C. Practical Considerations
While nondebtor substantive consolidation is still theoretically possible, the tides seem to be turning against the remedy. Furthermore, a series of recent decisions have cast further doubt with respect to whether any movant could ever meet the standard to demonstrate that nondebtor substantive consolidation is warranted.
In the case of SE Property Holdings LLC (Stewart I), the movant sought to substantively consolidate the debtors with nine nondebtor entities that the debtors managed or in which the debtors had an interest.272 The court, however, dismissed the initial complaint for failing to state a claim, finding that the movant had failed to demonstrate that "all creditors" would benefit from the consolidation.273 The court further found that for notice of a motion for substantive consolidation of a nondebtor to be adequate, the creditors of the nondebtor must be "afforded due process by receiving some type of notice [of the attempted substantive consolidation]."274 The court further noted that adequate notice must be provided "not only to the Non-Debtors but also to the Non-Debtors' creditors and owners."275
Following the court's determination in Stewart I, the petitioning creditor amended its complaint to add additional allegations that it failed to include in the original complaint, including an allegation that the only other creditor of the nondebtors would benefit from substantive consolidation.276 However, that other creditor filed an objection opposing the relief sought by the petitioning creditor.277 The court found this opposition highly persuasive and ultimately dismissed the complaint with prejudice.278 The decision was subsequently vacated after a number of additional creditors of the nondebtors were identified.279 After identifying these creditors, the movant was then required to demonstrate that these creditors would not be harmed by consolidating the entities.280 Ultimately, the parties resolved this dispute through settlement.281
In a separate case, the court ruled that creditors of nondebtor entities must be served with a copy of the substantive consolidation complaint.282 To permit the court to analyze the effect of substantive consolidation on these "innocent third parties," the complaint must allege "who the affected creditors are, whether they are aware of the proceeding, and whether they have been given an opportunity to be heard."283
Following these cases, the Ninth Circuit, in an opinion issued just...
