This blog, written by Thomas E. Rutledge, focuses primarily on business entity law in Kentucky. Postings on contract law, contractual and statutory construction, and the entity law of other jurisdictions appear as well. There may as well be some random discussions of classical, medieval and renaissance history.
Friday, October 3, 2014
More on Beads and Steads; Bankruptcy Court Denies Amended Complaint Asserting Substantive Consolidation
on Beads and Steads; Bankruptcy Court Denies Amended Complaint Asserting
In an earlier decision, the Bankruptcy Court denied an effort by
the bankruptcy trustee to utilize the alternative doctrines of inside an
outside reverse piercingin order to, in
effect, render the assets of one LLC liable on the debts of another.That prior decision was reviewed CLICK HERE.As then noted, even as the Bankruptcy Court
rejected the theories based upon reverse piercing, it did afford the trustee
the opportunity to file an amended complaint setting forth a theory based upon
substantive consolidation. Spradlin v. Beads and Steeds Inns, LLC (In re Howland), Case No. 12-51251, Adv. No. 14-5019 (October 2, 2014).
trustee did file that amended complaint asserting claims based upon substantive
consolidation.Filing is not, however,
the same as acceptance.In this
instance, the Bankruptcy Court denied the motion to amend the complaint,
finding it would be futile.
Discussing the nature of
substantive consolidation, the Court wrote:
Substantive consolidation is an extreme
remedy that is used only where there are no other adequate remedies,
“particularly where the entity sought to be consolidated is not itself already
a debtor in bankruptcy.”American Camshaft, 410 B.R. at 787.Substantive consolidation of the Prospective
Defendants requires proof that: “(1)
prepetition they disregarded separateness so significantly their creditors
relied on the breakdown of entity borders and treated them as one legal entity;
and (2) postpetition their assets and liabilities are so scrambled that
separating them is prohibitive and hurts all creditors.”See In
re Owens Corning, 419 F.3d 195, 205 (3d Cir. 2005).The Trustee’s Amended Complaint falls short. Slip
op. at 5.
substantive consolidation would not be in this case permitted, among other
basis, the Court observed:
amended Complaint contains no facts regarding how the Debtors and Meadow Lake
handled their financial statements or bank accounts.Specific factual allegations about the
Prospective Defendants’ financial statements and bank accounts may have
supported an inference that the assets and liabilities are hopelessly
scrambled.Further, facts about how the
Debtors and Meadow Lake disseminated this information to creditors, or facts
regarding their specific interactions with creditors, could have led to
reasonable inferences that creditors have suffered, and will suffer, harm
without substantive consolidation.
lack of this sort of information is more glaring considering the Trustee had
two years before the Complaint was filed to review financial statements, bank
account details and other proof addressing the Debtors’ and Meadow Lake’s
interaction with creditors.This is the
Trustee’s second chance to state a claim for relief.A conclusory allegation that the “assets and
liabilities are so scrambled that separating them is prohibitive and hurts all
creditors” is not enough to conclude the Trustee has pled a prima facie claim for such an extreme
remedy. Slip op. at 7.