In re: RAEJEAN BONHAM, aka Jean Bonham, aka Jeannie Bonham, dba World Plus, Inc., an Alaska corporation and ATLANTIC PACIFIC FUNDING CORPORATION, a Nevada corporation, Debtors.
THOMAS ALEXANDER; GAY ALEXANDER; ALEXANDER RENTALS; DEBBIE BAILEY; WAYNE BAILEY; SONDRA BAKER; HARRY BAKER; LISA BAKER; LLOYD BEADLE; JAMES BENNETT; MARIA BENNETT; THOMAS BOYD; SHEILA BOYD; LESLIE BOYD; JEREMY BOYD; JILL CAMERON; RAYMOND CAMERON; JOSEPH CAMPBELL; DENNIS CARY; MARVEL CARY; GENE MCCLANAHAN; FARRELL CHRISTENSEN; BRENT COOK; JOLANDA COOK; HEATHER COOK; MELANIE COOK; JIM DAVIS; ROXIE DAVIS; ROGER DELANEY; DOROTHY DELANEY; MARY BETH DIETHELM; NATHAN DIETHELM; ROBERT DUNN; NANCY DUTTON; LINETTE FINSTAD; RICHARD KEDROWSKI; MARY FLICKINGER; ALLEN FUSS; RAYETTE FUSS; IGNATIUS FUSS; JULIA FUSS; TOM FUSS; ARBARA FUSS; VELESTA FUSCO; PAULINE FUSCO; TEO FUSCO; JACQUELINE GOLDRICK; VICTOR GUNN; MARY GUNN; CYNTHIA HACHEZ; MIKE HACHEZ; GARY HALMSTAD; RAYNA HAMM; JOHN R. HILTENBRAND, JR.; GEORGE R. HORNER; JOANN HORNER; GEORGE L. HORNER; JUDITH HORNER; HORNER TRUST; RUSS JOHNSON; BECKY JOHNSON; ROBERT KARLEN; KAREN KARLEN; PAUL KELLER; CARLA KELLER; LEE KENASTON, GERALD KENASTON; JANENE KENASTON; KAREN KENASTON; DON KRATZER, JANICE LARSON, GRETA LINDLEY; KENNETH LINDLEY, LYNN MARVIN; ED MAYNARD; MAUREEN MAYNARD; HEIDI MORTON; LARRY NAUTA; SHERRY NAUTA; LEONARD NELSON; JEANETTE NELSON; ELMER OSTBLOOM; MARGARET STBLOOM; WILLIAM PASCOE; RUTH (SHERWOOD) PUGH; DEE RICHIE; ELIZABETH RICHIE; PAUL RITCHIE; BEN RITCHIE; BRADLEY RITCHIE; BARTHOLOMEW RITCHIE; BURTON RITCHIE; RACHAEL RITCHIE; REBECCA RITCHIE; ROXANNE RITCHIE; PAUL ROBINSON; HARRY SINZ; VICKI VICKERY; SALLY ROSS; MARY SCOTT; JAMES SISK; WAYNE TAYLOR; JOHN THORNTON; LINDSEY THORNTON; CARL TOMPKINS; ALANE TOMPKINS; VERLIN TOMPKINS; LINDA TOMPKINS; SCOTT TOMPKINS; CATHERINE TOMPKINS; CHARLES TRAVIS; CLIFFORD TRAVIS; BARBARA TRAVIS; EVERETT TRAVIS; TIM WALLIS; MARY WALLIS; RYAN WALRATH; CAROL WALRATH; CRAIG ZOET; ROBERT ZOET, Appellants,
v.
LARRY D. COMPTON, Trustee, Appellee.
In re: RAEJEAN BONHAM, aka Jean Bonham, aka Jeannie Bonham, dba World Plus, Inc., an Alaska corporation and Atlantic Pacific Funding Corporation, a Nevada corporation, Debtors.
MONIKA BROWN; JAMES LENTINE; JACK C. MELLOR; MORNA W. MELLOR; JONATHAN WIDDIS, Plaintiffs-Appellants,
v.
LARRY D. COMPTON, Trustee, Appellee.
In Re: RAEJEAN BONHAM, aka Jean Bonham, aka Jeannie Bonham, dba World Plus, Inc., an Alaska corporation and Atlantic Pacific Funding Corporation, a Nevada corporation, Debtors.
RANDY HANSEN; DAY ESSLEY; CLAUDIA ESSLEY; TIM MCKAY; LISA MCKAY; DEANNA SANDERSON, aka Dee Thornell; JOSEPH TAYLOR, SR., deceased; MARIA E. TAYLOR; JOSEPH TAYLOR, JR.; PATRIOT MANAGEMENT CORPORATION; and JAMES ROBERT WALKER, Plaintiffs-Appellants,
v.
LARRY D. COMPTON, Trustee, Appellee.
In Re: RAEJEAN BONHAM, aka Jean Bonham, aka Jeannie Bonham, dba WORLD PLUS, INC., an Alaska corporation and ATLANTIC PACIFIC FUNDING CORP., a Nevada corporation, Debtors.
