                                                                                                                           Opinions of the United
2005 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


8-15-2005

In Re: Owens Corning
Precedential or Non-Precedential: Precedential

Docket No. 04-4080




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                                            PRECEDENTIAL

         UNITED STATES COURT OF APPEALS
              FOR THE THIRD CIRCUIT


                       No. 04-4080


    IN RE: OWENS CORNING, a Delaware Corporation

                          CREDIT SUISSE FIRST
                          BOSTON, as Agent for the
                          prepetition bank lenders,

                                          Appellant


      On Appeal from the United States District Court
                for the District of Delaware
           (D.C. Civil Action No. 00-cv-03837)
         District Judge: Honorable John P. Fullam


                 Argued February 7, 2005

  Before: ROTH, AMBRO and FUENTES, Circuit Judges

                  (Filed August 15, 2005)

Martin J. Bienenstock, Esquire (Argued)
John J. Rapisardi, Esquire
Richard A. Rothman, Esquire
Timothy E. Graulich, Esquire
Weil, Gotshal & Manges LLP
767 Fifth Avenue, 27th Floor
New York, NY 10153

Ellen R. Nadler, Esquire
Jeffrey S. Trachtman, Esquire
Kenneth H. Eckstein, Esquire
Philip S. Kaufman, Esquire
Kramer, Levin, Naftalis & Frankel LLP
1177 Avenue of the Americas
New York, NY 10036

Roy T. Englert, Jr. Esquire
Robbins, Russell, Englert, Orseck & Untereiner LLP
1801 K Street, N.W., Suite 411
Washington, DC 20006

Rebecca L. Butcher, Esquire
Adam G. Landis, Esquire
Richard S. Cobb, Esquire
Landis, Rath & Cobb LLP
919 Market Street
Suite 600, P.O. Box 2087
Wilmington, DE 19899
       Counsel for (Appellant) Credit Suisse First Boston
       Corp., as Agent for the prepetition bank lenders

Alexandra A.E. Shapiro, Esquire
Mitchell A. Seider, Esquire

                               2
Alan Leavitt, Esquire
Latham & Watkins LLP
885 Third Avenue, Suite 1000
New York, NY 10022-4802

Amanda P. Biles, Esquire
Latham & Watkins LLP
Two Freedom Square
11955 Freedom Drive, Suite 500
Reston, Virginia 20190-5651
      Counsel for (Amicus-appellants) The Loan
      Syndications and Trading Association, Inc. and
      Clearing House Association L.L.C.

Richard M. Kohn, Esquire
Andrew R. Cardonick, Esquire
Goldberg, Kohn, Bell, Black, Rosenbloom & Moritz Ltd.
55 East Monroe Street, Suite 3700
Chicago, IL 60603

Jonathan N. Helfat, Esquire
Otterbourg, Steindler, Houston & Rosen, P.C.
230 Park Avenue
New York, NY 10169
      Counsel for (Amicus-appellant) Commercial Financial
      Association

Robert K. Rasmussen, Esquire
Milton Underwood Professor of Law
Vanderbilt Law School
131 21 st Avenue South

                               3
Nashville, TN 37240
      Counsel for (Amicus-appellants) Robert K. Rasmussen,
      Barry Adler, Susan Block-Lieb, G. Marcus Cole,
      Marcel Kahan, Ronald J. Mann, and David A. Skeel,
      Jr.

Adam H. Isenberg, Esquire
Saul Ewing LLP
1500 Market Street
Centre Square West, 38 th Floor
Philadelphia, PA 19102

Norman L. Pernick, Esquire
J. Kate Stickles, Esquire
Saul Ewing LLP
222 Delaware Avenue
P.O. Box 1266, Suite 1200
Wilmington, DE 19899

Charles O. Monk, II, Esquire (Argued)
Joseph M. Fairbanks, Esquire
Henry R. Abrams, Esquire
Dan Friedman, Esquire
Saul Ewing LLP
100 South Charles Street, 16 th Floor
Baltimore, MD 21201
      Counsel for (Appellee) Owens Corning, a Delaware
      Corporation; CDC Corp.; Engineered Yarns American
      Inc.; Exterior Systems Inc.; Falcon Foam Corp.;
      Fibreboard Corp.; HomeExperts; Integrex; Integrex
      Professional Services; Integrex Testing Systems;

                              4
      Integrex Supply Chain Solutions LLC; Integrex
      Ventures LLC; Jefferson Holdings Inc.; Owens-
      Corning Fiberglass Technology Inc.; Owens-Corning
      HT, Inc.; Owens-Corning Overseas Holdings, Inc.;
      Owens- Corning Remodeling Systems, LLC; Soltech,
      Inc.

Elihu Inselbuch, Esquire
Caplin & Drysdale, Chartered
399 Park Avenue, 27 th Floor
New York, NY 10022

Peter Van N. Lockwood, Esquire
Nathan D. Finch, Esquire
Walter B. Slocombe, Esquire
Caplin & Drysdale, Chartered
One Thomas Circle NW
Washington, DC 20005

Marla R. Eskin, Esquire
Campbell & Levine, LLC
800 North King Street, Suite 300
Wilmington, DE 19801
      Counsel for (Appellee) Official Committee of
      Unsecured Creditors

Michael J. Crames, Esquire
Jane W. Parver, Esquire
Edmund M. Emrich, Esquire
Andrew A. Kress, Esquire
Kaye Scholer LLP

                               5
425 Park Avenue
New York, NY 10022

James L. Patton, Jr., Esquire
Joseph M. Barry, Esquire
Young, Conaway, Stargatt & Taylor LLP
1000 West Street, P.O. Box 391
17 th Floor, Brandywine Building
Wilmington, DE 19801
        Counsel for (Appellee) James J. McMonagle, Legal
        Representative for Future Claimants

J. Andrew Rahl, Equire (Argued)
John B. Berringer, Esquire
John H. Doyle, III, Esquire
Howard Ressler, Esquire
Dennis J. Artese, Esquire
Anderson, Kill & Olick, P.C.
1251 Avenue of the Americas
New York, NY 10020

Francis A. Monaco, Jr.
Monzack & Monaco P.A.
1201 North Orange Street
400 Commerce Center
Wilmington, DE 19899
       Counsel for (Appellee) Official Representatives of the
       Bondholders and Trade Creditors f/k/a Official
       Committee of Unsecured Creditors of Owens Corning



                              6
Howard A. Rosenthal, Esquire
Alan R. Gordon, Esquire
Pelino & Lentz P.C.
1650 Market Street
One Liberty Place, 32 nd Floor
Philadelphia, PA 19103

Lawrence J. Kaiser, Esquire
Law Office of Laurence J. Kaiser
One Whitehall Street, Suite 2100
New York, NY 10004
     Counsel for (Amicus-appellee) Commercial Law
     League America




                 OPINION OF THE COURT


AMBRO, Circuit Judge

        We consider under what circumstances a court exercising
bankruptcy powers may substantively consolidate affiliated
entities. Appellant Credit Suisse First Boston (“CSFB”) is the
agent for a syndicate of banks (collectively, the “Banks”)1 that


   1
     Though CSFB is the named appellant, the real parties in
interest are the Banks (which include CSFB). Thus, unless the
context requires otherwise, CSFB and the Banks are referred to
interchangeably in this opinion.

                                 7
extended in 1997 a $2 billion unsecured loan to Owens Corning,
a Delaware corporation (“OCD”), and certain of its subsidiaries.
This credit was enhanced in part by guarantees made by other
OCD subsidiaries. The District Court granted a motion to
consolidate the assets and liabilities of the OCD borrowers 2 and
guarantors in anticipation of a plan of reorganization.

        The Banks appeal and argue that the Court erred by
granting the motion, as it misunderstood the reasons for, and
standards for considering, the extraordinary remedy of
substantive consolidation, and in any event did not make factual
determinations necessary even to consider its use. Though we
reverse the ruling of the District Court, we do so aware that it
acted on an issue with no opinion on point by our Court and
differing rationales by other courts.

        While this area of law is difficult and this case important,
its outcome is easy with the facts before us. Among other
problems, the consolidation sought is “deemed.” Should we
approve this non-consensual arrangement, the plan process
would proceed as though assets and liabilities of separate
entities were merged, but in fact they remain separate with the
twist that the guarantees to the Banks are eliminated. From this
we conclude that the proponents of substantive consolidation
request it not to rectify the seldom-seen situations that call for


  2
    For ease of reference, we refer hereinafter solely to OCD as
the borrower.

                                 8
this last-resort remedy but rather as a ploy to deprive one group
of creditors of their rights while providing a windfall to other
creditors.

