419 F.3d 195 (3rd Cir. 2005), 04-4080, In re Owens Corning

Docket Nº:04-4080.
Citation:419 F.3d 195
Party Name:In re: OWENS CORNING, a Delaware Corporation Credit Suisse First Boston, as Agent for the prepetition bank lenders, Appellant.
Case Date:August 15, 2005
Court:United States Courts of Appeals, Court of Appeals for the Third Circuit

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419 F.3d 195 (3rd Cir. 2005)

In re: OWENS CORNING, a Delaware Corporation Credit Suisse First Boston, as Agent for the prepetition bank lenders, Appellant.

No. 04-4080.

United States Court of Appeals, Third Circuit

August 15, 2005.

Argued Feb. 7, 2005.

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On Appeal from the United States District Court for the District of Delaware, D.C. Civil Action No. 00-cv-03837, District Judge: Honorable John P. Fullam

Martin J. Bienenstock, Esquire (Argued) John J. Rapisardi, Esquire, Richard A. Rothman, Esquire, Timothy E. Graulich, Esquire, Weil, Gotshal & Manges, LLP, Ellen R. Nadler, Esquire Jeffrey S. Trachtman, Esquire Kenneth H. Eckstein, Esquire, Philip S. Kaufman, Esquire, Kramer, Levin, Naftalis & Frankel, LLP, Roy T. Englert, Jr., Esquire, Robbins, Russell, Englert, Orseck & Untereiner, LLP, Rebecca L. Butcher, Esquire, Adam G. Landis, Esquire, Richard S. Cobb, Esquire, Landis, Rath & Cobb, LLP, Counsel for (Appellant) Credit Suisse First Boston Corp., as Agent for the prepetition bank lenders

Alexandra A.E. Shapiro, Esquire Mitchell A. Seider, Esquire Alan Leavitt, Esquire Latham & Watkins, LLP, Amanda P. Biles, Esquire, Latham & Watkins, LLP, Counsel for (Amicus-appellants) The Loan Syndications and Trading Association, Inc. and Clearing House Association L.L.C.

Richard M. Kohn, Esquire, Andrew R. Cardonick, Esquire, Goldberg, Kohn, Bell, Black, Rosenbloom & Moritz Ltd., Jonathan N. Helfat, Esquire Otterbourg, Steindler, Houston & Rosen, P.C., Counsel for (Amicus-appellant) Commercial Financial Association

Robert K. Rasmussen, Esquire, Milton Underwood, Professor of Law, Counsel for (Amicus-appellants) Robert K. Rasmussen, Barry Adler, Susan Block-Lieb, G. Marcus Cole, Marcel Kahan, Ronald J. Mann, and David A. Skeel, Jr.

Adam H. Isenberg, Esquire Saul Ewing LLP, Norman L. Pernick, Esquire J. Kate Stickles, Esquire, Saul Ewing, LLP, Charles O. Monk, II, Esquire (Argued), Joseph M. Fairbanks, Esquire Henry R. Abrams, Esquire, Dan Friedman, Esquire, Saul Ewing, LLP, Counsel for (Appellee) Owens Corning, a Delaware Corporation; CDC Corp.; Engineered Yarns American, Inc.; Exterior Systems, Inc.; Falcon Foam Corp.; Fibreboard Corp.; HomeExperts; Integrex; Integrex Professional Services; Integrex Testing Systems; Integrex Supply Chain

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Solutions LLC; Integrex Ventures LLC; Jefferson Holdings, Inc.; Owens-Corning Fiberglass Technology, Inc.; Owens-Corning HT, Inc.; Owens-Corning Overseas Holdings, Inc.; Owens- Corning Remodeling Systems, LLC; Soltech, Inc.

Elihu Inselbuch, Esquire, Caplin & Drysdale, Peter Van N. Lockwood, Esquire, Nathan D. Finch, Esquire, Walter B. Slocombe, Esquire, Caplin & Drysdale, Marla R. Eskin, Esquire, Campbell & Levine, LLC, Counsel for (Appellee) Official Committee of Unsecured Creditors

Michael J. Crames, Esquire, Jane W. Parver, Esquire, Edmund M. Emrich, Esquire, Andrew A. Kress, Esquire Kaye Scholer, LLP, James L. Patton, Jr., Esquire, Joseph M. Barry, Esquire, Young, Conaway, Stargatt & Taylor, LLP, Counsel for (Appellee) James J. McMonagle, Legal Representative for Future Claimants

J. Andrew Rahl, Equire (Argued), John B. Berringer, Esquire, John H. Doyle, III, Esquire, Howard Ressler, Esquire Dennis J. Artese, Esquire Anderson, Kill & Olick, P.C., Francis A. Monaco, Jr., Monzack & Monaco P.A., Counsel for (Appellee) Official Representatives of the Bondholders and Trade Creditors f/k/a Official Committee of Unsecured Creditors of Owens Corning