RICHARD ALFORD; CAROL ALFORD; EDWARD AMBROZEVITCH; KATHY AMBROZEVITCH; CHARLES ASHTON; BONNIE BENHAM; LARRY BENHAM; JOEL BOGGS; RITA BOGGS; ARTAN BUCKMEIER, aka Buckmeier Enterprises; ROXANNE BUCKMEIER aka Roxanne Siebeis; FLORIAN BUCKMEIER; VICTORIA BUCKMEIER, PAUL CARTER; STEEVYN CYSEWSKI; ALFRED DERAMUS; DEBORAH DESMOND; JIM DESMOND; JON DOTY; HOMER DOTY; CAROLYN DUNCAN; JAMES DUNLAP; PAT FENDERSON; ADELE FENDERSON; RONALD FRANKLIN; SHIRLEY FRANKLIN; ESTHER FREDERICKSON; LAWRENCE GILBERTSON; DAVID GLOVER; JAMIE GLOVER; SAMUEL HALBERT; REBECCA HALBERT; ALEX HAMAN; ELIZABETH HAMAN; JANET HAMAN; J&A HAMAN ENTERPRISES; GEORGE HOTRUM; SHARON HOTRUM; TARA HOTRUM; GEORGE HOTRUM; EULA INGRAHAM; LOIS KRIZE dba Marketing Plus dba Three K Company; MARGARET KRIZE; ROSEMARY KRIZE; ERIC LARSON; NANCY LARSON; RICHARD LINDEMAN; ELLEN LINSLEY; JAMES LONGWITH; RICHARD LYNCH; ZOLA LYNCH; DONALD OINES; ANN OINES; SALCHA MARINE, INC.; MARGO SAVELL; RICHARD SAVELL; HENRIETTA SELISKER; FRANK SELISKER; VICKE SPEAR-SHIPLEY; CLARK SPRINGER; BARBARA SPRINGER; GERARD UPHUES aka GARY UPHUES; DONA UPHUES; ESTATE OF ROSEMARY WALDRON; GERRY WYSE, Plaintiffs-Appellants,
v.
LARRY D. COMPTON, Trustee, Appellee.
In Re: RAEJEAN BONHAM, aka Jean Bonham, aka Jeannie Bonham, dba World Plus; WORLD PLUS, INC., an Alaska corporation and ATLANTIC PACIFIC FUNDING CORP., a Nevada corporation, Debtors.
RICHARD CLAUSEN; JAMES L. CRAWFORD; STEPHEN CRONKHITE; DALE CRONKHITE; RAY GUFFEY; GLORIA GUFFEY; JAMES SHOOK; JULIE SHOOK; EVIE S. WHITMIRE; CHARLES P. WHITMIRE, Appellants,
v.
LARRY D. COMPTON, Trustee, Appellee.
In Re: RAEJEAN BONHAM, aka Jean Bonham, aka Jeannie Bonham, dba World Plus; WORLD PLUS, INC., an Alaska corporation; and ATLANTIC PACIFIC FUNDING CORP., a Nevada corporation, Debtors.
RICHARD ACKISS; PATRICIA BABCOCK; DONALD W. BARRY; JOSEPH BELL; MARY BELL; SANDRA J. BENSON, EDDIE L. BENSON; DEKE BURNETT; NORAH WEST; BETT YORK; CARL CADY; CATHY CADY; LYELL CHITTENDEN; A.B. CLIFFORD, JR.; EILA CLIFFORD; DAVID CURRY; DONNA CURRY; CURRY GAMES, INC.; BERNARD DARLING; ARLEEN DARLING; DAVID A. DASH; MICHAEL P. DYKEMA; SHELLY A. DYKEMA; RICHARD DYKEMA; GISELA DYKEMA; BRIAN R. FOX; FRED B. FOX; ALAN R. GERING; CAROL S. GERING; ROBERT E. GIINTHER; MARTA L. GIINTHER; G. H. (PETE) GUNN; LORRETTA GUNN; PEGGY ANN THRANUM; CAROL NOVAHA; GENE HANSEN; MEBBLE HANSEN; RETTA M. JONES; GENE HANSEN; JEROME KRIER; TOTEM SERVICES, INC., RONALD J. KRISHNEK; JOHN K. LOHRKE; RODNEY J. MARCANTEL; VINCENZO MAZZIER; MARIA D. MAZZIER; CHERYL MAZZIER; MARUTINE MCMANUS; BEVERLY JOHNSON; DOUG E. CAMPBELL; DEAN OWEN; JANET OWEN; WILLIAM H. PARRETT; ANN E. DEHNER; ROBERT L. PHILLIPS; MARY E. PHILLIPS; MARGARET RUSSELL; DARRELL L. RUSSELL; THOMAS SCHMIDT; CRAIG A. SCHUMACHER; DEBRA SINGEL; DAN SNODGRESS; DARLENE SNODGRESS; ROBERT TAYLOR; BETTY TAYLOR; L. MICHAEL THOMAS; FRANCES THOMAS; DEBORAH F. VILLAS; FRANCES S.L. WILLIAMSON; PAMELA ODOM; LINDA L. WINTERS, Appellants,
v.
LARRY D. COMPTON, Trustee, Appellee.
In Re: RAEJEAN BONHAM, aka Jean Bonham, aka Jeannie Bonham, dba World Plus; WORLD PLUS, INC., an Alaska corporation; and ATLANTIC PACIFIC FUNDING CORP., a Nevada corporation, Debtors.