      I. Factual Background and Procedural History

       A.     Owens Corning Group of Companies

       OCD and its subsidiaries (which include corporations and
limited liability companies) comprise a multinational corporate
group. Different entities within the group have different
purposes. Some, for example, exist to limit liability concerns
(such as those related to asbestos), others to gain tax benefits,
and others have regulatory reasons for their formation.

       Each subsidiary was a separate legal entity that observed
governance formalities. Each had a specific reason to exist
separately, each maintained its own business records, and
intercompany transactions were regularly documented.3


  3
     For example, Owens-Corning Fiberglass Technology, Inc.
(“OCFT”) was created as an intellectual property holding
company to which OCD assigned all of its domestic intellectual
property. OCFT licensed this intellectual property back to OCD
in return for royalty payments. OCFT also entered into licensing
agreements with parties outside of the OCD family of
companies. This structure served to shield OCD’s intellectual
property assets (valued at over $500 million) from liability.

                               9
OCFT operated as an autonomous entity. It prepared its own
accounting and financial records and paid its own expenses from
its separate bank accounts. OCFT had its own employees
working at its Summit, Illinois plant, which contained
machinery and equipment for research and development.
       IPM, Inc. (“IPM”) was incorporated as a passive
Delaware investment holding company by OCD to consolidate
the investments of its foreign subsidiaries. IPM shielded the
foreign subsidiaries’ investments from OCD liability and
likewise shielded OCD from the liability of those foreign
subsidiaries. OCD transferred ownership of its foreign
subsidiaries to IPM and entered into a revolving loan agreement
under which IPM loaned dividends from those subsidiaries to
OCD. OCD paid interest on this revolving loan. IPM, like
OCFT, entered into agreements with parties unaffiliated with the
OCD group and operated as an autonomous entity. IPM also
prepared its own accounting and financial records and paid its
own expenses from its separate bank accounts. IPM’s officers
oversaw all investment activity and maintained records of
investment activity in IPM subsidiaries.
       Both OCFT and IPM operated outside of OCD’s business
units. Neither company received administrative support from
OCD and both paid payroll and business expenses from their
own accounts. Although summaries of their accounting ledgers
were entered into OCD’s centralized cash management system,
the underlying records were created and maintained by the
subsidiaries, not OCD. OCFT and IPM even had their own
company logos and trade names.
       Integrex was formed by OCD as an asbestos liability

                              10
Although there may have been some “sloppy” bookkeeping, two
of OCD’s own officers testified that the financial statements of
all the subsidiaries were accurate in all material respects.
Further, through an examination of the subsidiaries’ books,
OCD’s postpetition auditors (Ernst & Young) have eliminated
most financial discrepancies, particularly with respect to the
larger guarantor subsidiaries.




management company. For OCD’s asbestos liability, Integrex
ultimately processed only settled asbestos claims. The company
also provided professional services (such as litigation
management and materials testing) to the public. It had its own
trade name and trademarked logo, its own business unit and its
own financial team for business planning, and began several
startup businesses that ultimately failed.
         As discussed at Section I(B), infra, in 1997 OCD
acquired Fibreboard Corporation. Subsequently, OCD formed
Exterior Systems, Inc. (“ESI”) as a separate entity after several
subsidiaries of Fibreboard merged in 1999 in order to shield
itself from successor liability for Fibreboard’s asbestos products.
Although the directors and managers of ESI and OCD
overlapped, ESI observed corporate formalities in electing its
directors and appointing its officers. In addition, it filed its own
tax returns and kept its own accounting records. ESI held
substantial assets, including over $1 billion in property, 20
factories, and between 150 and 180 distribution centers.

                                11
       B.     The 1997 Credit Agreement

       In 1997 OCD sought a loan to acquire Fibreboard
Corporation. At this time OCD faced growing asbestos liability
and a poor credit rating that hindered its ability to obtain
financing. When CSFB was invited to submit a bid, it included
subsidiary guarantees in the terms of its proposal. The
guarantees gave the Banks direct claims against the guarantors
for payment defaults. They were a “credit enhancement”
without which the Banks would not have made the loan to OCD.
All draft loan term sheets included subsidiary guarantees.

       A $2 billion loan from the Banks to OCD closed in June
1997. The loan terms were set out primarily in a Credit
Agreement. Among those terms were the guarantee provisions
and requirements for guarantors, who were defined as “present
or future Domestic Subsidiar[ies] . . . having assets with an
aggregate book value in excess of $30,000,000.” Section 10.07
of the Agreement provided that the guarantees were “absolute
and unconditional” and each “constitute[d] a guarant[ee] of
payment and not a guarant[ee] of collection.” 4 A “No Release
of Guarantor” provision in § 10.8 stated that “the obligations of


  4
    This standard guarantee term means simply that, once the
primary obligor (here OCD) defaults, the Banks can proceed
against the guarantors directly and immediately without first
obtaining a judgment against OCD and collecting against that
judgment to determine if a shortfall from OCD exists.

                               12
each guarantor . . . shall not be reduced, limited or terminated,
nor shall such guarantor be discharged from any such
obligations, for any reason whatsoever,” except payment and
performance in full or through waiver or amendment of the
Credit Agreement. Under § 13.05 of the Credit Agreement, a
guarantor could be released only through (i) the unanimous
consent of the Banks for the guarantees of Fibreboard
subsidiaries or through the consent of Banks holding 51% of the
debt for other subsidiaries, or (ii) a fair value sale of the
guarantor if its cumulative assets totaled less than 10% of the
book value of the aggregate OCD group of entities.

       CSFB negotiated the Credit Agreement expressly to limit
the ways in which OCD could deal with its subsidiaries. For
example, it could not enter into transactions with a subsidiary
that would result in losses to that subsidiary. Importantly, the
Credit Agreement contained provisions designed to protect the
separateness of OCD and its subsidiaries. The subsidiaries
agreed explicitly to maintain themselves as separate entities. To
further this agreement, they agreed to keep separate books and
financial records in order to prepare separate financial
statements. The Banks were given the right to visit each
subsidiary and discuss business matters directly with that
subsidiary’s management. The subsidiaries also were prohibited
from merging into OCD because both entities were required to
survive a transaction under § 8.09(a)(ii)(A) of the Credit
Agreement.       This provision also prohibited guarantor
subsidiaries from merging with other subsidiaries unless there

                               13
would be no effect on the guarantees’ value.

          C.   Procedural History

        On October 5, 2000, facing mounting asbestos litigation,
OCD and seventeen of its subsidiaries (collectively, the
“Debtors”) filed for reorganization under Chapter 11 of the
Bankruptcy Code, 11 U.S.C. § 1101 et seq.5 Twenty-seven
months later, the Debtors and certain unsecured creditor groups
(collectively, the “Plan Proponents”) proposed a reorganization
plan (as amended, the “Plan”) predicated on obtaining
“substantive consolidation” of the Debtors along with three non-
Debtor OCD subsidiaries.6 Typically this arrangement pools all
assets and liabilities of the subsidiaries into their parent and
treats all claims against the subsidiaries as transferred to the
parent. In fact, however, the Plan Proponents sought a form of


  5
  For convenience we refer hereinafter simply to “Bankruptcy
Code §   ” when citing to a Code section.
      6
         As the Plan’s consolidation provisions affected so
significantly voting on the Plan and the manner of proceeding at
any confirmation hearing, the Plan Proponents filed a motion for
a ruling on consolidation in anticipation of those events. “While
not a routine procedure, it is not at all unusual for a plan
proponent, or a plan opponent, to seek a determination prior to
the plan confirmation hearing as to the legitimacy of a particular
provision of a proposed plan.” In re Stone & Webster, Inc., 286
B.R. 532, 542 (Bankr. D. Del. 2002) (Walsh, J.).

                               14
what is known as a “deemed consolidation,” under which a
consolidation is deemed to exist7 for purposes of valuing and
satisfying creditor claims, voting for or against the Plan, and
making distributions for allowed claims under it. Plan § 6.1.
Yet “the Plan would not result in the merger of or the transfer
or commingling of any assets of any of the Debtors or Non-
Debtor Subsidiaries, . . . [which] will continue to be owned by
the respective Debtors or Non-Debtors.” Plan § 6.1(a). Despite
this, on the Plan’s effective date “all guarantees of the Debtors
of the obligations of any other Debtor will be deemed
eliminated, so that any claim against any such Debtor and any
guarantee thereof . . . will be deemed to be one obligation of the
Debtors with respect to the consolidated estate.” Plan § 6.1(b).
Put another way, “the Plan eliminates the separate obligations of
the Subsidiary Debtors arising from the guarant[e]es of the 1997
Credit Agreement.” Plan Disclosure Statement at A-9897.

