In Re Owens Corning

419 F.3d 195 (2005)


P and its subsidiaries (which include corporations and limited liability companies) comprise a multinational corporate group. Each subsidiary was a separate legal entity that observed governance formalities. The financial statements of all the subsidiaries were accurate in all material respects. In 1997 P sought a loan to acquire Fibreboard Corporation. P faced growing asbestos liability and a poor credit rating that hindered its ability to obtain financing. D submitted a bid wherein D got direct claims against the guarantors for payment defaults. Without these 'credit enhancements,' D would not have made the loan. The Agreement expressly limited the ways in which P could deal with its subsidiaries. P could not enter into transactions with a subsidiary that would result in losses to that subsidiary. Under the agreement, the subsidiaries agreed explicitly to maintain themselves as separate entities. They agreed to keep separate books and financial records in order to prepare separate financial statements. D was given the right to visit each subsidiary and discuss business matters directly with that subsidiary's management. The subsidiaries also were prohibited from merging into P because both entities were required to survive a transaction under the Agreement. This provision also prohibited guarantor subsidiaries from merging with other subsidiaries unless there would be no effect on the guarantees' value. P and seventeen of its subsidiaries filed Chapter 11. Twenty-seven months later, the Debtors and certain unsecured creditor groups (Plan Proponents) proposed a reorganization plan predicated on obtaining 'substantive consolidation' of the Debtors along with three non-Debtor OCD subsidiaries. The Plan arrangement sought a deemed consolidation of all assets and liabilities of the subsidiaries into their parent and treats all claims against the subsidiaries as transferred to the parent. The Plan eliminates the separate obligations of the Subsidiary Debtors arising from the guarantees of D's Agreement. D objected to the consolidation. The judge determined that there was no basis for a finding that, in extending credit, D relied upon the separate credit of any of the subsidiary guarantors. It was also found that a substantive consolidation would greatly simplify and expedite the successful completion of this entire bankruptcy proceeding.