TERRY ANDERSON; S. GORDON BORJESSON; ARLYS BORJESSON; RICHARD BULLION; PHYLLIS BULLION; FOREST BUTTON; JOHN L. DASHIELL; JACKIE L. DASHIELL; DON DAVIS; DARLENE DAVIS; JAMES DAVIS; PAULA DAVIS; ROSA DAVIS; JAMES DAVIS; PAUL E. DAVIS; THORA E. DAVIS; TAY T. EPPERSON; CECELIA A. ESPARZA; ALAN FIDELO; DARLENE FIDELO; KEN GOLDMAN; SYLVIA GOLDMAN; JOYCE GOLDMAN; JOHN HARGESHEIMER; MARK K. HARRIS; REBECCA L. EAMES; JOHN RANDY HART; REBECCA BATT; SHERMAN HART; MARTIN S. JACKSON; SCOTT A. JOHANNES; KARIS D. JOHANNES; MARK JOHANNES; DONNA KREIENSIECK; LARRY L. LAWTON; JOHN LECLAIR; NIKI LECLAIR;TERENCE LORD; JOAN LORD; JOHN REILLY MICHAEL; MARTIN J. PATTERSON; DIANNE H. PATTERSON; RICHARD TAY; ANTHONY RAY; DONALD ROOSA; PATRICIA ROOSA; KEN ROOSA; HELEN ROOSA; BETTY KUHL; HERMANN M. RUESS; HOWARD M. SAKLAD; FLOYD SHILANSKI; ROSA SHILANSKI; PATRICIA J. SILZEL; TONYA TORRES; ANNA WIDDIS; STEPHEN WIDMER; JIM WILKINS; GAIL WILKINS; HARRY WONDERS; ALAN S. ZANGEN; KATHY A. ZANGEN; ESTELLE ZANGEN, Appellants,
v.
LARRY D. COMPTON, Trustee, Appellee.
In Re: RAEJEAN BONHAM, aka Jean Bonham, aka Jeannie Bonham, dba World Plus; WORLD PLUS, INC., an Alaska corporation; and ATLANTIC PACIFIC FUNDING CORP., a Nevada corporation, Debtors.
DAVID G. BETSCHART; SUSAN BETSCHART; BETSCHART ELECTRIC CO., INC.; BETSCHART ELECTRIC CO., INC. MONEY PURCHASE PENSION PLAN; CHRISTOPHER J. FARWELL; PEGGY A. FARWELL; CRAIG FORSTER; VICTORIA FORSTER; FREDRIC L. GUENTHER; HARRIETTE GUENTHER; ESTATE OF LLOYD W. GUENTHER; DONALD G. ARNOLD; JAMES V. GRIMES; JULIA P. GRIMES; GREGORY L. KLUH; G. L. KLUH & SONS JEWELERS, INC. PROFIT SHARING PLAN; G.L. KLUH & SONS, INC.; KATHLEEN KLUH; DEAN LAMB; MARY ELLEN MCKAIN; JOHN S. MURRAY; ROSEMARY MURRAY; PETER MURRAY; JACK J. SCHOEPFER; WENDY SCHOEPFER; CHARLES L. SCOTT; MARIAH C.M. SCOTT; CHARLES A. SCOTT, Appellants,
v.
LARRY D. COMPTON, Trustee, Appellee.
BRIAN BEMIS; LORETTA BEMIS; ROBERT BEMIS; KRIS BEMIS; JOSEPH BIELSKI; PATRICIA BIELSKI; AVAN BREES; ALASKA PLUS; BEVERLY KRAMME; CHRISTIAN BLANKENSHIP; MARVIN BREES; DARLENE BROWN; ROBERT CAMPBELL; JOAN F. CELUSNIK; WAYNE L. CLARK; VIRGINIA L. CLARK; BARBARA DAVENPORT; MICHAEL FORD; GRANT D. DAVENPORT; FRANK DEARMIN; PATRICIA DEARMIN; TIM DOW; ALICE ELLINGSON; HAROLD ELLINGSON; GREGORY ELY; THERESA ELY; DIANA K. EVANS aka DIANA KILLINGER; PETE GARDNER; W. MARTIN HAMMER; CYNTHIA HAMMER; DAVID HARSHMAM; JOE HARSHMAN; JOHN HERMAN; ROBERT HERMAN; KAYE HERMAN; CHUCK JOHNSON; MARGARET JOHNSON; RAY KIMBERLIN dba CUMMINSBUILDING, aka JEANETTE KIMBERLIN; FAR NORTH UTILITIES, INC.; TRANSARTIC, INC.; CRAIG KINDS, KYLE KINDA; SHARON M. MENSKI; JOHN M. MANTHEY; WILLIAM D. MILLER; DORIS R. MILLER; SANDY NELSON; SHANNA NELSON; JOSEPH NYQUIST; NEIL NYQUIST; JACK O'BRIEN; CHERRYL PEARSON; WILBERT PEARSON; FRAN GUTMAN; WILLARD GUTMAN; WILLIAM PFISTERER; LINDA PFISTERER; CARL PFISTERER; GENEVIEVE PFISTERER; AMANDA PFISTERER; WESTRE PFISTERER; GLENN PFISTERER; DONALD PRESLER; KRISTIN PRESLER; PEGGY L. PUGH; RANDY REYNOLDS; BRENDA LACY; THOMAS RICHARDSON; JOHN ROSIE; TYANNE ROSIE; ROBERT RUMMER; KAREN RUMMER; JEFF SANDERSON; DAWN SANDERSON; GARY SANDERSON; KRISTINE SANDERSON; CHUCK SANDERSON; DELBERT SANDERSON; BERNADETTE SANDERSON; JOE SANDERSON; LINDA
SANDERSON; TOM SCARBOROUGH; JUDY SCARBOROUGH; DANIEL SCHACHER; JULIE SCHACHER; LARRY SCHAFER; VELMA SCHAFER; ADELLE SMITH; CHRISTOPHER SMITH; JONATHON SMITH; JANA SMITH; ELIZABETH SMITH; JOSEPH C. STAM; DIANE C. STAM; AMANDA I. STAM; RICK STORM; WES UHLMAN; CAROLYN VANDER-KOOY; BARRY VANDER-KOOY; CONNIE VILLA; FREDERICK VILLA; ROBERT WEAVER; SANDY WEAVER; RICHARD D. WEBB; BILL WILLIAMS; JEFF L. WILSON; SANDY WYLIE-ECHEVERRIA; TINA WYLIE-ECHEVERRIA, Appellants,
v.