      The Banks objected to the proposed consolidation. Judge
Alfred Wolin held a hearing on this objection.8 He was

   7
     “[A]ll assets and liabilities of each Subsidiary Debtor . . .
will be treated as though they were merged into and with the
assets and liabilities of OCD . . . .” Plan § 6.1(b) (emphasis
added).
  8
    Pursuant to 28 U.S.C. § 157(d), Judge Wolin withdrew the
reference of, inter alia, the consolidation motion to the
Bankruptcy Court, thus making the District Court the judicial
forum for the motion to proceed.

                               15
subsequently recused from the Debtors’ bankruptcy proceedings
in light of In re Kensington Int’l Ltd., 368 F.3d 289 (3d Cir.
2004), and Judge John Fullam was designated by the Chief
Judge of our Court to replace him. Judge Fullam reviewed the
transcripts and exhibits of the hearing, ordered additional
briefing and on October 5, 2004, granted the consolidation
motion in an order accompanied by a short opinion. In re
Owens Corning, 316 B.R. 168 (Bankr. D. Del. 2004).

        Judge Fullam concluded that there existed “substantial
identity between . . . OCD and its wholly-owned subsidiaries.”
Id. at 171. He further determined that “there [was] simply no
basis for a finding that, in extending credit, the Banks relied
upon the separate credit of any of the subsidiary guarantors.” Id.
at 172. In Judge Fullam’s view, it was “also clear that
substantive consolidation would greatly simplify and expedite
the successful completion of this entire bankruptcy proceeding.
More importantly, it would be exceedingly difficult to untangle
the financial affairs of the various entities.” Id. at 171. As such,
he held substantive consolidation should be permitted, as not
only did it allow “obvious advantages . . . [, but was] a virtual
necessity.” Id. at 172. In any event, Judge Fullam wrote, “[t]he
real issue is whether the Banks are entitled to participate, pari
passu, with other unsecured creditors, or whether the Banks’
claim is entitled to priority, in whole or in part, over the claims
of other unsecured creditors.” Id. But this issue, he stated,
“cannot now be determined.” Id.



                                16
       CSFB appeals on the Banks’ behalf.

                  II. Appellate Jurisdiction

        The Plan Proponents moved to dismiss the appeal of the
District Court’s order granting consolidation on the ground that
it is not a “final decision” from which an appeal may be taken
pursuant to 28 U.S.C. § 1291.9 We denied that motion prior to
oral argument in this case and noted that our reasoning would
follow in this opinion.

        Recognizing the “protracted nature of many bankruptcy
proceedings, and the waste of time and resources that might
result if immediate appeal [is] denied,” United States Trustee v.
Gryphon at the Stone Mansion, Inc., 166 F.3d 552, 556 (3d Cir.
1999), “[w]e apply a broader concept of ‘finality’ when
considering bankruptcy appeals under § 1291 than we do when
considering other civil orders under the same section.” In re
Marvel Entm’t Group, Inc., 140 F.3d 463, 470 (3d Cir. 1998).
See also Buncher Co. v. Official Comm. of Unsecured Creditors
of GenFarm Ltd. P’ship IV, 229 F.3d 245, 250 (3d Cir. 2000)
(noting that we impose a “relaxed standard” of finality because
of unique considerations in bankruptcy cases); 16 Charles A.
Wright, Arthur R. Miller & Edward H. Cooper, Federal Practice
& Procedure § 3926.2 at 274 (2d ed. 1996) (describing the


  9
   This provision, rather than 28 U.S.C. § 158(d), applies when
the reference to a bankruptcy court is withdrawn.

                               17
“Third Circuit’s especially flexible approach to bankruptcy
finality”). Particularly relevant to our case is that “[t]o delay
resolution of discrete claims until after final approval of a
reorganization plan . . . would waste time and resources,
particularly if the appeal resulted in reversal of a bankruptcy
court order necessitating re-appraisal of the entire plan.” Clark
v. First State Bank (In re White Beauty View, Inc.), 841 F.2d
524, 526 (3d Cir. 1988). We have also stressed that “issues
central to the progress of the bankruptcy petition, those ‘likely
to affect the distribution of the debtor’s assets, or the
relationship among the creditors,’ should be resolved quickly.”
Century Glove, Inc. v. First Am. Bank, 860 F.2d 94, 98 (3d Cir.
1988) (quoting Southeastern Sprinkler Co. Inc. v. Meyertech
Corp. (In re Meyertech), 831 F.2d 410, 414 (3d Cir. 1987)).

        We consider four factors in determining whether we
should exercise jurisdiction over a bankruptcy appeal: “(1) [t]he
impact on the assets of the bankrupt estate; (2) [the] [n]ecessity
for further fact-finding on remand; (3) [t]he preclusive effect of
[the Court’s] decision on the merits of further litigation; and (4)
[t]he interest of judicial economy.” Buncher, 229 F.3d at 250.
All four factors weigh heavily in favor of our jurisdiction to
consider the appeal of an order granting substantive
consolidation. We thus join the four Courts of Appeal that have
exercised jurisdiction in this context. Alexander v. Compton (In
re Bonham), 229 F.3d 750, 762 (9th Cir. 2000); First Nat’l Bank
of El Dorado v. Giller (In re Giller), 962 F.2d 796, 797-98 (8th
Cir. 1992); Eastgroup Props. v. S. Motel Ass’n., 935 F.2d 245,

                                18
248 (11th Cir. 1991); and Union Sav. Bank v. Augie/Restivo
Baking Co., Ltd. (In re Augie/Restivo Baking Co., Ltd.), 860
F.2d 515, 516-17 (2d Cir. 1988).

        First, substantive consolidation has a profound effect on
the assets of the consolidated entities. See, e.g., Nesbit v. Gears
Unlimited, 347 F.3d 72, 86-87 (3d Cir. 2003). Second, there is
no need for additional fact-finding to assess the propriety of an
order granting substantive consolidation. In this case, for
example, Judge Fullam reached his decision after “[a] four-day
evidentiary hearing . . . was held by [his] predecessor, Judge
Wolin,” and after Judge Fullam reviewed “the transcript of the
testimony, and . . . the voluminous documentary record
compiled in the course of the hearing, and [had] the benefit of
post-trial briefing and argument.” In re Owens Corning, 316
B.R. at 169. Third, a substantive consolidation order clearly has
a preclusive effect on the merits of further litigation. In this
case, the order precludes at least the Banks from asserting any
right compromised or eliminated by virtue of the substantive
consolidation. Last, the interests of judicial economy are best
served by an immediate review of a substantive consolidation
order. A later reversal of such an order risks rendering
meaningless any proceedings premised on the viability of a plan
that calls for a consolidation (even if for only a temporary
period).

      Having concluded that we generally have jurisdiction to
review appeals of substantive consolidation orders, we inquire

                                19
whether anything is “different” about this case.     The Plan
Proponents argue that

             [t]he District Court Order lacks
             finality because it will be
             implemented, if at all, only
             following approval of a disclosure
             statement, the solicitation and vote
             of creditors as to the terms of the
             Proposed Plan, and, assuming the
             requisite vote, final confirmation of
             the Proposed Plan, before which
             creditors other than the Bank Debt
             Holders shall be given the
             opportunity to contest substantive
             consolidation. [Bankruptcy Code]
             § 1129. Thus, the District Court
             Order is conditioned upon plan
             confirmation . . . . The District
             Court Order has no present impact
             on the Debtors’ estates and does
             not change the status quo.

Plan Proponents’ Mot. to Dismiss at 10. In support of this
contention, the Plan Proponents rely primarily on In re A.S.K.
Plastics, Inc., No. Civ. A. 04-2701, 2004 WL 1903322 (E.D. Pa.
Aug. 24, 2004). Yet the conclusion that the Court lacked
jurisdiction in A.S.K. Plastics was premised on the fact that

                              20
“[u]nder no reasonable construction of the law could the Order’s
conditional consolidation be viewed as effect[ing] a ‘practical
termination’ of anything.” Id. at *2 (emphasis in original). That
order “emphasized [that] . . . [w]hen a final reorganization plan
[was] submitted to the Bankruptcy Court, [the party appealing
the order] [was] free to object to consolidation.” Id. In effect,
the A.S.K. Plastics order was designed to postpone
consideration of the substantive consolidation issue until the
plan confirmation stage.

