Substantive consolidation and the Archdiocese of Milwaukee bankruptcy

Benjamin G. Lombard and Peter C. Blain write on Substantive Consolidation: Adding Assets to the Bankruptcy Pot in this month's issue of Wisconsin Lawyer. First, the general principle.

"Creditors may face an unrecognized risk from substantive consolidation, which is an equitable doctrine in bankruptcy permitting the consolidation of legally separate entities that are members of the same corporate or other affiliated group."

Then, the introduction to the specific application.

"The U.S. Bankruptcy Court for the Eastern District of Wisconsin recently ruled on a motion for substantive consolidation in In re Archdiocese of Milwaukee. [footnote omitted] That motion dealt with an attempt by a committee of unsecured creditors (the creditors’ committee) to consolidate 210 separate, nonbankrupt parishes with the Archdiocese of Milwaukee for purposes of the Archdiocese’s bankruptcy case."

There are two lines of cases on what the standards are for deciding for or against substantive consolidation. In the Archdiocese's case, the Bankruptcy Court did not explicitly choose to apply one or the other.

"Instead, the court concluded that the creditors’ committee failed to show facts supporting consolidation under either of the tests and ultimately determined that '[g]iven the prejudice to the non-debtor Parishes and their creditors that would result from substantive consolidation,' it would not be proper to grant such a remedy." [footnote omitted]

The authors'conclusion includes this advice.

"The importance of separate identity to the tests used for substantive consolidation highlights the need to carefully document the separateness of the related entities in situations in which a party seeks to avoid substantive consolidation."

On other similar issues, I haven't seen anything in the press to indicate some vulnerability of the Faith In Our Future Trust on the ground of lack of separate identity. Same goes for the trust that replaced the Archdiocese of Milwaukee Parish Investment Fund. (The court has already ruled that the Fund, while on the Archdiocese's books, was handled in a way that did not subject it to creditors' claims, see my earlier post Property of the Estate in Church Bankruptcies: 'Archdiocese of Milwaukee'.)