leveraging substantive consolidation, piercing the...
TRANSCRIPT
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Presenting a live 90-minute webinar with interactive Q&A
Leveraging Substantive Consolidation,
Piercing the Veil, and Alter Ego in
Bankruptcy Proceedings Maximizing Creditor Recovery From or Asset Protection
for Debtors, Shareholders and Related Entities
Today’s faculty features:
1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific
TUESDAY, DECEMBER 1, 2015
Keith Miles Aurzada, Partner, Bryan Cave, Dallas
Steven Fender, Of Counsel, Greenspoon Marder Law, Ft. Lauderdale, Fla.
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ALTER EGO BASICS IN BANKRUPTCY
G. Steven Fender, Esq
Of Counsel
City Place Tower
525 Okeechobee Blvd., Suite 1570
West Palm Beach, FL 33401
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INTRODUCTION
• Alter Ego and Veil Piercing
• Permits the Court to disregard corporate form (“pierce the
corporate veil”) and treat a person and legal entity as one
in the same
• Showing to disregard corporate form requires showing
that person and entity are one and the same legally, or
“alter egos”
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Elements of Proof-Alter Ego
– Typically three elements:
– 1. Blurring of lines/domination and control
– 2. Improper purpose
– 3. Resulting harm to party seeking relief
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EXAMPLES OF ALTER EGO REMEDY IN
BANKRUTCY CASES
• Trustee Actions
• § 541 and § 542
• Augment and recover estate property
• Claims Disputes
• Standing
• State Law Governs
• “Reverse” veil piercing
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JURISDICTIONAL VEIL PIERCING
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SUBSTANTIVE CONSOLIDATION OF
NON-DEBTORS
• Examples of when the issue arises
– Bring non-debtor assets into the estate
– Chapter 7 trustee
– Chapter 11 plan assets
• Two lines of cases
– National split articulated in Florida districts
– Turns on § 303
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Non-Debtors May Be Substantively
Consolidation
Kapila v. S&G Fin. Services, LLC (In re S&G Fin. Servs., Inc.), 451 B.R. 573 (Bank. S.D. Fla. 2011)
-Chapter 7 trustee seeks to augment estate
-Bankruptcy court’s jurisdiction over non-debtors has always been “quite broad”
-Nothing in substantive consolidation jurisprudence requires target entity to be in bankruptcy
-§ 303 is not implicated due to different remedies and requirements
-Ninth Circuit permits it (In re Bonhan, 229 F.3d 750 (9th Cir. 2003)
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Non-Debtors Are Not Subject To Substantive
Consolidation
• In re Pearlman, 462 B.R. 849 (Bankr. M.D. Fla. 2012)
– Adversary defendants seeks to substantively
consolidate their clients’ with debtor
– § 303’s stringent procedures and protections cannot
be “swept away”
– Applied to other factual scenarios
– Alter ego is the remedy
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The Non-consolidation Opinion
Keith Miles Aurzada
(214) 721-8041
December 1, 2015
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• A Non-consolidation Opinion explains the law concerning
substantive consolidation in bankruptcy and provides
assurance that a pertinent party to the transaction would
likely not be consolidated with another party
• Required in a variety of transactions
– Particularly when a transaction involves a single-purpose entity
(“SPE”) or “special purpose vehicle” (“SPV”)
Non-consolidation Opinions: View at 10,000 feet
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• Court-made doctrine & equitable remedy in bankruptcy – Originated with Bankruptcy Act of 1898
• Permits court to consolidate assets and liabilities of multiple business entities in bankruptcy
• Purpose: Simplify obligations of multiple entities, which look/act as one, for the benefit of [some] creditors
• Effect: Entities are treated in accordance with how they held themselves out to be pre-bankruptcy & inter-entity obligations are eliminated – Note: Substantive consolidation is not to be confused with procedural
consolidation or joint administration
What is Substantive Consolidation?