        That is not our case. For the Banks the District Court’s
determination is hardly conditional.          It concluded “that
substantive consolidation should be permitted.” In re Owens
Corning, 316 B.R. at 172. It made no provision for the Banks
to reassert their objection to substantive consolidation at the plan
confirmation stage; the order is final against them and is thus a
practical termination of the substantive consolidation litigation.

       Lastly, we address the Plan Proponents’ argument that a
substantive consolidation order must immediately take effect in
order to be final for purposes of our jurisdiction. What they
ignore is that the order approving substantive consolidation is
the foundation on which the Plan is built. To assert that the
actual substantive consolidation can only be implemented in
conjunction with the effectiveness of an approved plan puts
form over function. As the Banks point out, “[t]here is no
support for the proposition that final orders lose their finality
because of a delay in implementation.” CSFB Opp’n to Mot. to

                                21
Dismiss at 13. Certainly, decisions resolving most disputes
(notably, disputes over the validity and value of claims) are not
implemented until a plan is confirmed and payment under the
plan becomes obligatory. Yet we exercise jurisdiction to review
many of these decisions before that “final” order issues. See,
e.g., Hefta v. Official Comm. of Unsecured Creditors (In re Am.
Classic Voyages Co.), 405 F.3d 127 (3d Cir. 2005). No reason
exists for us to vary that routine here.

       We conclude readily that we have appellate jurisdiction
to consider the Banks’ appeal under 28 U.S.C. § 1291.

                III. Substantive Consolidation

        Substantive consolidation, a construct of federal common
law, emanates from equity. It “treats separate legal entities as if
they were merged into a single survivor left with all the
cumulative assets and liabilities (save for inter-entity liabilities,
which are erased). The result is that claims of creditors against
separate debtors morph to claims against the consolidated
survivor.” Genesis Health Ventures, Inc. v. Stapleton (In re
Genesis Health Ventures, Inc.), 402 F.3d 416, 423 (3d Cir.
2005). Consolidation restructures (and thus revalues) rights of
creditors and for certain creditors this may result in significantly
less recovery.

       While we have not fully considered the character and
scope of substantive consolidation, we discussed the concept in

                                 22
Nesbit, 347 F.3d at 86-88 (surveying substantive consolidation
case law for application by analogy to the Title VII inquiry of
when to consolidate employers for the purpose of assessing a
discrimination claim), and In re Genesis Health Ventures, 402
F.3d at 423-24 (examining, inter alia, whether a “deemed”
consolidation for voting in connection with, and distribution
under, a proposed plan of reorganization is a substantive
consolidation for purposes of calculating U.S. Trustee quarterly
fees under 28 U.S.C. § 1930(a)(6)). Other courts, including the
Supreme Court itself in an opinion that spawned the concept of
consolidation, have holdings more on point than heretofore have
we. We begin with a survey of key cases, drawing from them
when substantive consolidation may apply consistent with the
principles we perceive as cabining its use, and apply those
principles to this case.

       A.     History of Substantive Consolidation

       The concept of substantively consolidating separate
estates begins with a commonsense deduction. Corporate
disregard 10 as a fault may lead to corporate disregard as a
remedy.



  10
    A term used by Mary Elisabeth Kors in her comprehensive
and well-organized article entitled Altered Egos: Deciphering
Substantive Consolidation, 59 U. Pitt. L. Rev. 381, 383 (1998)
(hereinafter “Kors”).

                              23
        Prior to substantive consolidation, other remedies for
corporate disregard were (and remain) in place. For example,
where a subsidiary is so dominated by its corporate parent as to
be the parent’s “alter ego,” the “corporate veil” of the subsidiary
can be ignored (or “pierced”) under state law. Kors, supra, at
386-90 (citing as far back as I. Maurice Wormser, Piercing the
Veil of Corporate Entity, 12 Colum. L. Rev. 496 (1912)). Or a
court might mandate that the assets transferred to a corporate
subsidiary be turned over to its parent’s trustee in bankruptcy for
wrongs such as fraudulent transfers, Kors, supra, at 391, in
effect bringing back to the bankruptcy estate assets wrongfully
conveyed to an affiliate. If a corporate parent is both a creditor
of a subsidiary and so dominates the affairs of that entity as to
prejudice unfairly its other creditors, a court may place payment
priority to the parent below that of the other creditors, a remedy
known as equitable subordination, which is now codified in
§ 510(c) of the Bankruptcy Code. See generally id. at 394-95.

       Adding to these remedies, the Supreme Court, little more
than six decades ago, approved (at least indirectly and perhaps
inadvertently) what became known as substantive
consolidation.11 Sampsell v. Imperial Paper & Color Corp., 313
U.S. 215 (1941). In Sampsell an individual in bankruptcy had
transferred assets prepetition to a corporation he controlled.


  11
    The actual term was not used until 1967. In re Commercial
Envelope Mfg. Co., 3 Bankr. Ct. Dec. 647, 648 (Bankr.
S.D.N.Y. 1977) (Babitt, J.).

                                24
(Apparently these became the corporation’s sole assets.) When
the bankruptcy referee ordered that the transferred assets be
turned over by the corporation to the individual debtor’s trustee,
a creditor of the non-debtor corporation sought distribution
priority with respect to that entity’s assets. In deciding that the
creditor should not be accorded priority (thus affirming the
bankruptcy referee), the Supreme Court turned a typical
turnover/fraudulent transfer case into the forebear of today’s
substantive consolidation by terming the bankruptcy referee’s
order (marshaling the corporation’s assets for the benefit of the
debtor’s estate) as “consolidating the estates.” Id. at 219.

        Each of these remedies has subtle differences. “Piercing
the corporate veil” makes shareholders liable for corporate
wrongs. Equitable subordination places bad-acting creditors
behind other creditors when distributions are made. Turnover
and fraudulent transfer bring back to the transferor debtor assets
improperly transferred to another (often an affiliate).
Substantive consolidation goes in a direction different (and in
most cases further) than any of these remedies; it is not limited
to shareholders, it affects distribution to innocent creditors, and
it mandates more than the return of specific assets to the
predecessor owner. It brings all the assets of a group of entities
into a single survivor. Indeed, it merges liabilities as well. “The
result,” to repeat, “is that claims of creditors against separate
debtors morph to claims against the consolidated survivor.” In
re Genesis Health Ventures, 402 F.3d at 423. The bad news for
certain creditors is that, instead of looking to assets of the

                                25
subsidiary with whom they dealt, they now must share those
assets with all creditors of all consolidated entities, raising the
specter for some of a significant distribution diminution.

       Though the concept of consolidating estates had Supreme
Court approval, Courts of Appeal (with one exception) were
slow to follow suit. Stone v. Eacho (In re Tip Top Tailors, Inc.),
127 F.2d 284 (4th Cir. 1942), cert. denied, 317 U.S. 635 (1942),
was the first to pick up on Sampsell’s new remedy.12 Little
occurred thereafter for more than two decades, until the Second
Circuit issued several decisions—Soviero v. National Bank of
Long Island, 328 F.2d 446 (2d Cir. 1964); Chemical Bank New
York Trust Co. v. Kheel (In re Seatrade Corp.), 369 F.2d 845
(2d Cir. 1966); Flora Mir Candy Corp. v. R.S. Dickson & Co.
(In re Flora Mir Candy Corp.), 432 F.2d 1060 (2d Cir. 1970);
and Talcott v. Wharton (In re Continental Vending Machine

  12
     Another case oft-mentioned, and preceding both Sampsell
and Stone, is Fish v. East, 114 F.2d 177 (10th Cir. 1940).
Determining that a corporate subsidiary was simply the parent’s
“instrumentality,” id. at 191, the Tenth Circuit affirmed the
turnover of the subsidiary’s assets to the parent. Though
asserting that a “corporate entity may be disregarded where not
to do so will defeat public convenience, justify wrong or protect
fraud,” id., “consolidation” was not mentioned. Indeed, as
creditors of the subsidiary in Fish were given first priority as to
its assets, id., a complete consolidation did not occur. Accord
Kors, supra, at 391 (“true consolidation” occurs only when
creditors of consolidated entities share pari passu).

                                26
Corp.), 517 F.2d 997 (2d Cir. 1975)—that brought substantive
consolidation as a remedy back into play and premise its
modern-day understanding.

