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 TUESDAY, DECEMBER 1, 2015 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Keith Miles Aurzada, Partner, Bryan Cave , Dallas Steven Fender, Of Counsel, Greenspoon Marder Law , Ft. Lauderdale, Fla. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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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 steven.fender@gmlaw.com 5
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” 6
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 7
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 8
JURISDICTIONAL VEIL PIERCING 9
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 10
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) 11
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 12
The Non-consolidation Opinion Keith Miles Aurzada keith.aurzada@bryancave.com (214) 721-8041 December 1, 2015 13
Non-consolidation Opinions: View at 10,000 feet • 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”) 14
What is Substantive Consolidation? • 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 15
Legal Authority • 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 16
Why Substantively Consolidate? • 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 17
Consolidating Non-Debtors with Debtors • 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 18
Non-consolidation Opinions: Who Writes? • 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 19
Non-consolidation Opinions: Why Have One? • 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 20
Non-consolidation Opinions: The Big 3 Tests Second Circuit Third Circuit D.C. Circuit Augie/Restivo (1988) Owens Corning (2005) Auto-Train (1987) – (i) if creditors dealt – (i) if creditors relied ─ (i) substantial identity with entities as a on entity sameness exists single economic unit – (ii) are postpetition ─ (ii) necessary to avoid – (ii) if debtor affairs assets are so harm or realize are so entangled that scrambled as to benefit consolidation will make separation ─ Focuses on debtor benefit creditors prohibitive, harm creditors – Focuses on creditors entities – Judge Ambro (lender-friendly jurist) 21
Non-consolidation Opinions: Other Circuits • 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 22
General Growth Properties Organization Chart Circled: Newgate Mall Land Acquisition, LLC 23
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