LARRY D. COMPTON, Trustee, Appellee.
In Re: RAEJEAN BONHAM, aka Jean Bonham, aka Jeannie Bonham, dba World Plus; WORLD PLUS, INC., an Alaska corporation and ATLANTIC PACIFIC FUNDING CORP., a Nevada corporation, Debtors.
TERRY FRANKLIN; LYNNE G. FRANKLIN; SHIRLYN, INC., Appellants,
v.
LARRY D. COMPTON, Trustee, Appellee.
Nos. 98-36081, 98-36083, 98-36086, 98-36089, 98-36091, 98-36093, 98-36108, 98-36109, 98-36205, 99-35046.
U.S. Court of Appeals for the Ninth Circuit
Argued and Submitted August 2, 2000
Filed October 4, 2000
[Copyrighted Material Omitted][Copyrighted Material Omitted][Copyrighted Material Omitted][Copyrighted Material Omitted]
Ronald W. Goss, Seattle, Washington, and Gerald K. Smith, Phoenix, Arizona, for appellants Richard K. Alford et al.
Grant E. Courtney, Seattle, Washington, for appellants David G. Betschart et al.
Rebecca S. Copeland, Anchorage, Alaska, for appellants Terry Anderson et al.
Cabot Christianson, Anchorage, Alaska, for appellee Larry D. Compton.
Appeal from the United States District Court for the District of Alaska. James K. Singleton, District Judge, Presiding. D.C. No.CV-98-00167-JKS
Before: Dorothy W. Nelson, Stephen Reinhardt and Sidney R. Thomas, CircuitJudges.
THOMAS, Circuit Judge:
We must decide whether a bankruptcy court may order substantive consolidation of two non-debtor corporations, World Plus, Inc. and Atlantic Pacific Funding Corporation, with the bankruptcy estate of Chapter 7 debtor Raejean Bonham nunc pro tunc as of the filing date of the involuntary Chapter 7 petition. We have jurisdiction pursuant to 28 U.S.C.S 158(d), and we reverse the decision of the district court and remand with instructions to affirm the bankruptcy court's order of nunc pro tunc substantive consolidation.
* This appeal arises out of a failed Ponzi scheme1 operated by debtor Raejean Bonham originally through a proprietorship known as "World Plus," which she eventually incorporated as World Plus, Inc. ("WPI"), and beginning in 1992, under the name of Atlantic Pacific Funding Corp. ("APFC"), a Nevada corporation. See In re Bonham,
Bonham was the sole shareholder and director of both WPI and APFC. See id. On September 18, 1995, the state of Alaska involuntarily dissolved WPI. APFC was never registered to do business in Alaska, had no employees and appears to have only engaged in activities related to the Ponzi scheme. APFC was not a viable Nevada corporation after October 1, 1995. See id. at 62-63.
Beginning in 1989, Bonham began issuing as an individual, as WPI, and later as APFC, short-term investment contracts with promised returns of 20% to 50% over periods ranging from 10 days to 8 months. See id. For investment contracts issued after 1992, investors indiscriminately received contracts from both WPI and APFC regardless of the entity to which investors made investment payments. See id. at 67. The airline ticket sales business, however, did not generate sufficient revenue to cover the debt service on the investment contracts. To service these debts, Bonham transferred investment income from one investor directly to another investor, and between WPI and APFC, in satisfaction of prior investment contracts. See id. at 69. Moreover, Bonham used proceeds from WPI and APFC towards her personal finances. See id. at 72.
On December 19, 1995, a group of WPI and APFC investors commenced an involuntary Chapter 7 proceeding against Bonham to collect on unpaid investment contracts. See id. at 60. The bankruptcy court appointed Larry D. Compton as the interim Chapter 7 trustee. Initially, Bonham contested the involuntary Chapter 7 petition; however, she subsequently agreed to the petition and filed a voluntary Chapter 11 petition. See id. On January 8, 1996, the bankruptcy court converted the bankruptcy case to Chapter 11 and appointed Compton as Chapter 11 trustee. Id. However, after Compton investigated Bonham's operations and concluded that he could not continue the business because it was the front for a Ponzi scheme, the bankruptcy court converted the case back to Chapter 7 and appointed Compton as Chapter 7 trustee. Id. Since the initiation of the bankruptcy case, approximately 1,111 proofs of claim have been filed against Bonham's debtor estate for over $53 million. See id.
