Corporate Form and Substantive Consolidation


This Article reformulates substantive consolidation doctrine in light of modern financing techniques. Building upon the author's research showing the prevalence of substantive consolidation in large public bankruptcies, it offers an economic account (based on Coase's theory of firm size) to explain why we should expect that the circumstances giving rise to substantive consolidation should be common (rather than rare as suggested by the rhetoric of case law). Extending the asset partitioning theory developed by Professors Hannsmann and Kraakman, it offers a model for looking at the corporate form within corporate groups, particularly in the insolvency context. The recent Third Circuit opinion in the Owens Corning bankruptcy provides a basis for discussion. Particular attention is paid to the structure of intercompany guarantees and how they perform a role similar to security interests (but without the notice protections that accompany security interests). An example shows how intercompany guarantees "squeeze down" recoveries for non-adjusting creditors (echoing the debate over the secured credit carve out started by Professor Warren in the late 1990's). The article concludes with a defense of the extension of an equitable remedy in light of the Supreme Court's holding in Grupo Mexicano (limiting equity to English Chancery practice in 1789) by locating a chancery case from 1676 that commented favorably on an averaging technique that is a proto-type for substantive consolidation.


Banking and Finance Law | Bankruptcy Law | Business Organizations Law | Constitutional Law | Economics | Legal History

Date of this Version

March 2006