In re Lease-a-fleet, Inc.

• Decision Date: 15 July 1992
• Docket Number: Bankruptcy No. 91-12996S,Adv. No. 92-0415S.
• Citation: 141 BR 869
• Parties: In re LEASE-A-FLEET, INC., Debtor. MORSE OPERATIONS, INC. d/b/a Lauderhill Leasing, Plaintiff, v. ROBINS LE-COCQ, INC., Defendant.
• Court: U.S. Bankruptcy Court — Eastern District of Pennsylvania

141 B.R. 869 (1992)

In re LEASE-A-FLEET, INC., Debtor MORSE OPERATIONS, INC. d/b/a Lauderhill Leasing, Plaintiff, v. ROBINS LE-COCQ, INC., Defendant.

Bankruptcy No. 91-12996S, Adv. No. 92-0415S.

United States Bankruptcy Court, E.D. Pennsylvania.

July 15, 1992.

Patrick Stapleton, Rawle & Henderson, Philadelphia, Pa., for debtor.

Karen Lee Turner, Dilworth, Paxson, Kalish & Kauffman, Philadelphia, Pa., for plaintiff.

Richard E. Stabinski, Phillips and Phelan, Philadelphia, Pa., for defendant.

Robert D. Sayre, Philadelphia, Pa., for the Banks.

Frederic Baker, Philadelphia, Pa., Asst. U.S. Trustee.

OPINION

DAVID A. SCHOLL, Bankruptcy Judge.

A. INTRODUCTION

Presently before the court is a Motion for Summary Judgment ("the Motion"), i.e., dismissal of this proceeding as a matter of law, filed by ROBINS LE-COCQ, INC. ("Robins"), the Defendant in the above-captioned adversary proceeding, in which MORSE OPERATIONS, INC. d/b/a LAUDERHILL LEASING ("Lauderhill"), a large creditor of LEASE-A-FLEET, INC. ("the Debtor"), seeks to "substantially consolidate" Robins, a non-debtor, with the Debtor's bankruptcy case.

Because we believe that the involuntary substantive consolidation of the case of a debtor with the non-case of a non-debtor is a type of relief fraught with conceptual problems, we believe that such relief, if ever appropriate, should be granted in only extraordinary situations, notably when the debtor and non-debtor are alter egos of one another and/or have totally commingled their assets. Finding that Robins and the Debtor have continually stood alone as totally distinct entities engaged in different businesses, and that no basis for this relief is stated, we will grant the Motion and dismiss this proceeding.

B. PROCEDURAL HISTORY

The instant adversary proceeding arises in connection with an underlying voluntary Chapter 11 bankruptcy case commenced by the Debtor on May 30, 1991. The factual and procedural history of the bankruptcy case, through June 9, 1992, is set forth in our three prior Opinions: (1) A determination of the rights of Lauderhill to certain payments received by the Debtor post-petition, vis-a-vis the Debtor and Meridian Bank ("Meridian") and United Valley Bank ("UVB") (collectively Meridian and UVB are referenced as "the Banks"), reported at 131 B.R. 945 (Bankr.E.D.Pa.1991), rev'd in part & aff'd in part, 141 B.R. 63 (E.D.Pa. 1992), appeal docketed, No. 92-1402 (3d Cir.) ("LAF I"); (2) A preliminary decision on Lauderhill's rights to certain administrative claims, presently reported only at 22 B.C.D. 1600, 140 B.R. 840 (Bankr.E.D.Pa. 1992) ("LAF II"); and (3) A judgment in favor of the Debtor in the amount of $850,055.03 in an action challenging certain prepetition payments to Lauderhill as preferences, decided June 9, 1992, 141 B.R. 853 ("LAF III").

Since we issued LAF III several noteworthy events have transpired. Firstly, immediately following our Opinion in LAF III, Lauderhill filed an appeal of that matter with the district court. In addition, Lauderhill requested and was granted, by the Honorable Robert F. Kelly, Jr. of the District Court, an Order dated June 9, 1992, staying not only our decision in LAF III, but also "proceedings relating to confirmation of any plan of reorganization" in this case. This Order halted the confirmation process which might have loosened the gridlock which we noted, in LAF III, at 856, was developing as a result of over-litigiousness of the parties, particularly Lauderhill.

Secondly, several events transpired in the consolidated suits including charges and counter-charges between the Debtor and Lauderhill, the reference of which has been withdrawn to the district court. On June 12, 1992, Judge Kelly granted certain aspects of Lauderhill's motion for summary judgment, but denied others, necessitating a two-week-long jury trial in those case(s). On July 3, 1992, the jury answered several Special Interrogatories in a manner which suggests that Lauderhill defrauded and improperly ruined the Debtor's business and that the Debtor was entitled to damages in the amount of approximately $3.5 million dollars. This verdict, if reduced to judgment, could adversely affect not only Lauderhill's administrative claims, see LAF II, 22 B.C.D. at 1605, 140 B.R. 840, but could undermine and affect all of its claims in this case.

