530 B.R. 711
Bankr. C.D. Cal.2015Background
- Debtor Owner Management Service, LLC and several affiliated entities filed chapter 11 on Jan 9, 2012; Bank of America commenced an adversary on Dec 18, 2013 seeking substantive consolidation of multiple entity and individual defendants with the Debtor.
- Plaintiff obtained a preliminary injunction and then moved for summary judgment to substantively consolidate OMS, related entities, and three Matsuba family members (Dorothy, Tom, Jamie) with the Debtor nunc pro tunc to the petition date.
- The Trustee and Plaintiff presented voluminous documentary evidence (recorded deeds, corporate filings, bankruptcy schedules, MORs, declarations, forensic accounting) showing pervasive title transfers, intercompany loans, shared bank accounts, commingled books, and control by the Matsuba family.
- Defendants argued tracing was feasible (submitted an expert declaration), contested admissibility of some evidence, and raised jurisdictional and statutory objections (Stern v. Marshall and Law v. Siegel issues).
- The court found extensive, intentional entanglement of records, finances, and transfers (700+ transactions), persistent refusal to deliver books/records to the Trustee, and that untangling would be costly or impossible — satisfying the Bonham entanglement test.
- The court granted summary judgment ordering substantive consolidation of all defendants (entities and individuals) nunc pro tunc to Jan 9, 2012, while reserving administration details (discharge deadlines, limitations) for further briefing.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether bankruptcy court may order substantive consolidation | Bank of America: consolidation is an equitable bankruptcy remedy to prevent unfair dilution of estate assets and is core and adjudicable by the bankruptcy court | Defendants: Stern and related authorities limit bankruptcy court power; §105 and equitable consolidation lack statutory basis per Siegel | Court: Stern does not prohibit substantive consolidation; Ninth Circuit precedent authorizes equitable consolidation under Bonham; bankruptcy court may decide the motion (core matter) |
| Standard for substantive consolidation (Bonham test) | Plaintiff: Debtor and defendants’ affairs are so entangled that tracing is impracticable and consolidation will benefit creditors | Defendants: Tracing is feasible; expert raises disputed fact about time/cost to untangle; inclusion of non-debtor individuals is improper | Court: Applied Bonham (entanglement prong): entanglement and inability to trace assets satisfied; inclusion of individuals warranted to prevent further harm |
| Admissibility/timeliness of defendants’ expert evidence | Plaintiff: Grobstein’s declarations are speculative, untimely (supplemental), and inadmissible under Rules 702/703 | Defendants: Expert shows factual dispute over feasibility/cost of tracing | Court: Struck/discounted supplemental/tentative expert material as untimely and insufficiently reliable; considered materials but found they did not create a genuine issue |
| Benefit/harm balance of consolidation | Plaintiff: Consolidation increases estate assets, avoids piecemeal litigation, benefits creditor body as a whole | Defendants: Consolidation would unfairly affect non-filing individuals and lacks precedent for including individuals | Court: Benefits to creditors and estate outweigh harms; inclusion of individuals necessary because they controlled and perpetuated the entanglement; court may impose equitable limits later |
Key Cases Cited
- Stern v. Marshall, 131 S. Ct. 2594 (U.S. 2011) (limits on bankruptcy courts entering final judgment on certain state-law counterclaims)
- Law v. Siegel, 134 S. Ct. 1188 (U.S. 2014) (bankruptcy courts’ §105 power cannot contravene specific Code provisions)
- Alexander v. Compton (In re Bonham), 229 F.3d 750 (9th Cir. 2000) (adopts Augie/Restivo test for substantive consolidation; entanglement and creditor-dealing prongs)
- Union Savings Bank v. Augie/Restivo Baking Co., 860 F.2d 515 (2d Cir. 1988) (formulation of substantive consolidation factors)
- In re Meruelo Maddux Props., Inc., 667 F.3d 1072 (9th Cir. 2012) (recognizes bankruptcy courts may order substantive consolidation)
- Celotex Corp. v. Catrett, 477 U.S. 317 (U.S. 1986) (summary judgment burden-shifting framework)
- Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (U.S. 1986) (standard for genuine dispute of material fact on summary judgment)