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more than $205,000,000 was transferred back and forth between them, and controlling individual disregarded entities' separateness, treated partnership's assets as if they were his own, and diverted assets of entities to shield them from creditors. Additionally, ordering substantive consolidation nunc pro tunc to debtors' petition date was warranted; and entry of partial final judgment, as to substantive consolidation claim, was warranted.
iii. In re Pearlman, et al., 462 B.R. 849 (Bankr. M.D. Fla. 2012)
Issue: Whether the court could substantively consolidate the debtor entities with various non- debtor entities also involved in the ponzi scheme.
Holding: The court held that substantive consolidation was a purely bankruptcy remedy and could not be extended to consolidate the assets and affairs of a non-debtor. The court concluded that it need not even reach all the factual issues raised by the trustee that could arise if the debtor and non-debtor entities were to be substantively consolidated. The court found that, as a matter of law, it could not substantively consolidate debtor and non-debtor entities. The court noted that "[t]he applicable test for substantive consolidation 'requires a showing that (1) there is substantial identity between the entities to be consolidated; and (2) consolidation is necessary to avoid some harm or to realize some benefit.' Once this prima facie showing is made, the burden shifts to an objecting party, usually a creditor, to show it relied on the separateness of one of the entities in extending credit, or that it will be prejudiced by the consolidation." The court then noted the split in authority on whether a bankruptcy court could consolidate a non-debtor's assets and liabilities into a debtor's estate. The court agreed with those courts that have concluded that § 105 does not grant bankruptcy courts the authority to substantively consolidate debtor and non-debtor entities. The court concluded that substantive consolidation was purely a bankruptcy remedy and did not extend to the assets and affairs of non-debtor entities. The court noted that "allowing substantive consolidation of non-debtors under § 105(a) circumvents the stringent procedures and protections relating to involuntary bankruptcy cases imposed by § 303 of the Bankruptcy Code" and §105 cannot be used for that purpose. The court also noted that veil piercing laws could provide the relief sought here - essentially permitting a finding that the two entities "are not really debtor and non-debtor, but one." In short, the court found that "any request to substantively consolidate non-debtors must fail under § 105(a) of the Bankruptcy Code because it is not an act that is "necessary or appropriate" to carry out any legitimate bankruptcy purpose. Rather, parties have other tools, albeit accompanied by stringent and befitting proof requirements, to force a non-debtor entity into bankruptcy."
©2014 William L. Norton III