The instant proceeding, as we noted in LAF III, at 856, is among the most doubtful in merit of the mass of pleadings filed by Lauderhill to attempt to vindicate its stance in its dealings with the Debtor. It was filed on April 16, 1992. Trial on the matter was scheduled on June 10, 1992. Also scheduled on that date were hearings on confirmation of the Debtor's and Lauderhill's competing liquidating plans, Lauderhill's Objection to Proofs of Claim of Robins and Meridian Bank, and the Banks' Motion to change their vote rejecting the Debtor's Plan. Since Judge Kelly's Order of June 9, 1992, specifically stayed any further proceedings in connection with confirmation, we did not conduct the scheduled hearing on matters related to that issue. However, at that time, we did address procedural issues which arose in connection with the Objections to the Claims and the instant proceeding.

As a result of a colloquy with counsel on June 10, 1992, we entered Orders directing Lauderhill to file more specific Objections to the Proofs of Claim of Meridian and Robins by June 19, 1992, and scheduled hearings on the Objections on August 12, 1992, and July 27, 1992, respectively. The trial of this proceeding was consolidated with the hearing on the Objection to Robins' claim.

During that colloquy, Lauderhill brought to our attention an improperly-filed and consequently dormant motion filed by it which requested that Robins be directed to provide a list of its creditors in order that Lauderhill could in turn serve notice of the adversary proceeding upon the said creditors. An Objection to the Motion was voiced by Meridian, which claimed that it was a creditor of Robins and that the dispatch of such a notice could "destroy" Robins. However, since Robins offered no objection to sending out such notices, we entered an Order requiring Robins to supply the list to Lauderhill by July 19, 1992, but for Lauderhill to withhold sending the notices out until June 25, 1992, to allow Meridian a time period within which to file any objections to the service of notice upon Robins' creditors. Meridian ultimately did not to file any objections, and the notices were presumably served upon Robins' creditors by Lauderhill.

On June 19, 1992, Robins filed the Motion now before the court. On June 24, 1992, we issued an Order directing Lauderhill to file any Responses and Briefs in opposition to the Motion by July 6, 1992. On June 19, 1992, Robins also filed a Motion for Sanctions against Lauderhill under Federal Rule of Bankruptcy Procedure ("F.R.B.P.") 9011 ("the 9011 Motion"), arising out of Lauderhill's allegedly bad faith filing of this proceeding. On July 1, 1992, we ordered that the 9011 Motion should be briefed only after the decision in the proceeding was made. Nevertheless, on July 6, 1992, Lauderhill replied to the 9011 Motion as well as to the instant Motion. Attached to Lauderhill's Brief in reference to the Summary Judgment Motion are portions of the testimony in the trial before the district court, deposition testimony of Steven Wolk, the Debtor's President ("Steven"); Donald Wolk, Steven's father, the President of Robins and the former President of the Debtor ("Donald"); Eli Engel, an "independent accountant" hired by the Debtor; and Affidavits of David Crowthers and Kenneth Biddick, accountants engaged by Lauderhill to review the Debtor's financial records.

C. DISCUSSION

a. CRITERIA FOR SUBSTANTIVE CONSOLIDATION OF DEBTORS

This court recently addressed the concept of substantive consolidation generally at some length in In re Orfa Corp. of Philadelphia, 129 B.R. 404, 412-16 (Bankr. E.D.Pa.1991). In that decision, we observed, id. at 413-14, that

the Bankruptcy Code does not specifically authorize a court to grant consolidation. Instead, the court\'s power to substantively consolidate cases is derived from its general equitable powers under 11 U.S.C. § 105. See, e.g., In re Augie/Restivo Baking Co., Ltd., 860 F.2d 515, 518 (2d Cir.1988); In re Murray Industries, Inc., 119 B.R. 820, 828 (Bankr.M.D.Fla.1990); Comment, Substantive Consolidation in Bankruptcy: A Primer, 43 VANDERBILT L.REV. 207, at 210-11, 220-31 (1990) (hereinafter cited as "Comment").

We identified three sets of "tests" for determining when consolidation was appropriate. Firstly, we observed that,

in In re F.A. Potts & Co., 23 B.R. 569, 572 (Bankr.E.D.Pa.1982), Chief Judge Twardowski adopted a two-part test in determining whether consolidation was appropriate:

1. The applicants must demonstrate that there is a necessity for substantive consolidation or a harm to be avoided by the use of the equitable remedy of substantive consolidation; and

2. The benefits of substantive consolidation must outweigh the harm to be caused to objecting creditors.

Id. at 414. Secondly, we noted that

in Augie/Restivo, supra, 860 F.2d at 518, the Second Circuit articulated a test involving two critical factors:

(i) whether creditors dealt with the entities as a single economic unit and "did not rely on their separate identity in extending credit;" or (ii) whether the affairs of the debtors are so entangled that consolidation will benefit all creditors.

Id. Finally, we stated that

other courts have designated as many as seven factors which have been cited as factors to be considered in determination of a motion for consolidation:

(1) The presence or absence of consolidated financial statements;

(2) The unity of interest of and ownership between various corporate entities (3) existence of parent and intercorporate guarantees on loans;

(4) degree of difficulty in segregating and ascertaining individual asset and

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