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• Bankruptcy Courts cite: – “Federal common law” and/or
– Section 105(a) of the Bankruptcy Code (i.e. the “Catch-All Provision”)
• Section 105(a): “The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title.”
• Akin to piercing the corporate veil or “mere instrumentality”/“alter-ego” doctrines under state law
Legal Authority
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• Remedy has severe effects on debtors and creditors
– Typically, creditors of one debtor entity will benefit at the expense
of creditors of another entity
• Doctrine employed when debtors clearly acted as one & it
would be unjust not to consolidate
– However, no uniform guidelines exist for when to apply doctrine
• Courts use SPARINGLY and only in most EGREGIOUS
of circumstances
Why Substantively Consolidate?
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• Majority of Courts – Permits consolidation of a non-debtor entity with a debtor entity
• Minority of Courts – Cite lack of jurisdiction over non-debtor in a bankruptcy action
– Will not consolidate non-debtor entities with debtor entities
• Burden of Proof: Higher for substantively consolidating a debtor entity with a non-debtor entity (where permitted) – Currently, only Ninth Circuit has upheld non-debtor/debtor
substantive consolidation
Consolidating Non-Debtors with Debtors
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• Bankruptcy lawyers
– Issue opinion
– Resolve questions about:
• “Entity separateness”
• Whether transaction is at “arms’ length”
• “Value” (less common)
• Why bankruptcy lawyers?
– Substantive consolidation only exists in bankruptcy court
Non-consolidation Opinions: Who Writes?
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• Rating Agency Requires – Due to impossibility of predicting outcome of substantive consolidation in
bankruptcy • 3 major “tests” exist at Circuit level (Second, Third, D.C.) • Other Circuits have adopted a test or added tweaks to existing test
– In CMBS Industry: ratings market determined that mere SPE structure not enough to isolate a mortgaged property from bankruptcy affiliates & poor performance of other properties
• Lenders concerned about risk to them (as creditor) • Breach of any SPE covenant results in material loan default • Opinion provides further assurance of remoteness of risk (provided a long set of
assumptions regarding the SPE provisions)
• Example CMBS Transactions Requiring Opinion – Securitizations
– Defeasances
– Loan Assumptions
Non-consolidation Opinions: Why Have One?
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Second Circuit Augie/Restivo (1988)
– (i) if creditors dealt with entities as a single economic unit
– (ii) if debtor affairs are so entangled that consolidation will benefit creditors
– Focuses on creditors
Third Circuit Owens Corning (2005)
– (i) if creditors relied on entity sameness
– (ii) are postpetition assets are so scrambled as to make separation prohibitive, harm creditors
– Judge Ambro (lender-friendly jurist)
Non-consolidation Opinions: The Big 3 Tests
D.C. Circuit
Auto-Train (1987)
─ (i) substantial identity
exists
─ (ii) necessary to avoid
harm or realize
benefit
─ Focuses on debtor
entities
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• Balancing Test
– (i) necessity of consolidation
– (ii) benefits versus harms
– (ii) prejudice resulting from not consolidating
– Circuits Adopting: First, Sixth, Eighth
• General Growth Properties (2009-2010)
– S.D.N.Y.: revenue generated at SPE-level flowed upstream into
centralized cash management account
• Court granted lien to DIP lenders
• Effect: De facto substantive consolidation
Non-consolidation Opinions: Other Circuits
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Circled: Newgate Mall Land Acquisition, LLC
Organization Chart
General Growth Properties
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Takeaway
Bad facts can be offset or ameliorated by other indicia of separateness
General Growth Properties: Takeaway
Hypothetical 1
Debtor/mall SPE shares rents with an affiliate
– Okay if: • Well-documented • Arms-length • Good reason (justified) • Short term
– However, attorney may not issue an opinion if any one of the above not present
Hypothetical 2
Property Manger manages more than one SPE affiliate
– Best if everyone pays own freight
– At market price
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