## Facts

- A syndicate of banks led by Credit Suisse First Boston provided Owens Corning and certain subsidiaries a $2 billion unsecured credit facility.
- The banks required guarantees from specific subsidiaries and negotiated covenants mandating corporate separateness (e.g., separate records, corporate formalities, limits on commingling).
- Owens Corning operated through multiple subsidiaries with ordinary intercompany transactions and some accounting imperfections, but with generally maintained entity separateness.
- Owens Corning and 17 subsidiaries filed Chapter 11 in 2000 due to asbestos-related liabilities.
- The debtors proposed a Chapter 11 plan using “deemed substantive consolidation” that would pool assets and liabilities for plan purposes and eliminate the subsidiary guarantees, effectively reducing the banks’ bargained-for credit enhancement.
- The district court (after withdrawal of the bankruptcy reference) granted substantive consolidation to be implemented upon plan effectiveness, and the banks appealed.

## Issues

1. Whether the order granting substantive consolidation (effective upon plan consummation) was final and appealable under 28 U.S.C. § 1291.
2. What equitable standard governs substantive consolidation of affiliated debtors, particularly when consolidation would eliminate subsidiary guarantees relied upon by specific creditors.
3. Whether substantive consolidation was proper where sophisticated lenders relied on entity separateness and the estates were not so entangled that separation was impracticable.

## Decision

- The court exercised appellate jurisdiction, holding the consolidation order was effectively final because it conclusively determined major distributional rights among creditor groups.
- The court reversed the district court’s order granting substantive consolidation and remanded.
- The court held substantive consolidation is an extraordinary remedy applied sparingly and was not justified on the record.
- The court concluded the plan’s consolidation feature impermissibly functioned primarily to redistribute value by nullifying the banks’ guarantees.

## Legal Principles

- Substantive consolidation is an equitable doctrine (not codified) that pools affiliated entities’ assets and liabilities and treats creditors as if they claim against a single estate.
- Consolidation is appropriate only in rare circumstances and cannot be justified by administrative convenience or by a desire to “level” recoveries.
- A proponent must show one of two conditions:
  - Prepetition creditors dealt with the entities as a single economic unit and did not rely on their separate identities in extending credit; or
  - The entities’ affairs are so entangled that disentanglement is impossible or so costly that it would materially impair creditor recoveries.
- Reliance on separateness weighs heavily against consolidation; courts should not use consolidation to negate negotiated credit enhancements such as subsidiary guarantees absent necessity grounded in creditor expectations or unavoidable entanglement.
- Consolidation should not be employed for a purely redistributive effect that reorders creditor priorities without a strong equitable basis.

## Conclusion

The Third Circuit rejected “deemed” substantive consolidation that would extinguish subsidiary guarantees where lenders had specifically relied on corporate separateness and the debtors failed to prove creditor nonreliance or hopeless entanglement, reaffirming consolidation as a limited equitable remedy rather than a tool for reallocating value among creditor groups.


In re Owens Corning, 419 F.3d 195 (3d Cir. 2005)