Understanding the Need for Substantive Consolidation In Chapter 11 Bankruptcy Cases

Posted by on Aug 25, 2011 in Chapter 11 Bankruptcy Issues | 11 comments

In chapter 11 business cases, substantive consolidation of one or more inter-related chapter 11 case filings ensures that similarly situated creditors are treated equitably through an appropriate division of the debtor’s assets by pooling the assets and liabilities of two or more related entities while eliminating inter-company claims.  Substantive consolidation is appropriate to: (1) enable the proper administration of the estates where a separate administration is unfeasible; (2) remedy debtor fraud or abuse; (3) promote the efficiency and reduced cost of reorganization; (4) avoid unnecessary litigation; and (5) prevent the possibility for separate chapter 11 plans that would require the obscure unraveling of inter-company claims and guarantees.

For California bankruptcies, the standards for substantive consolidation are articulated in the 9th Circuit case of Alexander v. Compton (In re Bonham), 229 F.3d 750, 764 (9th Cir. 2000).  Substantive consolidation facilitates the enterprise’s true obligations to creditors after intercompany claims are netted, giving all creditors a truly equitable distribution in bankruptcy.  While substative consolidation should only be brought before the court in appropriate cases, some experts believe it is a key doctrine in current chapter 11 bankruptcy practice.

 

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