## Facts

- S & G Financial Services of South Florida, Inc. (SGFS) operated a short-term mortgage lending business funded by individual investors.
- After an investor obtained a judgment against SGFS, writs of garnishment froze SGFS’s bank accounts.
- SGFS’s principal, Jorge Galceran, opened a new bank account in the name of S & G Financial Services, LLC (S & G) and deposited checks payable to SGFS into that account.
- Galceran directed certain SGFS mortgagors to make payments to Merrick Financial Group, LLC (Merrick) to avoid the garnishments.
- SGFS filed Chapter 7, and a trustee was appointed.
- The trustee filed an adversary complaint seeking substantive consolidation of SGFS with non-debtors S & G and Merrick to reach their assets for SGFS’s creditors; Intrepid Financial Services, Inc. intervened and also sought dismissal.
- S & G, Merrick, and Intrepid moved to dismiss under Rule 12(b)(6), arguing consolidation of non-debtors is improper and that other remedies should be used.
- For purposes of the motions, the court accepted the complaint’s factual allegations as true.

## Issues

1. Whether the bankruptcy court has equitable authority, as a matter of law, to order substantive consolidation of a debtor with non-debtor entities.
2. Whether the trustee’s allegations plausibly stated a claim for substantive consolidation sufficient to survive Rule 12(b)(6).

## Decision

- The court denied the motions to dismiss filed by S & G, Merrick, and Intrepid.
- The court held that substantive consolidation with non-debtors is not categorically barred and may be ordered under the bankruptcy court’s equitable powers in appropriate circumstances.
- The court found the complaint plausibly alleged common control, commingling, and diversion of assets to evade creditors, supporting a potential finding that the entities functioned as a single economic unit.
- The court declined to dismiss merely because other remedies (e.g., involuntary petitions, fraudulent transfer claims, alter ego theories) might also be available.
- The court concluded that creditor-fairness and commingling questions required development of a factual record and could not be resolved at the pleading stage.

## Legal Principles

- A bankruptcy court may treat a request for substantive consolidation as a core matter concerning estate administration and property issues within bankruptcy jurisdiction.
- On a Rule 12(b)(6) motion, the court accepts well-pleaded factual allegations as true and asks whether the complaint states a plausible claim for relief.
- Substantive consolidation is an equitable remedy that combines assets and liabilities of related entities into a single pool when necessary to achieve fairness to creditors.
- Allegations of unified control, commingled operations, and diversion of funds among affiliates to defeat creditor collection can support a plausible consolidation claim.
- The existence of alternative causes of action does not, by itself, bar a trustee from pleading substantive consolidation, particularly at the initial pleading stage.

## Conclusion

The bankruptcy court allowed the trustee’s substantive consolidation claim to proceed, holding that consolidation of a debtor with non-debtor affiliates may be available in equity and that the complaint plausibly alleged commingling and asset diversion warranting factual development before any merits ruling.


In re S & G Fin. Servs. of S. Fla., Inc., 451 B.R. 573 (Bankr. S.D. Fla. 2011)