Because minimal net proceeds were expected from the liquidation of Bonham's personal assets and WPI and APFC had no material assets, Compton filed over 600 adversary proceedings against investors of Bonham, WPI or APFC to avoid fraudulent transfers. Id. These cases are administered through a lead adversary action referred to as the Bonham Recovery Action ("BRA"), Adv. Case No. F95-00897-168 HAR.2 The investors, however, challenged the trustee's standing to avoid transfers made by WPI and APFC because the Chapter 7 petition named only Bonham as the debtor and moved to dismiss the adversary proceedings for lack of standing.
In response, Compton filed a motion for substantive consolidation nunc pro tunc of Bonham's debtor estate with the non-debtor estates of WPI and APFC effective as of December 19, 1995, the date on which the involuntary bankruptcy proceeding was commenced against Bonham. In a lengthy order making extensive findings of fact and conclusions of law, the bankruptcy court ordered the nunc pro tunc substantive consolidation of WPI and APFC with Bonham's estate in order to assure that the overcompensated initial investors would share in the losses suffered by subsequent investors. See id. at 74-75, 102. In doing so, the bankruptcy court determined that (1) the motions process was an appropriate procedure for substantive consolidation as long as there was notice and an opportunity to be heard, and (2) Bonham had constructed a Ponzi scheme for which WPI and APFC were simply vehicles Bonham used to perpetuate the fraud. See id. at 94-95, 96, 101-02. In a separate order, the bankruptcy court enumerated the terms and conditions of its order of substantive consolidation, which specifically reserved to the trustee the power to exercise the avoidance rights of the consolidated entities under 11 U.S.C. 544, 547 and 548.
The investors -in fourteen separate notices of appeal -appealed the substantive consolidation order to federal district court. In a brief order filed on September 30, 1998, the district court concluded that the bankruptcy court's order of substantive consolidation was not an appealable final order, dismissed the appeal for lack of finality and remanded for further proceedings. In doing so, the district court noted that the consolidation order (and the investors' objections)"are . . . bound up in the underlying merits of the case." The court therefore concluded that "any attempt to sort out the rights and wrongs of the parties at this stage is premature" because "[i]t is impossible to decide the consolidation issue without addressing the underlying record."
A majority of the investors appealed the district court order within 30 days of the issuance of the order dismissing the investors' appeals for lack of finality. However, four investors, represented by counsel Gary Sleeper and Mark P. Melchert, filed their notices of appeal on November 4, 1998, 34 days after the district court issued its order.3
II
A threshold jurisdictional issue is whether the bankruptcy court's order of substantive consolidation and the district court remand order for further proceedings are final and appealable orders pursuant to 28 U.S.C. 158. We review de novo the district court's ruling that a bankruptcy court's decision is not an appealable, final order. See Duckor Spradling & Metzger v. Baum Trust (In re P.R.T.C., Inc.),
Under 28 U.S.C. 158(d), appellate jurisdiction exists when the bankruptcy court order and the decision of the district court acting in its bankruptcy appellate capacity are both final orders.4 See Elliot v. Four Seasons Prop. (In re Frontier Prop.),
We have adopted a "pragmatic approach" to finality in bankruptcy because "certain proceedings in a bankruptcy case are so distinctive and conclusive either to the rights of individual parties or the ultimate outcome of the case that final decisions as to them should be appealable as of right." Id. at 1363 (citations omitted). Our approach "emphasizes the need for immediate review, rather than whether the order is technically interlocutory . . ." Allen v. Old Nat'l Bank of Washington (In re Allen),
Under our pragmatic approach, a bankruptcy court order is considered to be final and thus appealable "where it 1) resolves and seriously affects substantive rights and 2) finally determines the discrete issue to which it is addressed." Law Offices of Nicholas A. Franke v. Tiffany (In re Lewis),
We have yet to directly address whether a bankruptcy court's order of substantive consolidation is final and appealable under 158(a). However, other circuits have generally addressed interlocutory appeals of substantive consolidation orders without consideration of the jurisdictional question raised here. See, e.g., First Nat'l Bank of El Dorado v. Giller (In re Giller),
Consistent with the approach of our sister circuits, and properly applying Frontier Prop., we conclude that substantive consolidation orders are final and appealable under 158(a). A substantive consolidation order seriously affects the substantive rights of the involved parties. The bankruptcy rules recognize as much:
Consolidation, as distinguished from joint administration, is neither authorized nor prohibited by this rule since the propriety of consolidation depends on substantive considerations and affects the substantive rights of the creditors of the different estates.
