Although the Supreme Court’s Law v. Siegel decision in 2014 may have curtailed bankruptcy courts’ unfettered equity powers, the ability to order substantive consolidation survives, according to the Ninth Circuit’s Bankruptcy Appellate Panel.
A bankruptcy court held a trial and ordered substantive consolidation of an individual debtor’s chapter 7 estate with the assets of a corporation and a trust that the debtor controlled. On appeal, the debtor contended that Law took away the bankruptcy court’s equity power to substantively consolidate a nondebtor’s assets with the assets of a bankrupt estate.
In an unsigned memorandum on March 30, the appellate panel found no Ninth Circuit authority suggesting that bankruptcy courts no longer have the power of substantive consolidation that they have exercised as part of their “general equitable powers since the passage of the Bankruptcy Act of 1898.”
The panel also shot down the debtor’s argument that substantive consolidation ignores state law property rights, which must be respected under the Supreme Court’s Butner decision.
The appellate panel said that the law of substantive consolidation is a federal bankruptcy law and is not dependent upon state law concepts, citing the Ninth Circuit’s Bonham decision from 2000. By the way, Bonham adopted the Second Circuit’s Augie/Restivo standards for deciding when substantive consolidation is appropriate.
In Law v. Siegel, Justice Antonin Scalia, writing for the unanimous Court, held that equitable considerations may not contravene express provisions in the Bankruptcy Code. That decision might be interpreted as narrowing the Court’s Marrama opinion, which arguably allows bankruptcy judges to depart from what seems to be a nondiscretionary requirement of the statute. Justice Scalia dissented in Marrama.