       Other Circuit Courts fell in line in acknowledging
substantive consolidation as a possible remedy. See, e.g., FDIC
v. Hogan (In re Gulfco Inv. Corp.), 593 F.2d 921, 927-28 (10th
Cir. 1979); Pension Benefit Guar. Corp. v. Ouimet, 711 F.2d
1085, 1092-93 (1st Cir. 1983); Drabkin v. Midland-Ross Corp.
(In re Auto-Train Corp.), 810 F.2d 270, 276 (D.C. Cir. 1987);
Eastgroup, 935 F.2d at 252; In re Giller, 962 F.2d at 799; First
Nat’l Bank of Barnesville v. Rafoth (In re Baker & Getty Fin.
Servs., Inc.), 974 F.2d 712, 720 (6th Cir. 1992); Reider v. FDIC
(In re Reider), 31 F.3d 1102, 1106-07 (11th Cir. 1994); and In
re Bonham, 229 F.3d at 771.

        The reasons of these courts for allowing substantive
consolidation as a possible remedy span the spectrum and often
overlap. For example, Stone and Soviero followed the well-trod
path of alter ego analysis in state “pierce-the-corporate-veil”
cases. Stone, 127 F.2d at 287-89; Soviero, 328 F.2d at 447-48.
Accord In re Giller, 962 F.2d at 798; In re Gulfco Inv., 593 F.2d
at 928-29. Kheel dealt with, inter alia, the net-negative practical
effects of attempting to thread back the tangled affairs of
entities, separate in name only, with “interrelationships . . .
hopelessly obscured.” 369 F.2d at 847. See also, e.g., In re
Augie/Restivo, 860 F.2d at 518-19. In re Continental Vending
Machine balanced the “inequities” involved when substantive

                                27
rights are affected against the “practical considerations”
spawned by “accounting difficulties (and expense) which may
occur where the interrelationships of the corporate group are
highly complex, or perhaps untraceable.” 517 F.2d at 1001. See
also, e.g., In re Auto-Train, 810 F.2d at 276; Eastgroup, 935
F.2d at 249; In re Giller, 962 F.2d at 799; In re Reider, 31 F.3d
at 1108. See generally Kors, supra, at 402-06.

        Ultimately most courts slipstreamed behind two
rationales—those of the Second Circuit in Augie/Restivo and
the D.C. Circuit in Auto-Train. The former found that the
competing “considerations are merely variants on two critical
factors: (i) whether creditors dealt with the entities as a single
economic unit and did not rely on their separate identity in
extending credit, . . . or (ii) whether the affairs of the debtors are
so entangled that consolidation will benefit all creditors . . . .” In
re Augie/Restivo, 860 F.2d at 518 (internal quotation marks and
citations omitted). Auto-Train touched many of the same
analytical bases as the prior Second Circuit cases, but in the end
chose as its overarching test the “substantial identity” of the
entities and made allowance for consolidation in spite of
creditor reliance on separateness when “the demonstrated
benefits of consolidation ‘heavily’ outweigh the harm.” In re
Auto-Train, 810 F.2d at 276 (citation omitted).

       Whatever the rationale, courts have permitted substantive




                                 28
consolidation as an equitable remedy in certain circumstances.13
No court has held that substantive consolidation is not
authorized,14 though there appears nearly


   13
       Indeed, they have not restricted the remedy to debtors,
allowing the consolidation of debtors with non-debtors, see, e.g.,
In re Bonham, 229 F.3d at 765 (explaining that “[c]ourts have
permitted the consolidation of non-debtor and debtor entities in
furtherance of the equitable goals of substantive consolidation”)
(citing In re Auto-Train, 810 F.2d at 275-77; In re Tureaud, 59
B.R. 973, 974, 978 (N.D. Okla. 1986); In re Munford, 115 B.R.
390, 395-96 (Bankr. N.D. Ga. 1990)); Soviero, 328 F.2d 446,
and in some cases consolidation retroactively (known also as
nunc pro tunc consolidation), see, e.g., In re Baker & Getty
Financial Services, 974 F.2d at 720-21; Kroh Brothers
Development Co. v. Kroh Brothers Management Co. (In re Kroh
Brothers Development Co.), 117 B.R. 499, 502 (W.D. Mo.
1989); In re Tureaud, 59 B.R. at 977-78; see also Auto-Train,
810 F.2d at 277 (acknowledging that nunc pro tunc
consolidations can occur, though not in that case).
        In addition, though we do not permit the consolidation
sought in this case, no reason exists to limit it under the right
circumstances to any particular form of entity. (Indeed, this case
involves corporations and limited liability companies.) Accord
2 Collier on Bankruptcy ¶ 105.09[1][c] (15th rev. ed. 2005).
   14
     See In re Bonham, 229 F.3d at 765 (explaining that “the
equitable power [of substantive consolidation] undoubtedly
survived enactment of the Bankruptcy Code” and noting that
“[n]o case has held to the contrary”); but see In re Fas Mart

                               29
Convenience Stores, Inc., 320 B.R. 587, 594 n.3 (Bankr. E.D.
Va. 2004) (noting “there is persuasive academic argument that
there is no authority in bankruptcy law for substantive
consolidation”) (citing Daniel B. Bogart, Resisting the
Expansion of Bankruptcy Court Power Under Section 105 of the
Bankruptcy Code: The All Writs Act and an Admonition from
Chief Justice Marshall, 35 Ariz. St. L.J. 793, 810 (2003); J.
Maxwell Tucker, Grupo Mexicano and the Death of Substantive
Consolidation, 8 Am. Bankr. Inst. L. Rev. 427 (2000)
(hereinafter “Tucker”)).
       Since the Supreme Court’s decision in Grupo Mexicano
Desarrollo, S.A. v. Alliance Bond Fund, Inc., 527 U.S. 308
(1999) (federal district courts lack the equitable power to enjoin
prejudgment transfers of assets, as such an equitable remedy did
not exist at the time federal courts were created under the
Judiciary Act of 1789), some argue that substantive
consolidation, judge-made law not expressly codified in the
Bankruptcy Code adopted in the late 1970s, does not qualify as
an available equitable remedy. See, e.g., Tucker, supra at 442-
45. This argument has two facets. The first is that bankruptcy
courts are limited to exercising only the equitable remedies
extant at the time of the adoption of the Judiciary Act of 1789.
As substantive consolidation is a relatively recent remedy
nowhere contemplated in 1789, Grupo Mexicano by analogy
bars substantive consolidation just as it does prejudgment
preliminary injunctions forbidding asset transfers. Id. The
second (and corollary) facet of the argument is that, as
substantive consolidation is not specifically authorized in the
Bankruptcy Code, authority to confer it can exist, if at all, only

                               30
in § 105(a) of the Bankruptcy Code (bankruptcy courts “may
issue any order, process or judgment that is necessary or
appropriate to carry out the provisions of this title”). Even if
§ 105(a) “constitutes a direct, fresh grant of supplemental power
to the bankruptcy courts, independent of the power granted to
the federal courts under title 28 [of the United States Code],” id.
at 447, it can only implement powers already expressed in the
provisions of the Bankruptcy Code. Id. at 447-48. See In re
Combustion Eng’g, Inc., 391 F.3d 190, 236 (3d Cir. 2004) (“The
general grant of equitable power contained in § 105(a). . . must
be exercised within the parameters of the Code itself.”); In re
Kmart Corp., 359 F.3d 866, 871 (7th Cir. 2004) (“The power
conferred by § 105 is one to implement rather than to
override.”). But for joint spouse estates in Bankruptcy Code
§ 302(a), consolidation is permitted only in the context of a
confirmed plan of reorganization and the requirements that
entails. Tucker, supra, at 449 (citing to, inter alia, Bankruptcy
Code § 1123(a)(5)(C)).
        The first facet of the argument is, at the outset,
premature. Consolidating estates (indeed, consolidating debtor
and non-debtor entities) traces to the Supreme Court’s Sampsell
decision in 1941. 313 U.S. at 219. What the Court has given as
an equitable remedy remains until it alone removes it or
Congress declares it removed as an option. See In re Stone &
Webster, 286 B.R. at 540 (quoting Official Comm. of Asbestos
Claimants v. G-I Holdings, Inc. (In re G-I Holdings, Inc.), Adv.
No. 01-3065 (RG) (Bankr. D.N.J. March 12, 2001) (Hearing Tr.
at 71-2)).
        In addition, at the core of Grupo Mexicano was the extent

