In re Snider Bros., Inc.
| Decision Date | 08 March 1982 |
| Docket Number | Bankruptcy No. 4-80-00587-G to 4-80-00592-G. |
| Court | United States Bankruptcy Courts. First Circuit. U.S. Bankruptcy Court — District of Massachusetts |
| Parties | In re SNIDER BROS., INC., Acme Boneless Beef Co., Inc., Sutton Leasing Co., Inc., Portion Control Meat Processing Co., Inc., Quik "N" Ezy Meat Products, Inc., and Snider Food & Storage, Inc., Debtors. |
Mark N. Berman, Widett, Slater & Goldman, P.C., Boston, Mass., for creditors committees.
Sumner Silver, Talamo, Phillips, Silver & Talman, P.C., Worcester, Mass., for Commerce Bank & Trust Co.
James F. Queenan, Jr., Bowditch & Dewey, Worcester, Mass., for Snider Bros., Inc., et al.
MEMORANDUM AND ORDER ON APPLICATION FOR SUBSTANTIVE CONSOLIDATION
The six above-captioned corporate debtors filed individual voluntary petitions for Reorganization under Chapter 11 of the Bankruptcy Code. The cases have been jointly administered from their inception, but the creditors committees for all six corporate debtors now seek the consolidation of all of the assets and liabilities of the six debtors, as well as the elimination of all intercorporate debts, which they argue will benefit creditors generally. The Commerce Bank & Trust Co., a large secured creditor, interposed its objection to consolidation on the grounds that its secured position would be impaired thereby. The matter was argued orally on May 18, 1981, without testimony from any witnesses, and the matter taken under advisement pending receipt by the court of memoranda and affidavits. In the interim, all six debtors' Chapter 11 cases have been converted to Chapter 7.1
On September 9, 1980, Snider Bros., Inc., Acme Boneless Beef Co., Inc., Sutton Leasing Co., Inc., Portion Control Meat Processing Co., Inc., Quik "N" Ezy Meat Products, Inc. and Snider Food & Storage, Inc. each filed a voluntary petition for reorganization. All six debtors operated at a single location in Sutton, Massachusetts. Additionally, each corporation performed a separate function in a larger wholesale and retail meat operation. Snider Bros. had been in the business of purchasing, slaughtering, and processing beef cattle since 1931. Acme Boneless Beef was created in 1954 to market beef products at wholesale. Portion Control came into existence in 1955 for the purpose of selling general meat products. That same year, Quik "N" Ezy was formed to begin the business of selling meat products at retail. Sutton Leasing and Snider Food & Storage were both formed later to own, and lease back, the real property and buildings from which the other four companies did business.
Benjamin, Abraham and Jack Snider are the principal stockholders of all six corporations. Additionally, they are the officers and directors of each company. As a result, it is more than apparent that the six debtor corporations, although individually incorporated, can be fairly described as a family-run "integrated business operation for the purchasing, slaughtering, processing, packaging and sale, both at wholesale and retail, of meat and meat products".2 Every step in the process of bringing meat products from the farm to the consumer is covered by one of the six corporations.
The business of the debtors was successful until cash flow problems arose in connection with their various operations. When the Chapter 11 petitions were filed, the debtors were in need of immediate financing in order to continue their day-to-day operations. The Commerce Bank financed the debtors' operations for two months before deciding to terminate its loan agreement. In November 1980, after the Bank stopped advances to the debtors, all business operations ceased. While it has never been stated, it seems apparent that one of the reasons for seeking consolidation was the hope that it would facilitate a sale of all of the debtors' assets as a going concern, or the investment of new money by an outside source. Apparently the prayers of creditors were never answered, resulting in conversion of all six estates to liquidation under Chapter 7.
The creditors committees for all six debtors have sought consolidation on the grounds that, because of the inter-corporate relationship of the debtors, the accounting difficulties and expense involved in trying to separate their financial affairs, and the fact that creditors were generally aware of the interrelationship of these six debtors, it would be equitable to consolidate and merge the separate estates into one. The Commerce Bank, though it did not object in writing, did appear and object verbally to consolidation on May 18, 1981. As grounds therefore, Commerce Bank alleged a valid security interest in certain accounts receivable of these debtors which, if the cases are consolidated, could be reduced by offsetting claims. It is argued that a creditor of one debtor could offset his claim against any debt which he might owe to another debtor. The bank claims that receivables would, in this way, be diminished by $70,000. The creditors committees have not refuted that claim, nor do they take issue with it, but instead argue that equity should not permit the bank to "cower behind the fiction of the debtors' corporate facade" when in fact it never relied on the corporate separateness of these debtors.