Adv. Ctte. Note to Bankr. R. 1015. Numerous cases and commentators have similarly noted that substantive consolidation "is no mere instrument of procedural convenience . . . but a measure vitally affecting substantive rights." See, e.g., Flora Mir Candy Corp. v. R.S. Dickson & Co. (In re Flora Mir Candy Corp.),
In the instant case, bankruptcy court "finally determine[d]" the "discrete issue" of whether WPI and APFC should be substantively consolidated with Bonham's estate, a decision that "resolve[d] and seriously affect[ed ] substantive rights" of the parties.6 The consolidation order is of the sort that "can cause irreparable harm if the losing party must wait until the bankruptcy court proceedings terminate before appealing." In re Allen,
The district court order was also final and appealable under 158(d). Although a district court renders a final order when it affirms or reverses a bankruptcy court's final order, see In re Vylene Enterprises,
In contrast to the finality concerns raised in the usual case in which the district court reverses and remands the bankruptcy court order for further factual findings, the district court here declined to exercise jurisdiction after determining that the substantive consolidation order was non-final, and therefore, remanded this action for further proceedings. Thus, the sole question posed on appeal is whether the district court properly dismissed the investors' appeal for lack of finality. As such, the balancing tests set forth in Vylene and Bonner Mall do not apply. Because the district court erred in dismissing the investors' appeal for lack of finality, we may exercise jurisdiction over the appeal of the district court decision.
III
The bankruptcy court did not err in substantively consolidating the estates, nor in doing so nunc pro tunc. We review the bankruptcy court's decision independently of the district court's decision. See In re Lewis,
* Contrary to the investors' argument, the bankruptcy court had the power to enter the substantive consolidation order.7 "[F]or many purposes, courts of bankruptcy are essentially courts of equity, and their proceedings inherently proceedings in equity." Pepper v. Litton,
Although substantive consolidation was not codified by the Bankruptcy Reform Acts of 1978 or 1994, see Pub.L. No. 95598 (1978) and Pub.L. No. 103-394, 104(a) (1994), as were related provisions allowing for procedural consolidation or joint administration, courts, as well as the bankruptcy rules, recognize its validity and have ordered substantive consolidation subsequent to the enactment of the Bankruptcy Code. See, e.g., In re Reider,
The theory of substantive consolidation emanates from the core of bankruptcy jurisprudence. As Justice Douglas noted, "[t]he power of the bankruptcy court to subordinate claims or adjudicate equities arising out of the relationship between the several creditors is complete." Sampsell,
The primary purpose of substantive consolidation "is to ensure the equitable treatment of all creditors. " Id. Absent any statutory guidelines and with an eye towards its equitable goals, courts have ratified substantive consolidation in a variety of circumstances. For example, the substantive consolidation of two estates was first tacitly approved by the Supreme Court in the context of a debtor who had abused corporate formalities and allegedly made fraudulent conveyances of the debtor shareholder's assets to the corporation. See Sampsell,
More recently, in Giller, the Eighth Circuit considered the appeal by a creditor of several debtor corporations that were substantively consolidated because the sole and majority shareholder of the corporations had abused the debtors' corporate forms and had caused transfers that would give rise to fraudulent conveyance and preference causes of action. See
Courts have permitted the consolidation of non-debtor and debtor entities in furtherance of the equitable goals of substantive consolidation. See, e.g., In re Auto-Train,
Thus, even though substantive consolidation was not codified in the statutory overhaul of bankruptcy law in 1978, the equitable power undoubtedly survived enactment of the Bankruptcy Code. No case has held to the contrary.
B
The bankruptcy court did not err in using its substantive consolidation power in this case. Two broad themes have emerged from substantive consolidation case law: in ordering substantive consolidation, courts must (1) consider whether there is a disregard of corporate formalities and commingling of assets by various entities; and (2) balance the benefits that substantive consolidation would bring against the harms that it would cause. See In re Reider,
Two "similar but not identical" tests have been applied to assess whether substantive consolidation is proper, neither of which we have had occasion to apply or adopt. See In re Reider,
The Second Circuit has applied an independent test which requires the consideration of two factors:"(1) whether creditors dealt with the entities as a single economic unit and did not rely on their separate identity in extending credit; or (2) whether the affairs of the debtor are so entangled that consolidation will benefit all creditors." In re Reider,
The Second Circuit's approach is more grounded in substantive consolidation and economic theory; it is also more easily applied. Thus, we adopt it and utilize it in our analysis of this case. In applying the Second Circuit's test, we must determine whether Bonham's creditors either dealt with WPI, APFC and Bonham as a single economic unit and did not rely on the separate credit of each of the consolidated entities; or, whether the operations of WPI and APFC were excessively entangled with Bonham's affairs to the extent that consolidation will benefit all creditors. See In re Augie/Restivo,
The application of the Second Circuit test makes clear that the bankruptcy court did not err in ordering substantive consolidation of WPI, APFC and Bonham's estate under either of these elements. The bankruptcy court's findings support its conclusion that Bonham, WPI and APFC "were but instrumentalities of the bankrupt with no separate existence of their own." See Soviero v. Franklin Nat'l Bank of Long Island,
The record clearly shows, and the investors do not dispute the bankruptcy court's determination, that Bonham commingled her personal assets with those of WPI and APFC, that there was no clear demarcation between the affairs of Bonham, WPI and APFC, and that Bonham often commingled the assets and names of WPI and APFC. See In re Bonham,
The bankruptcy court also did not err in according little weight to the investors' affidavits stating that they had relied on the separate credit of WPI and APFC in entering into investment contracts. On appeal, the investors again point to these affidavits and contend that the bankruptcy court "ignored" them. The burden rests on the investors to overcome the presumption that they did not rely on the separate credit of WPI or APFC. See In re Auto-Train,
The investors contend that the bankruptcy court failed to properly weigh the benefits of substantive consolidation against the harm to the investors.12 The "harm" usually measured is the harm to the entity which is being substantively consolidated. Here, the only "harm" is that third parties may have greater exposure to risk because they may lose a legal defense to what would otherwise be viable claims of fraudulent transfer. In short, the alleged "harm" is that fraudulent transfers of money will be recovered, the estates will be equitably administered and the assets equitably distributed. The bankruptcy court did not err in this aspect of its analysis.