                                31
of general, unarticulated equity authority in the federal courts
(which, the Court held, can only be justified by reference to
1789 equity authority). It was not a bankruptcy case. The
extensive history of bankruptcy law and judicial precedent
renders the issue of equity authority in the bankruptcy context
different to such a degree as to make it different in kind.
Notably, in the only two instances in which the word
“bankruptcy” appears in Justice Scalia’s majority opinion in
Grupo Mexicano, he uses the existence of court authority in the
bankruptcy context as a reason to support the conclusion that the
district court did not have the authority under generalized equity
powers to implement the remedy it imposed. First, he pointed
out that “[t]he law of fraudulent conveyances and bankruptcy
was developed to prevent [the] conduct [at issue]; an equitable
power to restrict a debtor's use of his unencumbered property
before judgment was not.” Grupo Mexicano, 527 U.S. at 322
(emphasis added). Second, he stressed that finding the authority
to justify the District Court’s remedy in generalized equity
power would “add[], through judicial fiat, a new and powerful
weapon to the creditor’s arsenal[;] the new rule could radically
alter the balance between debtor’s and creditor’s rights which
has been developed over centuries through many laws–
including those relating to bankruptcy, fraudulent conveyances,
and preferences.” Id. at 331 (emphasis added).
        In short, the Court’s opinion in Grupo Mexicano
acknowledged that bankruptcy courts do have the authority to
deal with the problems presented by that case. One way to
conceptualize this idea is to recognize that, had the company in
Grupo Mexicano been in bankruptcy, the bankruptcy court

                               32
unanimous consensus that it is a remedy to be used “sparingly.”
In re Augie/Restivo, 860 F.2d at 518; see also In re Bonham,
229 F.3d at 767 (explaining that “almost every other court has
noted [that substantive consolidation] should be used




would have had the authority to implement the remedy the
district court lacked authority to order under general equity
power outside the bankruptcy context.
        As for the argument’s second facet, it begins with a
concession. Bankruptcy Code § 1123(a)(5)(C)’s very words
allow for “consolidation of the debtor with one or more persons”
pursuant to a plan “[n]otwithstanding any otherwise applicable
non-bankruptcy law.” Accord Tucker, supra, at 448-49. See
also In re Stone & Webster, 286 B.R. at 540-43. Whether
§ 105(a) allows consolidation outside a plan is an issue we need
not address—though that arguably is what the Plan Proponents
propose by moving for a “deemed” consolidation—because, as
we note below, consolidation, no matter how it is packaged,
cannot pass muster in this case.
        In this context, we also need not address the argument,
made in the Amicus Curiae Brief of the Commercial Finance
Association, that substantive consolidation fails the “best
interests test” of Bankruptcy Code § 1129(a)(7) (a requirement
for plan confirmation that each creditor that does not vote to
accept the plan must receive or retain property under the plan at
least equal to its recovery in a Bankruptcy Code Chapter 7
liquidation). See generally In re Stone & Webster, 286 B.R. at
544-46.

                               33
‘sparingly’”) (citing In re Flora Mir, 432 F.2d at 1062-63).15

        B.    Our View of Substantive Consolidation

       Substantive consolidation exists as an equitable remedy.
But when should it be available and by what test should its use
be measured? As already noted, we have commented on
substantive consolidation only generally in Nesbit, 347 F.3d at
86-88, and In re Genesis Health Ventures, 402 F.3d at 423-24.
The latter nonetheless left little doubt that, if presented with a
choice of analytical avenues, we favor essentially that of
Augie/Restivo. Id. at 423. The Auto-Train approach (requiring
“substantial identity” of entities to be consolidated, plus that
consolidation is “necessary to avoid some harm or realize some
benefit,” 810 F.2d at 276) adopts, we presume, one of the
Augie/Restivo touchstones for substantive consolidation while
adding the low bar of avoiding some harm or discerning some
benefit by consolidation. To us this fails to capture completely
the few times substantive consolidation may be considered and
then, when it does hit one chord, it allows a threshold not


   15
      Thus we disagree with the assertion of a “liberal trend”
toward increased use of substantive consolidation—e.g.,
Eastgroup, 935 F.2d at 248 (describing “a ‘modern’ or ‘liberal’
trend toward allowing substantive consolidation”) (citing In re
Murray Indus., Inc., 119 B.R. 820, 828 (Bankr. M.D. Fla.
1990)); In re Vecco Construction Industries, Inc., 4 B.R. 407,
409 (Bankr. E.D. Va. 1980).

                               34
sufficiently egregious and too imprecise for easy measure. For
example, we disagree that “[i]f a creditor makes [a showing of
reliance on separateness], the court may order consolidation . . .
if it determines that the demonstrated benefits of consolidation
‘heavily’ outweigh the harm.” Id. at 276 (citation omitted); see
also Eastgroup, 935 F.2d at 249. If an objecting creditor relied
on the separateness of the entities, consolidation cannot be
justified vis-à-vis the claims of that creditor.16

       In assessing whether to order substantive consolidation,
courts consider many factors (some of which are noted in
Nesbit, 347 F.3d at 86-88 nn. 7 & 9). They vary (with degrees
of overlap) from court to court. Rather than endorsing any
prefixed factors, in Nesbit we “adopt[ed] an intentionally open-
ended, equitable inquiry. . . to determine when substantively to


  16
      This opens the question whether a court can order partial
consolidation (such a consolidation order “could provide that . . .
[a creditor relying on separateness] would receive a distribution
equal to what [it] would have received absent consolidation and
that the remainder of the assets and liabilities be consolidated.”)
Kors, supra, at 450-51. Because this theoretical issue is not
before us—and in any event (i) facts bringing it to the fore are
unlikely, id. at 451 (“If circumstances lead one party to rely on
the single status of the one debtor, it is unlikely that other
creditors are relying on the joint status of the two entities,
especially as reliance must be reasonable.”), and (ii) may present
practical concerns depending on the facts of a particular
case—we do not decide it in this case.

                                35
consolidate two entities.” Id. at 87. While we mentioned that
“in the bankruptcy context the inquiry focuses primarily on
financial entanglement,” id., this comment primarily related to
the hopeless commingling test of substantive consolidation. But
when creditors deal with entities as an indivisible, single party,
“the line between operational and financial [factors] may be
blurred.” Id. at 88. We reiterate that belief here. Too often the
factors in a check list fail to separate the unimportant from the
important, or even to set out a standard to make the attempt.
Accord Br. of Law Professors 17 as Amici Curiae at 11-12. This
often results in rote following of a form containing factors
where courts tally up and spit out a score without an eye on the
principles that give the rationale for substantive consolidation
(and why, as a result, it should so seldom be in play). Id.
(“[D]iffering tests with . . . agreed . . . factors run the risk that
courts will miss the forest for the trees. Running down factors
as a check list can lead a court to lose sight of why we have
substantive consolidation in the first instance . . . and often [to]
fail [to] identify a metric by which [it] can . . . [assess] the
relative importance among the factors. The . . . [result is] resort
to ad hoc balancing without a steady eye on the . . . [principles]


  17
    They are Robert K. Rasmussen of Vanderbilt Law School,
Barry Adler of the NYU School of Law, Susan Block-Leib of
Fordham University School of Law, G. Marcus Cole of Stanford
Law School, Marcel Kahan of the NYU School of Law, Ronald
J. Mann of the University of Texas Law School, and David A.
Skeel, Jr. of the University of Pennsylvania School of Law.

                                 36
to be advanced . . . .”).

        What, then, are those principles? We perceive them to be
as follows.

(1)    Limiting the cross-creep of liability by respecting entity
       separateness is a “fundamental ground rule[].” Kors,
       supra, at 410. As a result, the general expectation of
       state law and of the Bankruptcy Code, and thus of
       commercial markets, is that courts respect entity
       separateness absent compelling circumstances calling
       equity (and even then only possibly substantive
       consolidation) into play.

(2)    The harms substantive consolidation addresses are nearly
       always those caused by debtors (and entities they control)
       who disregard separateness.18 Harms caused by creditors
       typically are remedied by provisions found in the
       Bankruptcy Code (e.g., fraudulent transfers, §§ 548 and
       544(b)(1), and equitable subordination, § 510(c)).

(3)    Mere benefit to the administration of the case (for
       example, allowing a court to simplify a case by avoiding


  18
    Though creditors conceivably can cause debtors to conflate
separate organizational forms, the specter of lender liability
(which came to the fore in only the last two decades) makes this
theoretical possibility all the more remote.

