Eastgroup Properties v. Southern Motel Assoc., Ltd.
| Decision Date | 11 July 1991 |
| Docket Number | No. 90-3701,P-H,90-3701 |
| Citation | 935 F.2d 245 |
| Parties | 25 Collier Bankr.Cas.2d 158, 21 Bankr.Ct.Dec. 1423, Bankr. L. Rep. P 74,055 EASTGROUP PROPERTIES, Al Olshan, Morris Macy, Plaintiffs-Appellants, v. SOUTHERN MOTEL ASSOC., LTD., George E. Mills, Jr., Trustee for Southern Motel Associates, Ltd. and Trustee for GainesvilleProperties, Inc., GainesvilleProperties, Inc., Defendants-Appellees. |
| Court | U.S. Court of Appeals — Eleventh Circuit |
Samuel J. Zusmann, Jr., Maguire, jVoorhis & Wells, P.A., Richard Blackstone Webber, II, Orlando, Fla., for Eastgroup Properties.
Kelton M. Farris, Orlando Fla., for Al Olshan and Morris Macy.
Robert L. Young Carlton, Fields, Ward, Emmanuel Smith & Cutler, P.A., Orlando, Fla., for plaintiffs-appellants.
Peter N. Hill Wolff, Hill & Meininger, P.A., Orlando, Fla., for George E. Mills, Jr.
Appeal from the United States District Court for the Middle District of Florida.
Before KRAVITCH and EDMONDSON, Circuit Judges, and GODBOLD, Senior Circuit Judge.
Appellants, Eastgroup Properties, Al Olshan, and Morris Macy, all of whom are creditors of Southern Motel Association, challenge the district court's decision to affirm the order of the bankruptcy court to consolidate substantively the bankruptcy estates of two related entities, Gainesville P-H Properties ("GPH") and Southern Motel Association ("SMA"). Appellants contend that both the bankruptcy court and the district court erred in finding (1) a sufficient factual basis for consolidation and (2) a legal basis for consolidation. Because we conclude that the bankruptcy trustee made a prima facie case for consolidation and that appellants provided no substantial evidence of their reliance on the separate credit of SMA, we affirm the order of substantive consolidation.
Appellee George E. Mills is the Chapter 7 bankruptcy trustee for the bankruptcy estates of SMA and GPH. SMA is a limited partnership that was formed for the purpose of acquiring and holding fee simple title to, and leasehold interests in, motel properties. GPH is a corporation whose sole business is the operation of the motel businesses owned or leased by SMA. 1 Appellant Eastgroup Properties ("Eastgroup") leased five properties to SMA, which were subleased to GPH. 2 Appellants Olshan and Macy--apparently in the capacity of trustees--sold certain properties to SMA which were secured by an inferior purchase money mortgage note; they held mortgages on the motel properties purchased or leased by SMA and leased or subleased to GPH. 3
SMA and GPH filed for Chapter 11 bankruptcy in 1987. In 1989, both bankruptcy cases were converted to Chapter 7 bankruptcy cases; and Mills was appointed the trustee in both cases. Mills moved to consolidate substantively the two bankruptcy cases. 4 This motion was granted after the bankruptcy court conducted a hearing; the trustee presented evidence for substantive consolidation, but none of the appellants presented independent evidence. The district court affirmed the bankruptcy court's order to consolidate substantively the two bankruptcy estates.
SMA and GPH are commonly owned. The limited partners of SMA are Kilimanjaro Holdings, Inc.; Tharani, Inc.; and Ringgold Investments, Inc. 5 GPH is wholly owned by Florten Corporation, which in turn is wholly owned by 11 Stars Realty, Inc. Kilimanjaro Holdings, Tharani, and Ringgold Investments own 11 Stars Realty. In addition to being owned by the same entities (Kilimanjaro Holdings, Tharani, and Ringgold Investments), both SMA and GPH have common officers. Georgia King, the secretary/treasurer and comptroller of GPH, was also the secretary of SMA's general partner; she served as comptroller, office manager, and secretary for both SMA and GPH. 6
SMA and GPH had entered into written lease agreements about the management and operation of eleven motel properties, including the five properties SMA had leased from Eastgroup. GPH's lease obligations to SMA were designed to cover SMA's mortgage and lease obligations on the properties. 7 At the hearing, King testified that funds flowed between GPH and SMA and that it was likely that GPH undertook payment of some of SMA's unsecured obligations, although she could not recall any specific instance. 8 At some point--apparently near the end of the Chapter 11 cases--GPH defaulted on its contractual obligations to SMA, falling three and, in some cases, four months in arrears.