The facts which bear upon the Court's decision appear to be substantially undisputed. The committees point out that there were periodic inter-corporate transfers of assets between the various debtors which are reflected in the books and records of each debtor. It is conceded that each debtor did keep separate books of account, prepared separate financial statements, and submitted individual corporate tax returns. Michael Gilburd, the court-authorized accountant for the debtors, in his affidavit attached to the Memorandum of the creditors committees, averred that considerable time and expense would be necessary to verify the accuracy of the many inter-corporate transfers which are reflected on the books of each debtor, as well as to verify certain unexplained correcting entries which he presumed were made in settling inter-corporate accounts. The bank does not dispute that inter-corporate transfers occurred, but argues that those transfers are all properly recorded on the books of account for the debtors involved.
The creditors committees cite the inter-corporate use of certain personnel without proper allocations of payroll expense as another example of the lack of corporate separateness of these debtors. The affidavit of Morris Abramoff recounted the fact that in his capacity as a purchasing and selling agent on the payroll of Acme Boneless Beef, he also purchased and sold all the beef for Snider Bros. Additionally, the creditors committees allege that although the debtors kept separate books of account, those books were collectively maintained by a single bookkeeping staff. The bank acknowledges the fact that certain individuals did not work exclusively for the company that was paying them, but argues that with respect to the bookkeeping staff, the individuals were all on different corporate payrolls, so that each corporation made contributions to overall bookkeeping expense. Finally, both sides agree that, for the most part, each corporation maintained a separate personnel base and associated payroll, except for the few examples cited.
There were inter-corporate guarantees of loans as well as loans between the various debtors. The schedules of each debtor reveal guarantees by each debtor of bank loans to the other corporations. Further, the Bank concedes that when one of the debtors would be unable to purchase goods on credit, another which was sufficiently credit worthy would do so, and then sell the purchased goods on credit to its affiliated corporation. It appears that at least some such "loans" or credit sales between the various corporations were entered on the books of each and in the proper accounts.
Thus, it is alleged that although the debtors maintained separate title to most assets, separate payrolls, filed separate tax returns and financial statements, and for the most part observed corporate formalities, there is sufficient evidence of the integration of business operations, numerous examples of shared personnel and equipment, and such frequent inter-corporate borrowing and guarantees as to warrant a finding that the six corporate debtors should be treated as one. In opposition, the Commerce Bank argues that although there were minor deviations from corporate formality, the six debtors, for the most part, maintained their corporate integrity. As such, and in view of the certain prejudice to the bank's secured position it argues that consolidation should not be permitted.
The power to consolidate the estates of separate debtors is one arising out of equity, enabling the bankruptcy court to disregard corporate entities in order to reach assets for the satisfaction of a related corporation. In re Continental Vending Machine Corporation, 517 F.2d 997, 1000 (2nd Cir. 1975). It is a power which should be used sparingly, for while the term has a disarmingly innocent sound, consolidation in bankruptcy is no mere instrument of procedural convenience, but a measure vitally affecting substantive rights. Matter of Flora Mir Candy Corporation, 432 F.2d 1060, 1062 (2nd Cir. 1970); Chemical Bank New York Trust Company v. Kheel, 369 F.2d 845, 847 (2nd Cir. 1966).
It must be recognized and affirmatively stated that substantive consolidation, in almost all instances, threatens to prejudice the rights of creditors. See In re Coventry Energy Corporation, 5 B.C.D. 98 (S.D.Ohio 1979). This is so because separate debtors will almost always have different ratios of assets to liabilities. Thus, the creditors of a debtor whose asset-to-liability ratio is higher than that of its affiliated debtor must lose to the extent that the asset-to-liability ratio of the merged estates will be lower. Why then would substantive consolidation ever be permitted?
A...
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