                               37
           other issues or to make postpetition accounting more
           convenient) is hardly a harm calling substantive
           consolidation into play.

(4)         Indeed, because substantive consolidation is extreme (it
           may affect profoundly creditors’ rights and recoveries)
           and imprecise, this “rough justice” remedy should be rare
           and, in any event, one of last resort after considering and
           rejecting other remedies (for example, the possibility of
           more precise remedies conferred by the Bankruptcy
           Code).

(5)        While substantive consolidation may be used defensively
           to remedy the identifiable harms caused by entangled
           affairs, it may not be used offensively (for example,
           having a primary purpose to disadvantage tactically a
           group of creditors in the plan process or to alter creditor
           rights).

        The upshot is this. In our Court what must be proven
(absent consent) concerning the entities for whom substantive
consolidation is sought is that (i) prepetition they disregarded
separateness so significantly their creditors relied on the
breakdown of entity borders and treated them as one legal
entity,19 or (ii) postpetition their assets and liabilities are so


      19
       This rationale is meant to protect in bankruptcy the
prepetition expectations of those creditors. Accord Kors, supra,

                                   38
scrambled that separating them is prohibitive and hurts all
creditors.20

      Proponents of substantive consolidation have the burden
of showing one or the other rationale for consolidation. The
second rationale needs no explanation. The first, however, is
more nuanced. A prima facie case for it typically exists when,
based on the parties’ prepetition dealings, a proponent proves
corporate disregard creating contractual expectations of




at 419. The usual scenario is that creditors have been misled by
debtors’ actions (regardless whether those actions were
intentional or inadvertent) and thus perceived incorrectly (and
relied on this perception) that multiple entities were one.
   20
      This rationale is at bottom one of practicality when the
entities’ assets and liabilities have been “hopelessly
commingled.” In re Gulfco Inv., 593 F.2d at 929; In re Vecco,
4 B.R. at 410. Without substantive consolidation all creditors
will be worse off (as Humpty Dumpty cannot be reassembled or,
even if so, the effort will threaten to reprise Jarndyce v.
Jarndyce, the fictional suit in Dickens’ Bleak House where only
the professionals profited). With substantive consolidation the
lot of all creditors will be improved, as consolidation
“advance[s] one of the primary goals of bankruptcy–enhancing
the value of the assets available to creditors . . .–often in a very
material respect.” Kors, supra, at 417 (citation omitted).

                                39
creditors 21 that they were dealing with debtors as one
indistinguishable entity. Kors, supra, at 417-18; Christopher W.
Frost, Organizational Form, Misappropriation Risk and the
Substantive Consolidation of Corporate Groups, 44 Hastings
L.J. 449, 457 (1993). Proponents who are creditors must also
show that, in their prepetition course of dealing, they actually
and reasonably relied on debtors’ supposed unity. Kors, supra,
at 418-19. Creditor opponents of consolidation can nonetheless
defeat a prima facie showing under the first rationale if they can
prove they are adversely affected and actually relied on debtors’
separate existence.22

         C.   Application of Substantive Consolidation to
              Our Case

        With the principles we perceive underlie use of
substantive consolidation, the outcome of this appeal is apparent
at the outset. Substantive consolidation fails to fit the facts of


    21
        “[T]ort and statutory claimants, who, as involuntary
creditors, by definition did not rely on anything in becoming
creditors,” Kors, supra, at 418, are excluded, leaving only those
creditors who contract with an entity for whom consolidation is
sought.
    22
       As noted already, supra n.16, we do not decide here
whether such a showing by an opposing creditor defeats totally
the quest for consolidation or merely consolidation as to that
creditor.

                               40
our case and, in any event, a “deemed” consolidation cuts
against the grain of all the principles.

       To begin, the Banks did the “deal world” equivalent of
“Lending 101.” They loaned $2 billion to OCD and enhanced
the credit of that unsecured loan indirectly by subsidiary
guarantees covering less than half the initial debt. What the
Banks got in lending lingo was “structural seniority”—a direct
claim against the guarantors (and thus against their assets levied
on once a judgment is obtained) that other creditors of OCD did
not have. This kind of lending occurs every business day. To
undo this bargain is a demanding task.

              1.      N O P RE PE T IT IO N D IS RE G ARD      OF
                      C ORPORATE S EPARATENESS

       Despite the Plan Proponents’ pleas to the contrary, there
is no evidence of the prepetition disregard of the OCD entities’
separateness. To the contrary, OCD (no less than CSFB)
negotiated the 1997 lending transaction premised on the
separateness of all OCD affiliates. Even today no allegation
exists of bad faith by anyone concerning the loan.23 In this
context, OCD and the other Plan Proponents cannot now ignore,


   23
     The bondholders do claim certain Banks misled them in
purchasing OCD debt subsequent to the 1997 loan. But we
know of no claim of wrong by the Banks in connection with the
1997 transaction.

                               41
or have us ignore, the very ground rules OCD put in place.
Playing by these rules means that obtaining the guarantees of
separate entities, made separate by OCD’s choice of how to
structure the affairs of its affiliate group of companies, entitles
a lender, in bankruptcy or out, to look to any (or all) guarantor(s)
for payment when the time comes. As such, the District Court’s
conclusions of “substantial identity” of OCD and its
subsidiaries, and the Banks’ reliance thereon, are incorrect. For
example, testimony presented by both the Banks and the Debtors
makes plain the parties’ intention to treat the entities separately.
CSFB presented testimony from attorneys and bankers involved
in negotiating the Credit Agreement that reflected their
assessment of the value of the guarantees as partially derived
from the separateness of the entities. As OCD concedes, these
representatives “testified that the guarant[e]es were . . . intended
to provide ‘structural seniority’ to the banks,” and were thus
fundamentally premised on an assumption of separateness.
Debtors Ans. Br. at 26.

        In the face of this testimony, Plan Proponents nonetheless
argue that the Banks intended to ignore the separateness of the
entities. In support of this contention, they assert, inter alia, that
because the Banks did not receive independent financial
statements for each of the entities during the negotiating
process, they must have intended to deal with them as a unified
whole. Because the Banks were unaware of the separate
financial makeup of the subsidiaries, the argument goes, they



                                 42
could not have relied on their separateness.24

       This argument is overly simplistic. Assuming the Banks
did not obtain separate financial statements for each subsidiary,
they nonetheless obtained detailed information about each
subsidiary guarantor from OCD, including information about



  24
     Debtors make a similar argument on the basis of the Banks’
failure to exercise their right to monitor the entities
independently. For much the same reasoning that follows in the
text, we reject that argument as well.
       We reject outright Debtors’ claim that the Banks’ alleged
reliance on corporate separateness fails because they did not
obtain a third-party legal opinion from counsel that substantive
consolidation was unlikely to occur were OCD or the guarantors
subject to bankruptcy. By custom and practice this type of
counsel opinion is requested and given for newly formed entities
whose “special purpose” is to obtain structured financing (i.e.,
where “a defined group of assets . . . [are] structurally isolated,
and thus serve as the basis of a financing . . . .” Committee on
Bankruptcy and Corporate Reorganization of The Association
of the Bar of the City of New York, Structured Financing
Techniques, 50 Bus. Law. 527, 529 (1995)). It is customarily
not given (nor even requested) for entities in existence for any
significant period of time or set up for other than a structured
financing transaction. See Tribar Opinion Committee, Opinions
in the Bankruptcy Context: Rating Agency, Structured
Financing, and Chapter 11 Transactions, 46 Bus. Law, 717, 726
& n.42 (1991).

                                43
that subsidiary’s assets and debt. Moreover, the Banks knew a
great deal about these subsidiaries. For example, they knew that
each subsidiary guarantor had assets with a book value of at
least $30 million as per the terms of the Credit Agreement, that
the aggregate value of the guarantor subsidiaries was over $900
million and that those subsidiaries had little or no debt.
Additionally, the Banks knew that Fibreboard’s subsidiaries
(including the entities that became part of ESI) had no asbestos
liability, would be debt-free post-acquisition and had assets of
approximately $700 million.

       Even assuming the Plan Proponents could prove
prepetition disregard of Debtors’ corporate forms, we cannot
conceive of a justification for imposing the rule that a creditor
must obtain financial statements from a debtor in order to rely
reasonably on the separateness of that debtor. Creditors are free
to employ whatever metrics they believe appropriate in deciding
whether to extend credit free of court oversight. We agree with
the Banks that “the reliance inquiry is not an inquiry into
lenders’ internal credit metrics. Rather, it is about the fact that
the credit decision was made in reliance on the existence of
separate entities . . . .” CSFB Opening Br. at 31 (emphasis in
original).25 Here there is no serious dispute as to that fact.



