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Writing for Law360, John Loughnane Evaluates Substantive Consolidation

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John G. Loughnane, a partner in Nutter’s Business Department, analyzed two recent opinions concerning the law of substantive consolidation in Law360. In the article, “Substantive Consolidation Remains Alive and Well,” John points out that the two decisions both involved efforts by Chapter 7 trustees to substantively consolidate the assets of related, nondebtor entities with the bankruptcy estate administered by each trustee.

In the Massachusetts decision, Lassman v. Cameron Construction LLC (In re Cameron Construction & Roofing Co. Inc.) (Bankr. D. Mass. 2016), the bankruptcy court allowed substantive consolidation. In contrast, in the unpublished Sixth Circuit decision in Spradlin v. Beads And Steeds Inns LLC ( In re: Matthew Lowell Howland and Meagan Larae Howland) (6th Cir. 2017) substantive consolidation was not allowed as the court determined the trustee did not satisfy the burden of alleging sufficient facts.

According to John, these opinions are worth reviewing as they serve as an important reminder of the significant equitable power that bankruptcy courts wield. That power affects the fate not only of debtors and their creditors, but the rights and obligations of related parties and their creditors as well. He notes that because trustees are well motivated to seek to augment the assets of estates they monitor and because substantive consolidation remains alive and well as an equitable theory in bankruptcy, it behooves all borrowers and creditors relying on entity separateness to ensure that corporate affairs are kept separate and discrete not just on paper, but in reality too. Failure to do so may result in the imposition of substantive consolidation by a court exercising its equitable powers.

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