Of course, "[r]esort to consolidation . . . should not be Pavlovian," see In re Augie/Restivo,
Contrary to the investors' assertions, the instant appeal is distinguishable from our affirmance of a district court's refusal to order substantive consolidation in Anaconda. In Anaconda, creditors of the parent corporation-debtor sought to share in the assets of its subsidiaries to the same extent as the creditors would have been entitled to share in the assets of the parent corporation. See
Even though the parent corporation benefitted from its subsidiaries, we noted that consolidation would be improper based on several factors distinguishing Anaconda from the instant appeal: (1) the parent corporation and the subsidiaries were not operated as a single entity; (2) the subsidiaries were not operated as part of a scheme to perpetuate the fraud; and, (3) the objecting creditors of the parent corporation had relied solely upon the sole credit of the parent corporation and did not seek additional security from the subsidiaries. See id. at 627. Based on these findings, the district court had correctly held that the subsidiaries had existed as separate corporate entities and that the objecting creditors had not been prejudiced by the corporate relationship between the parent and subsidiaries. See id. at 627-28. In contrast, Bonham, WPI and APFC were not operated as separate entities, and the creditors of APFC and WPI -like Bonham's creditors -relied solely on Bonham, and not on the separate credit of the two corporations.
Finally, the investors' contention that the bankruptcy court cannot order substantive consolidation for the sole purpose of preserving the trustee's avoidance power, where there are no assets to be pooled, is without merit. The primary motivation for ordering substantive consolidation in the instant appeal is to allow the trustee to pursue avoidance actions against "Target" creditors who have recouped, in part or in full, their investments with Bonham. With substantive consolidation nunc pro tunc, the trustee will be able to recover fraudulent transfers made by WPI and APFC within one year prior to the filing of the involuntary petition against Bonham and to redistribute the recovered assets equitably to all of Bonham's creditors. See 11 U.S.C. 548(a)(1); see also 11 U.S.C. 547(b) (trustee may avoid preferential transfer made to a debtor on or within ninety days before the date of the filing of the bankruptcy petition). Such a motivation is not without precedent and is proper in light of the equitable nature of substantive consolidation. Cf. In re Giller,
Absent express preservation of the trustee's avoidance power, an order of substantive consolidation would ordinarily eliminate that power. For example, in Parkway Calabasas, the bankruptcy court held that the trustee's fraudulent conveyance cause of action in an adversary proceeding was rendered moot by the substantive consolidation of two bankruptcy cases where the bankruptcy court order failed to preserve the trustee's avoidance powers. See
However, "[t]he bankruptcy court has the power, in appropriate circumstances, to order less than complete substantive consolidation, or to place conditions on the substantive consolidation," including the preservation of avoidance claims by the formerly separate estates. In re Parkway Calabasas,
Similarly, in Parkway Calabasas, the bankruptcy court recognized that it could have imposed conditions or qualifications on the order of substantive consolidation that would have allowed the trustee to assert fraudulent conveyance claims in the adversary proceeding, but failed to do so. See
Here, the bankruptcy court expressly ordered the substantive consolidation of WPI and APFC with Bonham's estate to allow Compton to pursue avoidance actions against investors who received fraudulent transfers in connection with the Ponzi investment scheme. See In re Bonham ,
C
The bankruptcy court did not err in substantively consolidating WPI and APFC with Bonham's estate nunc pro tunc. Absent nunc pro tunc substantive consolidation, the trustee would be barred from seeking the avoidance of fraudulent conveyances made through WPI and APFC prior to one year before the date of the order of substantive consolidation.
We have yet to consider whether a bankruptcy court may order nunc pro tunc substantive consolidation. In Parkway Calabasas, for example, the trustee sought to preserve fraudulent conveyance causes of action through nunc pro tunc substantive consolidation, despite the fact that substantive consolidation was ordered to be prospective only. See
Several courts, however, have held that substantive consolidation nunc pro tunc is proper under the appropriate circumstances. In Auto-Train, the bankruptcy court substantively consolidated a wholly-owned non-debtor subsidiary of a debtor corporation in a pending bankruptcy case. See
Because the consolidation proceeding will already have established a substantial identity between the entities to be consolidated, this inquiry begins with the proponent of nunc pro tunc making a showing that nunc pro tunc is necessary to achieve some benefit or avoid some harm. Following this showing, a potential preference holder may challenge the nunc pro tunc entry of the consolidation order by establishing that it relied on the separate credit of one of the entities to be consolidated and that it will be harmed by the shift in filing dates. If a potential preference holder meets this burden, the court must then determine whether the benefits of nunc pro tunc outweigh its detriments.
