A. Requesting Substantive Consolidation
Because the Bankruptcy Code does not expressly provide for the remedy of substantive consolidation, it likewise provides no specific procedures for seeking, nor for implementing, the remedy. Consequently, a variety of approaches to request substantive consolidation have developed. Not only has the mechanism for seeking substantive consolidation varied, but the party seeking it has varied as well. Requests for substantive consolidation have come from debtors,18 chapter 7 trustees,19 chapter 11 trustees,20 lienholders,21 unsecured creditors,22 official committees,23 and the office of the U.S. Trustee.24
While no specific method for requesting substantive consolidation is required, some form of official request must be made. For example, in In re Aldape Telford Glazier Inc., the U.S. Trustee moved to dismiss the debtor's chapter 7 case, claiming that the debtor had improperly attempted to jointly file a single bankruptcy petition on behalf of one Idaho corporation and its two wholly owned dissolved limited liability companies.25 In opposition, the debtor argued, among other things, that one petition was appropriate because the chapter 7 trustee could substantively consolidate the three entities into a single entity.26 The court rejected the debtor's argument, stating that it would be unreasonable to place such a burden on the trustee and further noted — presumably to highlight that even if the request was reasonable it would still not be a defense to the U.S. Trustee's motion for dismissal — that "at least one proper case filing is a prerequisite to [the] Court exercising its jurisdiction to consider substantive consolidation of that case and its assets and liabilities with another debtor's case or with the assets and liabilities of a non-debtor entity."27 While it is clear that a party in interest may bring an action to substantively consolidate, it is unclear whether the bankruptcy court has the authority to sua sponte order such relief when no such affirmative request has been made.28
1. Motion
Typically, a party seeking substantive consolidation will seek the relief by motion. This may be effectuated pursuant to Bankruptcy Rule 9014, with the movant seeking substantive consolidation as a contested matter in the debtor's main bankruptcy case.29 Using this method, the moving party must provide proper notice and the opportunity to be heard to the affected parties.30 The extent to which a movant must provide notice to parties-in-interest is addressed in a subsequent chapter.31
The moving party bears the burden of demonstrating "not only that there is substantial identity between the entities to be consolidated, but also that consolidation is necessary to avoid some harm or realize some benefit."32 Even when the relief requested is consensual and no objections have been raised, the court is nonetheless obliged to review a request for substantive consolidation to ensure that it satisfies the necessary burden. Such relief "is not warranted simply because no objection was made," but rather, "the bankruptcy court[] [is] obligat[ed] to make [an] independent inquiry into the necessity and desirability of substantive consolidation."33
2. Adversary Proceeding
Another common avenue for seeking substantive consolidation is through an adversary proceeding pursuant to Bankruptcy Rule 7001. Indeed, under certain circumstances, some courts have required that substantive consolidation be sought pursuant to an adversary proceeding as opposed to a contested matter.34 In particular, courts often have expressed concern with addressing substantive consolidation in a contested matter — as opposed to in an adversary proceeding — when the moving party is attempting to substantively consolidate a debtor with a non-debtor.35
For example, in In re Julien Co., the chapter 11 trustee sought to amend the bankruptcy petition, which was originally filed as an involuntary petition against The Julien Co., to identify the debtor as Julien J. Hohenberg d/b/a The Julien Company.36 The trustee argued that the court was permitted to substantively consolidate the assets of Mr. Hohenberg with those of the debtor and further claimed that "substantive consolidation is 'ordinarily considered a contested matter in which relief must be sought by motion under Rule 9014.'"37
The court rebuffed this...
