## Facts

- Tip Top Tailors, Inc. was incorporated in Delaware in 1939 and operated multiple retail stores, including a Richmond, Virginia location managed from Newark, New Jersey.
- A separate Virginia corporation of the same name was later chartered; nominal shares were issued to nominees for the Delaware corporation’s benefit.
- The Virginia corporation had no meaningful separate existence: no capital paid in, no separate contracts, payroll, or operations, and its “records” were transcriptions from the Delaware corporation’s books.
- The Richmond store functioned as part of the Delaware company’s integrated business: orders were taken in Richmond, fulfilled in Newark, shipped back to Richmond, and daily reports were sent to Newark; receipts were used to pay local expenses and the remaining funds were remitted for the Delaware corporation’s use.
- In November 1940, the Delaware corporation was adjudicated bankrupt in New Jersey, and Stone was appointed receiver/trustee.
- Shortly thereafter, creditors attached Richmond store property as property of the Virginia corporation, and an involuntary bankruptcy petition was filed against the Virginia corporation in Virginia; it was adjudicated bankrupt.
- Stone, as trustee of the Delaware corporation, filed an approximately $39,069 claim in the Virginia bankruptcy as an inter-company debt owed by the Virginia corporation.
- Eacho, trustee of the Virginia corporation, asserted the Virginia corporation was merely an instrumentality of the Delaware corporation and sought to subordinate Stone’s inter-company claim.
- A special master found the Virginia corporation was a “mere shell” and recommended subordination; the district court adopted that recommendation, denied intervention by certain Delaware creditors, and refused to consolidate the two bankruptcies.

## Issues

1. Whether an asserted inter-company debt claim by the parent’s trustee should be subordinated in the subsidiary’s bankruptcy when the subsidiary was a shell used as an instrumentality of the parent.
2. Whether the bankruptcy estates of the Delaware and Virginia corporations should be administered as a single enterprise (substantive consolidation) where operations, management, and creditor dealings were effectively unitary.

## Decision

- The Fourth Circuit held that the facts showed there was, in substance, one enterprise, one management, and one creditor group, despite two corporate charters.
- The court determined that equitable administration required treating the two proceedings on a consolidated basis so that creditors would share ratably in the combined assets of the business.
- The court accepted that the inter-company “debt” functioned as internal operating-capital funding rather than an arm’s-length obligation and should not compete on equal footing with outside creditors.
- The case was remanded with directions to administer the estates equitably consistent with consolidation and appropriate treatment of the internal claim.

## Legal Principles

- Bankruptcy courts, acting in equity, may disregard formal corporate separateness where an affiliated corporation has no real independent activity and functions as a shell or instrumentality of another.
- Substantive consolidation is appropriate when affiliated entities’ affairs are so unified that creditors dealt with the business as a unit and separate-entity distribution would produce inequitable results.
- Inter-company advances within a single integrated enterprise may be treated as capital or internal adjustments and subordinated to the claims of external general creditors when equity so requires.

## Conclusion

The Fourth Circuit required equitable consolidation of the Delaware and Virginia Tip Top Tailors bankruptcies because the Virginia corporation was a nonoperating shell and creditors dealt with the business as one enterprise; the parent’s inter-company claim was treated as an internal funding item subordinate to outside creditors in achieving a fair distribution.


Stone v. Eacho (In re Tip Top Tailors, Inc.), 127 F.2d 284 (4th Cir. 1942)