Id. The D.C. Circuit nonetheless applied this rule to reverse the nunc pro tunc feature of the bankruptcy court's order of substantive consolidation because the bankruptcy court had given "little or no weight" to the objecting creditor's reliance on the separate credit of the consolidated entity. Id.; but see In re Kroh,
While we ratify nunc pro tunc consolidation, we decline to adopt Auto-Train's approach to determining whether nunc pro tunc substantive consolidation should be ordered for many of the same reasons the Sixth Circuit declined to do so in Baker. In Baker, the Sixth Circuit allowed for the nunc pro tunc consolidation of two debtor estates. See
In Matter of Evans, the bankruptcy court noted that implicit in any order of substantive consolidation is the determination "that the assets and liabilities of one debtor are substantially the same assets and liabilities of the second debtor."
If the reasons for substantively consolidating two cases filed under the Code is to protect the unsecured creditors of both debtors where the assets and liabilities of the debtors are so intermingled as to make them substantially the same, and if the purpose of the preference provisions is to assure equality of distribution among all creditors, then it logically follows that where two cases are substantively consolidated upon a determination by the Court that the assets and liabilities of each debtor are not clearly separable, the preference provisions require us to treat the creditors of both debtors in substantially the same manner. In order for us to do so, we must assign a like filing date to both Debtors for purposes of the preference provisions.
Id. The Baker court similarly concluded that "[t]he order of consolidation rests on the foundation that the assets of all of the consolidated parties are substantially the same, " and that the earliest filing date is the controlling date. In re Baker,
We agree with the Sixth Circuit and adopt a similar rationale. See In re Baker,
Applying this approach, it is clear that the bankruptcy court did not err in ordering substantive consolidation nunc pro tunc. Bonham commingled her personal assets with those of WPI and APFC, and failed to maintain any corporate distinction between those entities to the extent that there was little to distinguish Bonham, WPI and APFC. As such, the filing date of the original involuntary bankruptcy petition is the controlling date from which to measure the limitations period for the trustee's avoidance actions. In light of the foregoing, the bankruptcy court did not err in substantively consolidating WPI and APFC with Bonham's estate nunc pro tunc.
IV
We reverse the decision of the district court and remand with instructions to affirm the order of the bankruptcy court substantively consolidating Bonham's estate with WPI and APFC nunc pro tunc.
REVERSED AND REMANDED WITH INSTRUCTIONS.
Notes:
Notes
"The term `Ponzi scheme' is derived from Charles Ponzi, a famous Boston swindler. With a capital of $150, Ponzi began to borrow money on his own promissory notes at a 50% rate of interest payable in 90 days. Ponzi collected nearly $10 million in 8 months beginning in 1919, using the funds of new investors to pay off those whose notes had come due." United States v. Masten,
A bankruptcy trustee has power to avoid fraudulent transfers under the Bankruptcy Code and pursuant to state law. See 11 U.S.C. 544(b), 548; see also Wyle v. C.H. Rider & Family (In re United Energy Corp.),
These appeals were timely despite having been filed 30 days after entry of the district court's order of dismissal and remand to the bankruptcy court for further proceedings. See Fed. R. App. P. 4(a). Because the district court did not enter a separate judgment after dismissing the investors' appeal of the bankruptcy court's order of substantive consolidation for lack of finality, the time for filing a notice of appeal never began to run. McCalden v. Calif. Library Ass'n,
Under 28 U.S.C. 158(d), we have jurisdiction over "appeals from all final decisions, judgments, orders and decrees entered" under 28 U.S.C. 158(a), which in turn gives the district court jurisdiction to hear appeals "from final judgments, orders, and decrees" of the bankruptcy court.
An order may be final and appealable even when the time for filing an appeal has not begun to run. See McCalden,
The bankruptcy court after giving notice to the parties and conducting evidentiary hearings made extensive findings of fact and conclusions of law in ordering consolidation. See In re Bonham ,
This court has previously discussed the doctrine, but never considered a direct challenge to the bankruptcy court's power to employ it. See Gill v. Sierra Pacific Constr., Inc. (In re Parkway Calabasas),
Section 105(a) states: "The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title." 11 U.S.C. 105(a).
Courts have ordered substantive consolidation in numerous procedural contexts. For example, a bankruptcy court may order substantive consolidation as a contested matter upon motion by the involved parties, as was done in the instant appeal, or via an adversary proceeding or other procedural device, as long as there is notice and an opportunity to be heard. See In re Reider,
Courts have noted a non-determinative list of factors that a court should consider in determining whether a proponent of substantive consolidation has established a prima facie case for substantive consolidation. See, e.g., Eastgroup,
The Eighth Circuit in Giller has adopted a three-factor variant of the Auto-Train test: "1) the necessity of consolidation due to the interrelationship among the debtors; 2) whether the benefits of consolidation outweigh the harm to creditors; and (3) prejudice resulting from not consolidating the debtors." See
In part, they argue that the bankruptcy court failed to conduct an explicit cost-benefit analysis, but rather, relied "only on general notions of fairness." The investors cite to no authority that requires any sort of costbenefit analysis. Rather, substantive consolidation is premised on a "sole aim: fairness to all creditors," and not on any formalistic cost-benefit analysis. Cf. Colonial Realty,