    25
      Further, a creditor’s lack of diligence is relevant only
insofar as it bears on the credibility of its assertion of reliance on
separateness.

                                 44
               2.      N O H OPELESS C OMMINGLING E XISTS
                       P OSTPETITION

        There also is no meaningful evidence postpetition of
hopeless commingling of Debtors’ assets and liabilities. Indeed,
there is no question which entity owns which principal assets
and has which material liabilities. Likely for this reason little
time is spent by the parties on this alternative test for substantive
consolidation. It is similarly likely that the District Court
followed suit.

         The Court nonetheless erred in concluding that the
commingling of assets will justify consolidation when “the
affairs of the two companies are so entangled that consolidation
will be beneficial.” In re Owens Corning, 316 B.R. at 171
(emphasis added). As we have explained, commingling justifies
consolidation only when separately accounting for the assets and
liabilities of the distinct entities will reduce the recovery of
every creditor—that is, when every creditor will benefit from the
consolidation. Moreover, the benefit to creditors should be from
cost savings that make assets available rather than from the
shifting of assets to benefit one group of creditors at the expense
of another. Mere benefit to some creditors, or administrative
benefit to the Court, falls far short. The District Court’s test not
only fails to adhere to the theoretical justification for “hopeless
commingling” consolidation—that no creditor’s rights will be
impaired—but also suffers from the infirmity that it will almost
always be met. That is, substantive consolidation will nearly

                                 45
always produce some benefit to some in the form of
simplification and/or avoidance of costs. Among other things,
following such a path misapprehends the degree of harm
required to order substantive consolidation.

        But no matter the legal test, a case for hopeless
commingling cannot be made. Arguing nonetheless to the
contrary, Debtors assert that “it would be practically impossible
and prohibitively expensive in time and resources” to account
for the voluntary bankruptcies of the separate entities OCD has
created and maintained. Debtors Ans. Br. at 63. In support of
this contention, Debtors rely almost exclusively on the District
Court’s findings that

              it would be exceedingly difficult to
              untangle the financial affairs of the
              various entities . . . [and] there are
              . . . many reasons for challenging
              the accuracy of the results achieved
              [in accounting efforts thus far]. For
              example, transfers of cash between
              subsidiaries and parent did not
              include any payment of interest;
              and calculations of royalties are
              subject to question.

In re Owens Corning, 316 B.R. at 171. Assuming arguendo that
these findings are correct, they are simply not enough to

                               46
establish that substantive consolidation is warranted.

         Neither the impossibility of perfection in untangling the
affairs of the entities nor the likelihood of some inaccuracies in
efforts to do so is sufficient to justify consolidation. We find R
2 Investments, LDC v. World Access, Inc. (In re World Access,
Inc.), 301 B.R. 217 (Bankr. N.D. Ill. 2003), instructive on this
point. In World Access the Court noted that the controlling
entity “had no uniform guidelines for the recording of
intercompany interest charges” and that the debtors failed to
“allocate overhead charges amongst themselves.” Id. at 234.
The Court held, however, that those accounting shortcomings
were “merely imperfections in a sophisticated system of
accounting records that were conscientiously maintained.” Id.
at 279. It ultimately concluded that “all the relevant accounting
data . . . still exist[ed],” that only a “reasonable review to make
any necessary adjustments [was] required,” and, thus, that
substantive consolidation was not warranted. Id.

        The record in our case compels the same conclusion. At
its core, Debtors’ argument amounts to the contention that
because intercompany interest and royalty payments were not
perfectly accounted for, untangling the finances of those entities
is a hopeless endeavor. Yet imperfection in intercompany
accounting is assuredly not atypical in large, complex company
structures. See, e.g., Lynn M. LoPucki, The Myth of the
Residual          Owner,          16      n.50       (2004),
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=401160.

                                47
For obvious reasons, we are loathe to entertain the argument that
complex corporate families should have an expanded
substantive consolidation option in bankruptcy. And we find no
reason to doubt that “perfection is not the standard in the
substantive consolidation context.” In re World Access, 301
B.R. at 279. We are confident that a court could properly order
and oversee an accounting process that would sufficiently
account for the interest and royalty payments owed among the
OCD group of companies for purposes of evaluating
intercompany claims—dealing with inaccuracies and difficulties
as they arise and not in hypothetical abstractions.

       On the basis of the record before us, the Plan Proponents
cannot fulfill their burden of demonstrating that Debtors’ affairs
are even tangled, let alone that the cost of untangling them is so
high relative to their assets that the Banks, among other
creditors, will benefit from a consolidation.26

              3.      O THER C ONSIDERATIONS              D OOM
                      C ONSOLIDATION AS W ELL

       Other considerations drawn from the principles we set
out also counsel strongly against consolidation. First of all,


  26
    For example, we simply cannot imagine that it would cost
Debtors even 1% of the Banks’ asserted $1.6 billion claim to
account for the allegedly incalculable intercompany interest and
royalty payments.

                               48
holding out the possibility of later giving priority to the Banks
on their claims does not cure an improvident grant of
substantive consolidation. Among other things, the prerequisites
for this last-resort remedy must still be met no matter the priority
of the Banks’ claims.

       Secondly, substantive consolidation should be used
defensively to remedy identifiable harms, not offensively to
achieve advantage over one group in the plan negotiation
process (for example, by deeming assets redistributed to negate
plan voting rights), nor a “free pass” to spare Debtors or any
other group from proving challenges, like fraudulent transfer
claims, that are liberally brandished to scare yet are hard to
show. If the Banks are so vulnerable to the fraudulent transfer
challenges Debtors have teed up (but have not swung at for so
long), then the game should be played to the finish in that
arena.27

      But perhaps the flaw most fatal to the Plan Proponents’
proposal is that the consolidation sought was “deemed” (i.e., a


     27
        The same sentiment applies to the argument of the
bondholders that, subsequent to the 1997 loan to OCD, the
Banks defrauded them in connection with a prospectus
distributed with respect to a sale of OCD bonds underwritten by
some of the Banks. If the bondholders have a valid claim, they
need to prove it in the District Court and not use their
allegations as means to gerrymander consolidation of estates.

                                49
pretend consolidation for all but the Banks). If Debtors’
corporate and financial structure was such a sham before the
filing of the motion to consolidate, then how is it that post the
Plan’s effective date this structure stays largely undisturbed,
with the Debtors reaping all the liability-limiting, tax and
regulatory benefits achieved by forming subsidiaries in the first
place? In effect, the Plan Proponents seek to remake substantive
consolidation not as a remedy, but rather a stratagem to “deem”
separate resources reallocated to OCD to strip the Banks of
rights under the Bankruptcy Code, favor other creditors, and yet
trump possible Plan objections by the Banks. Such “deemed”
schemes we deem not Hoyle.

                         IV. Conclusion

          Substantive consolidation at its core is equity. Its
exercise must lead to an equitable result. “Communizing” assets
of affiliated companies to one survivor to feed all creditors of all
companies may to some be equal (and hence equitable). But it
is hardly so for those creditors who have lawfully bargained
prepetition for unequal treatment by obtaining guarantees of
separate entities. Accord Kheel, 369 F.2d at 848 (Friendly, J.,
concurring) (“Equality among creditors who have lawfully
bargained for different treatment is not equity but its opposite
. . . .”). No principled, or even plausible, reason exists to undo
OCD’s and the Banks’ arms-length negotiation and lending
arrangement, especially when to do so punishes the very parties
that conferred the prepetition benefit—a $2 billion loan

                                50
unsecured by OCD and guaranteed by others only in part. To
overturn this bargain, set in place by OCD’s own pre-loan
choices of organizational form, would cause chaos in the
marketplace, as it would make this case the Banquo’s ghost of
bankruptcy.

        With no meaningful evidence supporting either test to
apply substantive consolidation, there is simply not the nearly
“perfect storm” needed to invoke it. Even if there were, a
“deemed” consolidation—“several zip (if not area) codes away
from anything resembling substantive consolidation,” In re
Genesis Health Ventures, 402 F.3d at 424—fails even to qualify
for consideration. It is here a tactic used as a sword and not a
shield.

         We thus reverse and remand this case to the District
Court.




                              51
