In re Standard Brands Paint Co., Bankruptcy No. LA 92-15505-KM
| Decision Date | 13 May 1993 |
| Docket Number | LA 92-15521-KM to LA 92-15524-KM.,Bankruptcy No. LA 92-15505-KM |
| Court | United States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — Central District of California |
| Parties | In re STANDARD BRANDS PAINT COMPANY, a Delaware Corporation; Standard Brands Paint Co., a California Corporation; Major Paint Company, a California Corp.; Zynolyte Products Company, a California Corporation; and Standard Brands Realty Co., Inc., a California Corporation, Debtors. |
K. John Shaffer, Stutman, Treister & Glatt, Los Angeles, CA.
OPINION GRANTING SUBSTANTIVE CONSOLIDATION OF ESTATES OF FIVE DEBTORS
The present motion to substantively consolidate involves the following undisputed facts:
A. All Five DIPs Have Always Operated as a Consolidated Entity
There are five Chapter 11 debtors involved in this motion, all of them corporations. All five are debtors in possession. These are Standard Brands Paint Company, a Delaware corporation; Standard Brands Paint Co., a California corporation; Major Paint Company, a California corporation; Standard Brands Realty Co., Inc., a California corporation; and Zynolyte Products Company, a California corporation. This motion is a core proceeding.
Debtor Standard Brands Paint Company, a Delaware Corporation (hereinafter "SBP"), is the parent corporation. Parent SBP is a publicly traded company. Debtors Standard Brands Paint Co., Major Paint Co., Standard Brands Realty Co., and Zynolyte Products Company are wholly owned direct and indirect subsidiaries of debtor SBP.
In addition to the four debtor subsidiaries, SBP has four additional wholly owned direct and indirect subsidiaries which are not in bankruptcy. These nondebtor subsidiaries are The Art Store, a California corporation; SBP Leasing Company, a Nevada corporation; SBP Transportation Company, Inc., a California corporation; and Promark Group West, a Nevada corporation.
Collectively, debtors are one of the largest manufacturers, distributors and retailers of paint and paint related merchandise in the Western United States. Debtor SBP's only function is being the holding company for its various subsidiaries. (Declaration of Dan Bane). Debtors are vertically integrated. With some overlap, debtors operate as follows: Debtor subsidiary Paint Co. operates retail paint and paint-related stores. Debtor subsidiary Major manufactures paint and paint-related items. Debtor subsidiary Zynolyte is the distribution subsidiary for paint manufactured by Major. Debtor subsidiary Realty owns or manages real estate holdings, including those where Paint operates the retail paint stores. (Declaration of Dan Bane).
The evidence on this motion is uncontroverted that the five debtor corporations and the nonfiled subsidiaries have always operated as a consolidated entity, with the subsidiaries and parent all being dependent on each other to make a functional whole. (Declarations of Dan Yukelson and Dan Bane). It is uncontroverted that the debtors have always operated with consolidated financial statements and have always done their reporting to the SEC on a consolidated basis. (Declarations of Dan Yukelson and Dan Bane). The evidence is also uncontroverted that the five debtors have always held themselves out to creditors as being a consolidated entity, and have never given any creditor separate financial information for any single subsidiary. (Declarations of Dan Yukelson and Dan Bane).
The debtors would suffer negative tax effects if the debts between/among the debtors were permanently cancelled. Cancellation of debt would affect debtors' state net operating loss carryovers and their adjusted state tax basis in property. (Declaration of Jeffrey Tolin). Forgiveness of intercompany indebtedness could result in adverse state income tax results (apparently because forgiveness of debt is "phantom" income, though this is not stated expressly). (Declaration of Irving Thau). Similarly, dissolving the four debtor subsidiaries or merging them into the parent could result in adverse tax effects. (Declaration of Jeffrey Tolin).
By previous order, the court administratively consolidated the handling of the five cases, pursuant to Federal Rules of Bankruptcy Procedure Rule 1015.
B. The Motion for Substantive Consolidation only Requests Consolidation of the Five Debtors' Estates
By motion filed December 21, 1992, all five debtors in possession (herein after "DIPs") move the court to substantively consolidate their five bankruptcy estates, on the terms described infra this section of this opinion at Subpart D, Items 1-6. The motion only asks to substantively consolidate the estates of the debtor parent SBP and its four debtor direct and indirect subsidiaries. It does not ask to substantively consolidate the nondebtor subsidiaries' assets or liabilities with the estates of the five debtors.
C. The DIPs' Motion to Substantively Consolidate is Unopposed, and in Fact Supported by All Major Parties
The five DIPs' motion to substantively consolidate is presently unopposed. Originally there was one objection and one alternative motion. The objection was by CIT Group/Equipment Financing, Inc. (hereinafter "CIT"), a secured equipment lender. The alternative motion was by the Official Creditors' Committee for unsecured creditors, which moved to substantively consolidate the estates of the four debtor subsidiaries, but not the estate of parent SBP. At that time the Creditors' Committee had filed a competing plan of reorganization, calling for only the four subsidiaries' estates to be substantively consolidated. CIT and the Creditors' Committee withdrew their respective objection and alternative motion after all major parties in the case reached agreement on the consensual plan of reorganization which is set for confirmation hearing this date.
At the hearing where the Committee and CIT withdrew their objection to the present motion, the Court questioned counsel for all parties present regarding their clients' positions on the present motion. Through their respective counsel, the Creditors' Committee for unsecured creditors, CIT, the prepetition insurance company lenders (owed over $100 million), the prepetition bank lender (Security Pacific National Bank, now known as Bank of America, NT & SA), the debtors' postpetition lender, and the other parties present all stated on the record that they support the present motion. Thus, the motion is not only unopposed, but is supported by all major groups of creditors.
Because the four subsidiary debtors are wholly owned by the parent debtor SBP, there are no "publicly held" shareholders of the subsidiaries to be adversely affected by any consolidation.
D. What the DIPs are Requesting is Not Normal Substantive Consolidation. It is Substantive Consolidation Modified from What Most Caselaw Calls Substantive Consolidation
The DIPs' motion can most accurately be described as requesting substantive consolidation with a twist. (Debtors' Motion for Substantive Consolidation with declarations, and Debtors' Supplemental Memorandum in Support of Substantive Consolidation). Some of what the debtors request in their motion is "typical", some of what is asked for is unusual, possibly unique. The debtors are requesting substantive consolidation on the following terms:
There is very little express in the Bankruptcy Code or the Federal Rules of Bankruptcy Procedure regarding the subject of substantive consolidation. Federal Rules of Bankruptcy Procedure Rule 1015 refers to consolidation of two or more cases for administrative purposes, which is referred to as "joint administration", but does not address the subject of substantive consolidation. (See however the Official Advisory Committee Note (1983) to Rule 1015). The Note distinguishes joint administration from substantive consolidation, and states that substantive consolidation of the estates of two or more separate debtors may be appropriate under some circumstances, "as when the affairs of an individual and a corporation controlled by that individual are so intermingled that the court cannot separate their assets and liabilities."
The only reference in the Bankruptcy Code to consolidation appears in ...
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