By Stephanie Cumings
Nov. 13– Individuals
who have not filed for bankruptcy can be drawn into the bankruptcy
of a business if their financial affairs are too entangled
The district court in this case acknowledged that
this procedure, knowncalled substantive consolidation, is more often
utilized to bring a company into another businesss bankruptcy or into
a people bankruptcy, but there is less precedent for roping
in a non-debtor person. However Judge Manuel L. Real said the
idea was the same and need to be applied to non-debtor
people if that means a fairer outcome for lenders.
‘Ring Masters of the
The business and relevant people in this case
said they were “involvedassociated with the business of ‘buying real
estate, although they [did] not explain  in any information how the
investments work or what the function was of so lots ofmany various
company names,” according to the bankruptcy court. After among
the business submitteddeclared bankruptcy, lender Bank of America took legal action against
to substantively consolidate the case with the other relevant
business and people.The bankruptcy court concurred that 10 non-debtors,. including 3 individuals, should be retroactively combined. into the debtors bankruptcy.
The bankruptcy court said that”the. financial affairs of the entities and specific accuseds [were] so entangled that they make up [d] a single business.” The.
court stated that the individual defendants were the “ring masters.
behind the labyrinthine system of deals and transfers of.
homes that can just be untangled if the individuals usage of.
accounts and home transfers are included.” The person.
defendants appealed, arguing that the court had impermissibly.
used substantive consolidation to non-debtor individuals.Insulating Cash With.
Impunity In bankruptcy,
substantive consolidation allows. courts to consolidate the estates of other debtors or non-debtors. when their monetary affairs are sufficiently intermingled. Without. this power,”debtors might insulate money through transfers amongst. inter-company shell corporations with impunity, “the district court. said.Circuit courts have various approaches when. identifying if substantive consolidation is suitable, but they. generally agree that prejudice to the creditors in the absence of. consolidation has to outweigh bias to the entities being. consolidated, according to research performed by
Bloomberg BNA. As. the district court in this case noted, in Alexander v. Compton(In re Bonham ), 229 F. 3d. 750(9th Cir. 2000), the Ninth Circuit embraced a test that contains. two factors: “( 1)whether lenders handled the entities as a. single financial device and did not rely on their different identity in. extending credit; or( 2)whether the affairs of the debtor are so. entangled that consolidation will benefit all lenders.”Financial Entanglement In this case, the bankruptcy court counted on the. second element in finding substantive consolidation was necessitated. The district court said this finding was “supported by 70 pages of. findings of truth,”which found that”[ t] he entanglement varied from. the admitted’typical account to every other element of [d] ebtors. company operations: its non-decision makers; its business design;. its business address; and its post office boxes and who controls. them.”The bankruptcy court also discovered that it would take.
“10s of thousands”of dollars for experts to untangle the.
monetary accounts. In addition, the debtor and the accuseds.
would prevent demands for financial records or offer altered or. insufficient records when asked by the bankruptcy court, therefore the. district court stated that efforts to untangle their finances would. likely be”useless. “Business Entities vs. Human.
Beings The defendants said that neither the Ninth Circuit.
nor the United States Supreme Court have actually ever allowed the consolidation of a. non-debtor person.”While this may be true, the Bankruptcy Code. typically does not recognize a difference between organizational. entities or human beings,”the court stated.” For example, Title 11.
USC. 109(b ), which defines who might be a debtor in.
bankruptcy, makes no distinction between people and
. corporations for purposes of Chapter 7.
… Due to the fact that the whole. principle of substantive consolidation is predicated on the objective of. getting a reasonable result for lenders, which is among the objectives. and functions of the federal bankruptcy plan, this [c] ourt finds. no distinction in between the substantive consolidation of non-debtor. corporate entities or nondebtor individuals when such consolidation.
is essential to protect creditors rights and avoid. injustice.
“The court also turned down the defendants argument.
that consolidating the individuals would breach the demands.
for uncontrolled bankruptcy. The court stated that substantive.
consolidation and spontaneous bankruptcy are” 2 separate and.
distinct principles “with different requirements.Finally, the court stated there were no authentic
problems. regarding the realities of the case, which there was
“overwhelming. proof of purposeful entanglement.
“Beyond the Ninth Circuit The Second Circuit attended to a similar issue
in. FDIC v. Colonial Realty Co., 966. F. 2d 57(2d Cir. 1992), where the court held that 2. individuals who were debtors might have their bankruptcies.
consolidated with a corporate entity debtor, according to research study. conducted by Bloomberg BNA. The Second Circuit court declined the
. FDICs argument that “substantive consolidation springs from the.
equitable doctrine of piercing the business veil, which authorizes.
a court to disregard the corporate fiction when it guards or.
advances scams, and therefore need to not be invoked to merge the.
estates of people,” discovering that”the contrast of the 2.
doctrines is not entirely apt.”The court discovered “no basis”for a. “blanket proscription” on applying substantive consolidation to.
people. The Second Circuit makes no significant difference. in between debtor people and non-debtor people in this. opinion.The Second Circuit likewise turned down the argument that.
the Bankruptcy Code prohibits the consolidation of non-spousal.
Both the Eighth and Eleventh Circuits have found that.
substantive consolidation can be utilized to consolidate the cases of.
debtor spouses.David S. Kupetz, Jason Daniel Balitzer, and Steven. Frederick Werth of Sulmeyer Kupetz PC, Los Angeles, represented the. appellants.Natalie B. Daghbandan, Richard Poole Steelman, Jr.,.
and Sharon Z. Weiss of Bryan Cave LLP, Santa Monica
, Calif.,. represented Bank of America.To call the press reporter on this story: Stephanie
Cumings in Washington at email@example.com!.?.!To call the editor responsible for this story:. Jay Horowitz at firstname.lastname@example.org!.?.!