Howard A. Rosenthal, Esquire Alan R. Gordon, Esquire Pelino & Lentz P.C., Lawrence J. Kaiser, Esquire Law Office of Laurence J. Kaiser, Counsel for (Amicus-appellee) Commercial Law League America

Before: ROTH, AMBRO and FUENTES, Circuit Judges


AMBRO, Circuit Judge

We consider under what circumstances a court exercising bankruptcy powers may substantively consolidate affiliated entities. Appellant Credit Suisse First Boston ("CSFB") is the agent for a syndicate of banks (collectively, the "Banks")1 that extended in 1997 a $2 billion unsecured loan to Owens Corning, a Delaware corporation ("OCD"), and certain of its subsidiaries. This credit was enhanced in part by guarantees made by other OCD subsidiaries. The District Court granted a motion to consolidate the assets and liabilities of the OCD borrowers2 and guarantors in anticipation of a plan of reorganization.

The Banks appeal and argue that the Court erred by granting the motion, as it misunderstood the reasons for, and standards for considering, the extraordinary remedy of substantive consolidation, and in any event did not make factual determinations necessary even to consider its use. Though we reverse the ruling of the District Court, we do so aware that it acted on an issue with no opinion on point by our Court and differing rationales by other courts.

While this area of law is difficult and this case important, its outcome is easy with the facts before us. Among other problems, the consolidation sought is "deemed." Should we approve this non-consensual arrangement, the plan process would proceed as though assets and liabilities of separate entities were merged, but in fact they remain separate with the twist that the guarantees to the Banks are eliminated. From this we conclude that the

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proponents of substantive consolidation request it not to rectify the seldom-seen situations that call for this last-resort remedy but rather as a ploy to deprive one group of creditors of their rights while providing a windfall to other creditors.

I. Factual Background and Procedural History

A. Owens Corning Group of Companies

OCD and its subsidiaries (which include corporations and limited liability companies) comprise a multinational corporate group. Different entities within the group have different purposes. Some, for example, exist to limit liability concerns (such as those related to asbestos), others to gain tax benefits, and others have regulatory reasons for their formation.

Each subsidiary was a separate legal entity that observed governance formalities. Each had a specific reason to exist separately, each maintained its own business records, and intercompany transactions were regularly documented.3 Although there may have been some "sloppy" bookkeeping, two of OCD's own

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officers testified that the financial statements of all the subsidiaries were accurate in all material respects. Further, through an examination of the subsidiaries' books, OCD's postpetition auditors (Ernst & Young) have eliminated most financial discrepancies, particularly with respect to the larger guarantor subsidiaries.

B. The 1997 Credit Agreement

In 1997 OCD sought a loan to acquire Fibreboard Corporation. At this time OCD faced growing asbestos liability and a poor credit rating that hindered its ability to obtain financing. When CSFB was invited to submit a bid, it included subsidiary guarantees in the terms of its proposal. The guarantees gave the Banks direct claims against the guarantors for payment defaults. They were a "credit enhancement" without which the Banks would not have made the loan to OCD. All draft loan term sheets included subsidiary guarantees.

A $2 billion loan from the Banks to OCD closed in June 1997. The loan terms were set out primarily in a Credit Agreement. Among those terms were the guarantee provisions and requirements for guarantors, who were defined as "present or future Domestic Subsidiar[ies] . . . having assets with an aggregate book value in excess of $30,000,000." Section 10.07 of the Agreement provided that the guarantees were "absolute and unconditional" and each "constitute[d] a guarant[ee] of payment and not a guarant[ee] of collection."4 A "No Release of Guarantor" provision in § 10.8 stated that "the obligations of each guarantor . . . shall not be reduced, limited or terminated, nor shall such guarantor be discharged from any such obligations, for any reason whatsoever," except payment and performance in full or through waiver or amendment of the Credit Agreement. Under § 13.05 of the Credit Agreement, a guarantor could be released only through (i) the unanimous consent of the Banks for the guarantees of Fibreboard subsidiaries or through the consent of Banks holding 51 % of the debt for other subsidiaries, or (ii) a fair value sale of the guarantor if its cumulative assets totaled less than 10% of the book value of the aggregate OCD group of entities.

CSFB negotiated the Credit Agreement expressly to limit the ways in which OCD could deal with its subsidiaries. For example, it could not enter into transactions with a subsidiary that would result in losses to that subsidiary. Importantly, the Credit Agreement contained provisions designed to protect the separateness of OCD and its subsidiaries. The subsidiaries agreed explicitly to maintain themselves as separate entities. To further this agreement, they agreed to keep separate books and financial records in order to prepare separate financial statements. The Banks were 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 OCD because both entities were required to survive a transaction under § 8.09(a)(ii)(A) of the Credit Agreement. This provision also prohibited guarantor subsidiaries from merging with other subsidiaries unless there would be no effect on the guarantees' value.

C. Procedural History

On October 5, 2000, facing mounting asbestos litigation, OCD and seventeen of its

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subsidiaries (collectively, the "Debtors") filed for reorganization under Chapter 11 of the Bankruptcy Code, 11 U.S.C. § 1101 e...

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