SMA and GPH operated out of a central office in Orlando, Florida. Five or six GPH employees worked in this office. While the majority of their time was spent performing services for GPH, the entity which paid their salaries, these employees also performed services for SMA. No effort was made to account for the time these individuals performed services for SMA, and SMA never made salary or wage payments to them. In addition, no effort was made to allocate overhead between the two entities. Despite this sharing of office and personnel, King testified at the hearing that GPH and SMA each held itself out to the public and to its creditors as a separate corporation. There is evidence, however, that GPH represented--to at least one of the companies with which it did business, Specialty Roofing and Waterproofing, Inc.--that it owned the property where the creditor was to perform certain work, when, in fact, SMA owned the particular property.
Appellants contend that the bankruptcy court erred in weighing the equities when it ordered substantive consolidation. They argue that its apparent rationale for consolidation--that, absent consolidation, SMA's equity holders might receive a distribution after all claims were paid, while GPH's unsecured creditors (who might receive a distribution if the estates were consolidated) would not receive anything--is disproved by the mathematics of the cases: that, regardless of consolidation, GPH's unsecured creditors will receive no distribution and SMA's equity holders will receive nothing. Appellants also argue that the bankruptcy court gave inadequate weight to the fact that consolidation would prejudice them because their unsecured claims would not be paid if the estates are consolidated. The trustee, on the other hand, contends that the bankruptcy court properly found that he had established a prima facie case for consolidation and that, because the appellants failed to present evidence that they had relied on SMA's separate credit, the bankruptcy court's order of substantive consolidation, which was affirmed by the district court, should be affirmed by this court.
While not specifically authorized by the bankruptcy code, bankruptcy courts have the power to order substantive consolidation by virtue of their general equitable powers. See, e.g., Union Savings Bank v. Augie/Restivo Baking Co. (In re Augie/Restivo Baking Co.), 860 F.2d 515, 518 & n. 1 (2d Cir.1988); Drabkin v. Midland-Ross Corp. (In re Auto-train Corp.), 810 F.2d 270, 276 (D.C.Cir.1987). 9 The purpose of substantive consolidation is "to insure the equitable treatment of all creditors." In re Murray Indus., 119 B.R. 820, 830 (Bankr.M.D.Fla.1990). It involves the pooling of the assets and liabilities of two or more related entities; the liabilities of the entities involved are then satisfied from the common pool of assets created by consolidation. See In re Augie/Restivo Baking Co., 860 F.2d at 518; Holywell Corp. v. Bank of New York, 59 B.R. 340, 347 (S.D.Fla.1986). In a Chapter 11 consolidation case, the creditors of the consolidated entities are combined for the purpose of voting on reorganization plans. In re Augie/Restivo Baking Co., 860 F.2d at 518. In addition, substantive consolidation eliminates the inter-corporate liabilities of the consolidated entities. Id; see also Holywell Corp., 59 B.R. at 347.
Because the entities to be consolidated are likely to have different debt-to-asset ratios, consolidation "almost invariably redistributes wealth among the creditors of the various entities." In re Auto-train, 810 F.2d at 276. Thus, courts have stated that substantive consolidation should be "used sparingly." See In re Continental Vending Machine Corp., 517 F.2d at 1001 (quoting Chemical Bank New York Trust Co. v. Kheel, 369 F.2d 845, 847 (2d Cir.1966)). There is, however, a "modern" or "liberal" trend 10 toward allowing substantive consolidation, which has its genesis in the increased judicial recognition of the widespread use of interrelated corporate structures by subsidiary corporations operating under a parent entity's corporate umbrella for tax and business purposes.
In re Murray Indus., 119 B.R. at 828-29.
We have never addressed the issue of the standard which bankruptcy courts in this circuit should employ in making a determination of whether substantive consolidation is warranted. It is agreed that the basic criterion by which to evaluate a proposed substantive consolidation is whether "the economic prejudice of continued debtor separateness" outweighs "the economic prejudice of consolidation." See In re Snider Bros., Inc., 18 B.R. 230, 234 (Bankr.D.Mass.1982). In other words, a court must "conduct a searching inquiry to ensure that consolidation yields benefits offsetting the harm it inflicts on objecting parties." In re Auto-train, 810 F.2d at 276.
The D.C. Circuit has elaborated a standard, which we adopt today, by which to determine whether to grant a motion for substantive consolidation. Under this standard, the proponent of substantive consolidation must show that (1) there is substantial identity between the entities to be consolidated; and (2) consolidation is necessary to avoid some harm or to realize some benefit. Id; see also In re Murray Indus., 119 B.R. at 829; Matter of Lewellyn, 26 B.R. 246, 251 (Bankr.S.D.Iowa 1982); In re Snider Bros., 18 B.R. at 238. When this showing is made, a presumption arises "that creditors have not relied...
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