Vanderbilt Law Review

Article Title

Substantive Consolidation in Bankruptcy: A Primer


Substantive consolidation is a powerful vehicle in bankruptcy by which the assets and liabilities of one or more entities are combined and treated for bankruptcy purposes as belonging to a single enterprise. Because substantive consolidation vitally affects the rights and interests of parties involved in bankruptcy proceedings, it is termed a matter"pregnant with consequence"' and should be used with caution. Substantive consolidation is not a common occurrence because it exacts strict requirements in order to protect the parties that it affects. Because substantive consolidation lacks clear statutory guidance, however,courts examine the facts of each case closely to ascertain whether consolidation is warranted.

The dearth of literature on the subject led one commentator to term substantive consolidation a "neglected corner of the law."' As corporations increasingly use multi-tiered structures to gain tax advantages and perform business operations, however, substantive consolidation must be understandable and predictable so that parties in bankruptcy proceedings may avoid undesirable changes to their security status. In multi-entity cases in which the economic prejudice caused by continued entity separateness outweighs the potential prejudice that accompanies consolidation, bankruptcy's equitable remedy of substantive consolidation provides relief. A creditor that lends to a specific entity must understand substantive consolidation so that the creditor's bargained for expectation of satisfaction from the entity's assets will not be impaired.Debtors similarly should understand substantive consolidation in order to prepare effective reorganization plans and predict court action affecting estate assets. Further, a creditor, debtor, or any party in interest should understand how substantive consolidation can be used tactically to protect a priority interest or prevent a loss of assets. Part II of this Note explores the requirements and consequences of substantive consolidation.

Part III analyzes the evolution of substantive consolidation through the circuit courts. Part IV addresses ancillary issues and the tactical uses of substantive consolidation. Part V concludes that substantive consolidation is not an ill-defined trap to be feared by creditors. Because an order for consolidation requires a delicate balance of equities, creditors can expect protection generally given to them under the Bankruptcy Code.