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Third Circuit Cuts Substantive Consolidation Risk
Lenders won a victory on Aug. 15 when the Third Circuit limited the equitable remedy of substantive consolidation in the Owens Corning reorganization case. In re Owens Corning, ____ F.3d ___, 2005 U.S. App. LEXIS 17150*1 (3d Cir. 2005), amended by 2005 U.S. App. LEXIS 18043 (3d Cir. Aug. 23, 2005); further amended Sept. 2, 2005, petitions for reh'g en banc filed Aug. 29, 2005. Reversing the district court, the court held that “affiliated [debtor and non-debtor] entities” could not be “substantively” consolidated on the facts of the case before it. According to the court, the debtor and its allies sought substantive consolidation, a “last-resort remedy,” in order to “deprive one group of creditors [ie, the unsecured lenders] of their rights while providing a windfall to other creditors.” Id. at *5-*6. The future claimants' representative and a creditors' committee filed petitions for rehearing en banc on Aug. 29. Answers to those petitions were due to be filed by Sept. 12.
Practical Significance
The Owens Corning decision means that creditors can have greater assurance that a deal structure with subsidiary/affiliate credit support will be respected in a bankruptcy case. Moreover, the substantive consolidation remedy will be unavailable if it would unfairly harm certain creditors in order to benefit others.
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