eleven non-debtor affiliates, including TSA, into a single pooled estate for distribution.
- The Panel determined that any creditor-specific prejudice did not outweigh the equitable need for a pro rata distribution given the impracticability of untangling the entities’ affairs.

## Legal Principles

- Substantive consolidation is an equitable, federal bankruptcy remedy aimed at achieving a fair pro rata distribution when entity separateness would produce inequitable results.
- Consolidation may be justified where creditors dealt with affiliated entities as a single economic unit without meaningful reliance on separateness, or where the entities’ financial affairs are so entangled that separation is impracticable and consolidation benefits creditors overall.
- Courts weigh the benefits of consolidation against harm to particular creditors; prohibitive cost or impossibility of reliable tracing supports consolidation.
- Substantive consolidation may extend to non-debtor affiliates when they function as part of the debtor’s enterprise and inclusion is necessary to prevent inequitable distributions in light of commingling and unified control.

## Conclusion

The appellate panel left in place a nunc pro tunc substantive consolidation order pooling the assets and liabilities of affiliated debtor and non-debtor entities tied to a Ponzi-scheme enterprise, based on extensive commingling, entanglement, and the equitable objective of a single pro rata distribution to creditors.


In re LLS America, LLC, 2012 WL 2042503 (B.A.P. 9th Cir. 2012)