462 B.R. 186
Bankr. N.D. Tex.2011Background
- Development, AH F Development, Ltd., filed a voluntary Chapter 11 on Oct. 19, 2009, with no ongoing operations, employees, or debtor-in-possession structure.
- AHF is the general partner of Development and caused the Chapter 11 filing; AHF has a contested $16,080,449 receivable on Development’s books and alleges alter-ego/commingling issues.
- The United States Trustee, Attebury Family Partnership, L.P., and the Rice Trust moved to dismiss Development and opposed consolidation with the affiliated AHF case; the Official Unsecured Creditors Committee and investors later joined the consolidation motion.
- AHF Committee alleged Development was essentially an alter ego entity and a vehicle for misappropriated fiduciary funds, seeking to consolidate to avoid preferential recoveries for Attebury and related parties.
- O’Cheskey, the Chapter 11 Trustee of AHF, joined later, agreeing to consolidation in his pleading but incorporating earlier positions; trial on dismissal/consolidation occurred on Mar. 4, 2011.
- The court ultimately found there is cause to dismiss and declined to order substantive consolidation, holding that dismissal is required under §1112(b) and that consolidation would be improper.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether dismissal is required or unusual circumstances permit consolidation | UST, Rice Trust, Attebury: dismissal exists without unusual circumstances | Movants for consolidation: consolidation would protect creditors and resolve intercompany claims | Dismissal is mandated; unusual circumstances do not warrant consolidation |
| Whether Development should be substantively consolidated with AHF | Consolidation would eliminate intercompany receivables and simplify claims | Consolidation would prejudice Development’s creditors and misallocate assets | Not ordered; court declines substantive consolidation and opts for dismissal |
| Whether the $16 million receivable is viable and central to consolidation rationale | Receivable supports consolidation as a pooling device | Receivable is spurious; Development was a conduit with no standalone asset | The receivable is not viable; consolidation not justified by its existence |
| Whether use of AHF’s filing date for avoidance actions is appropriate in consolidation | Not applicable since consolidation is not approved |
Key Cases Cited
- In re Babcock & Wilcox Co., 250 F.3d 955 (5th Cir.2001) (describes substantive consolidation as pooling assets and claims; heavy prejudice risk)
- In re Permian Producers Drilling, Inc., 263 B.R. 510 (W.D.Tex.2000) (equitable basis for consolidation; limits and considerations)
- In re ASARCO, LLC, 420 B.R. 314 (S.D.Tex.2009) (limits on consolidation; can tailor order)
- In re Introgen Therapeutics, Inc., 429 B.R. 570 (Bankr.W.D.Tex.2010) (balancing/factor approach to consolidation; expert testimony considered)
- In re Bonham, 229 F.3d 750 (9th Cir.2000) (nunc pro tunc consolidation; caution against broad use)
- In re Pacific Lumber Co., 584 F.3d 229 (5th Cir.2009) (plan/claims structure; recognition of consolidation concept)
- In re Amco Ins., 444 F.3d 690 (5th Cir.2006) (tightens scrutiny; consolidation affects substantive rights)
- In re DRW Property Co., 54 B.R. 489 (Bankr.N.D.Tex.1985) (prejudice and accounting considerations in consolidation)