Substantive Consolidation of Debtor and Non-Debtor Entities

(Excerpt) Based on section 105’s grant of equitable powers, bankruptcy courts have the power to substantively consolidate debtors. Substantive consolidation pools the assets of separate legal entities and treats them as one, allowing each entity’s liability to be satisfied out of the common pool. Although it has been accepted that courts have the power to consolidate a debtor with other related debtors, it its less clear when courts can consolidate a debtor with a non-debtor, or if courts have the authority to do so at all. Even though most courts have determined that they do have the power to substantively debtors with non-debtor entities, the reluctance of some courts to recognize the power at all reflects a larger trend. Because consolidation impacts the creditors of all entities involved, “the remedy of substantive consolidation is rarely granted.” When the entity targeted for consolidation is a non-debtor, the threat to its creditors is even higher than when consolidating debtors. Thus, a party seeking substantive consolidation of a debtor with a non-debtor must meet a heavier burden to show that the benefits outweigh the potential harms