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Non-Debtor Substantive Consolidation: The Tensions of Form and Substance

Norton Annual Survey of Bankruptcy Law
September 2017, R. Stephen McNeill and D. Ryan Slaugh

The legal theory supporting a Bankruptcy Court's use of substantive consolidation is anything but straightforward. Add a non-debtor to the equation and you end up with “a type of relief fraught with conceptual problems.” Given the lack of an express statutory provision providing for or prohibiting substantive consolidation, and a reliance on equitable powers that are heavily dependent on unique factual circumstances, case law provides, not surprisingly, a conflicting and murky narrative of how the doctrine should be applied.

Those courts that have applied the remedy have relied, for the most part, on the equitable powers granted in section 105(a) of the Bankruptcy Code. Opponents of the remedy have framed it as a subversion of more specific statutory provisions of the Bankruptcy Code. No matter which position prevails, the underlying principal of treating creditors equitably is best served by unifying the courts in their application of the remedy, thereby providing creditors with a predictable landscape to navigate when dealing with debtors.

This article does not take a position as to which approach is best suited to accomplishing the goals set forth in the Bankruptcy Code. Rather, presented herein is an overview of the state of the law, an explanation of the tensions that exist among the competing judicial decisions, and a discussion of why such tensions persist.

This article appears in the Norton Annual Survey of Bankruptcy Law, Volume 2017, Issue 2017 (September 2017) and is posted with permission.

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