                                                                                                                           Opinions of the United
2007 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


8-2-2007

In Re: Lisanti Foods
Precedential or Non-Precedential: Non-Precedential

Docket No. 05-3912




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Recommended Citation
"In Re: Lisanti Foods " (2007). 2007 Decisions. Paper 634.
http://digitalcommons.law.villanova.edu/thirdcircuit_2007/634


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                                                          NOT PRECEDENTIAL

                 UNITED STATES COURT OF APPEALS
                      FOR THE THIRD CIRCUIT




                                No. 05-3912




                      IN RE: LISANTI FOODS INC.;
                    LISANTI FOODS OF TEXAS, INC.;
                   LISANTI FOODS OF ARIZONA, INC.


    JOSEPH M. LISANTI, JR.; ROSEMARIE LISANTI; LISANTI REALTY OF
ARIZONA, INC.; LISANTI REALTY CORP; LISANTI ENTERPRISES, LLC; TEXAS
  TRUCKING CORP.; JL TRUCKING, LLC; NEW JERSEY TRUCKING CORP.;
                   ARIZONA FREIGHT HAULERS, INC.,

                                 Appellants.




               On Appeal from the United States District Court
                       for the District of New Jersey
                               (04-cv-03868)
                 District Judge: Honorable John C. Lifland




               Submitted pursuant to Third Circuit LAR 34.1(a)
                               June 28, 2007




           Before: BARRY, FUENTES and GARTH, Circuit Judges.
                                  (Filed: August 2, 2007)




                               OPINION OF THE COURT




FUENTES, Circuit Judge.

       In this bankruptcy appeal, appellants argue that the Bankruptcy Court erred in

“substantively consolidating” three debtors in confirming a bankruptcy plan. Applying

the standard laid out in In re: Morfesis, 270 B.R. 28 (Bankr. D.N.J. 2001), the Bankruptcy

Court concluded that the debtors could be consolidated on account of their “substantial

identity.” The District Court affirmed. After we decided In re: Owens Corning, 419 F.3d

195 (3d Cir. 2005), articulating our standard for substantive consolidation, the District

Court reconsidered the issue, and concluded that consolidation was still appropriate. We

will affirm.

                                             I.

       Substantive consolidation is a “construct of federal common law” that “‘treats

separate legal entities as if they were merged into a single survivor with all the cumulative

assets and liabilities.’” Owens Corning, 419 F.3d at 205 (quoting Genesis Health

Ventures, Inc. v. Stapleton (In re Genesis Health Ventures, Inc.), 402 F.3d 416, 423 (3d

Cir. 2005)). In this case, the Bankruptcy Court confirmed a liquidation plan proposing to

substantively consolidate three debtors (former wholesale distributors of Italian specialty



                                             -2-
food products) into a single entity for subsequent distribution to creditors. (A-108) In

approving consolidation, the Court considered, inter alia, “whether there is a substantial

identity between the entities to be consolidated.” (A-604)1

       In making its determination, the Court heard testimony from two witnesses, which,

in the Court’s view, established substantial identity among the debtors. Specifically,

these witnesses testified that “all three debtors have the same officers, same directors and

shareholders. They conducted the same general business operations under very similar

names. . . . [I]ntercompany dealings were done without the usual corporate formalities. . .

. [Moreover,] the debtors did not charge each other for all services which they rendered to

one another” (A-604) and they were “moving profits between and among the debtors.”

(A-605) The witnesses also testified that “for the purposes of . . . secured lending, the

debtors were viewed as a single entity,” and that “the unsecured creditors likewise viewed

the debtors as a single entity when extending credit terms.” (A-605-06) Relying on this

testimony, the Bankruptcy Court held that, “through the witnesses, the proponents have

established that both debtors and creditors viewed the debtors as a single enterprise.” (A-

606 (emphasis added))

                                             II.

       In this appeal, appellants challenge whether the Bankruptcy Court’s findings are



       1
         The Court also considered whether consolidation would benefit or harm
creditors, concluding that the benefits of consolidation would heavily outweigh any harm
to a creditor.

                                             -3-
sufficient to support substantive consolidation under the standard articulated in In re:

Owens Corning, 419 F.3d 195 (3d Cir. 2005), a decision we announced after the

Bankruptcy Court rendered its decision. Under Owens Corning, a proponent of

substantive consolidation must demonstrate one of two rationales for its application:

“that (i) prepetition [the entities for whom substantive consolidation is sought]

disregarded separateness so significantly their creditors relied on the breakdown of entity

borders and treated them as one legal entity, or (ii) postpetition their assets and liabilities

are so scrambled that separating them is prohibitive and hurts all creditors.” 419 F.3d at

211.

       The application of Owens Corning was directly at issue before the District Court,

which, in a thorough and carefully reasoned opinion, concluded that “the evidence

presented in the bankruptcy hearings . . . provides ample support for granting substantive

consolidation under the first prong (creditor reliance on pre-petition disregard of

separateness) of the newly articulated Owens Corning standard.” (SA20-21) We fully

agree with this conclusion. The findings of the Bankruptcy Court, which may only be

disturbed if clearly erroneous, In re: Am. Pad & Paper Co., 478 F.3d 546, 551 (3d Cir.

2007), comfortably support a conclusion that the “creditors relied on the breakdown of

entity borders and treated them as one legal entity,” Owens Corning, 419 F.3d at 211. As

the District Court recognized, “[a]lthough the Bankruptcy Court used creditors’ reliance

on Debtor unity as evidence of ‘substantial identity,’ it also speaks directly to, and



                                              -4-
satisfies, the first prong of the Owens Corning test.” (SA21)

       Therefore, and for substantially the reasons set forth in the District Court’s

opinion, we will affirm.




                                             -5-
