Presenting a live 90-minute webinar with interactive Q&A - - PowerPoint PPT Presentation

The audio portion of the conference may be accessed via the telephone or by using your computer's

• speakers. Please refer to the instructions emailed to registrants for additional information. If you

have any questions, please contact Customer Service at 1-800-926-7926 ext. 10.

Presenting a live 90-minute webinar with interactive Q&A

Leveraging Substantive Consolidation, Piercing the Veil, and Alter Ego in Bankruptcy Proceedings

Maximizing Creditor Recovery From or Asset Protection for Debtors, Shareholders and Related Entities

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific TUESDAY, DECEMBER 1, 2015

Keith Miles Aurzada, Partner, Bryan Cave, Dallas Steven Fender, Of Counsel, Greenspoon Marder Law, Ft. Lauderdale, Fla.

Tips for Optimal Quality

Sound Quality If you are listening via your computer speakers, please note that the quality

• f your sound will vary depending on the speed and quality of your internet

connection. If the sound quality is not satisfactory, you may listen via the phone: dial 1-866-873-1442 and enter your PIN when prompted. Otherwise, please send us a chat or e-mail sound@straffordpub.com immediately so we can address the problem. If you dialed in and have any difficulties during the call, press *0 for assistance. Viewing Quality To maximize your screen, press the F11 key on your keyboard. To exit full screen, press the F11 key again.

FOR LIVE EVENT ONLY

Continuing Education Credits

In order for us to process your continuing education credit, you must confirm your participation in this webinar by completing and submitting the Attendance Affirmation/Evaluation after the webinar. A link to the Attendance Affirmation/Evaluation will be in the thank you email that you will receive immediately following the program. For additional information about continuing education, call us at 1-800-926-7926

• ext. 35.

FOR LIVE EVENT ONLY

Program Materials

If you have not printed the conference materials for this program, please complete the following steps:

• Click on the ^ symbol next to “Conference Materials” in the middle of the left-

hand column on your screen.

• Click on the tab labeled “Handouts” that appears, and there you will see a

PDF of the slides for today's program.

• Double click on the PDF and a separate page will open.
• Print the slides by clicking on the printer icon.

FOR LIVE EVENT ONLY

ALTER EGO BASICS IN BANKRUPTCY

• G. Steven Fender, Esq

Of Counsel City Place Tower 525 Okeechobee Blvd., Suite 1570 West Palm Beach, FL 33401 steven.fender@gmlaw.com

5

INTRODUCTION

• Alter Ego and Veil Piercing
• Permits the Court to disregard corporate form (“pierce the

corporate veil”) and treat a person and legal entity as one in the same

• Showing to disregard corporate form requires showing

that person and entity are one and the same legally, or “alter egos”

6

Elements of Proof-Alter Ego

– Typically three elements: – 1. Blurring of lines/domination and control – 2. Improper purpose – 3. Resulting harm to party seeking relief

7

EXAMPLES OF ALTER EGO REMEDY IN BANKRUTCY CASES

• Trustee Actions
• § 541 and § 542
• Augment and recover estate property
• Claims Disputes
• Standing
• State Law Governs
• “Reverse” veil piercing

8

JURISDICTIONAL VEIL PIERCING

9

SUBSTANTIVE CONSOLIDATION OF NON-DEBTORS

• Examples of when the issue arises

– Bring non-debtor assets into the estate – Chapter 7 trustee – Chapter 11 plan assets

• Two lines of cases

– National split articulated in Florida districts – Turns on § 303

10

Non-Debtors May Be Substantively Consolidation

Kapila v. S&G Fin. Services, LLC (In re S&G Fin. Servs., Inc.), 451 B.R. 573 (Bank. S.D. Fla. 2011)

• Chapter 7 trustee seeks to augment estate
• Bankruptcy court’s jurisdiction over non-debtors has

always been “quite broad”

• Nothing in substantive consolidation jurisprudence

requires target entity to be in bankruptcy

• § 303 is not implicated due to different remedies and

requirements

• Ninth Circuit permits it (In re Bonhan, 229 F.3d 750 (9th
• Cir. 2003)

11

Non-Debtors Are Not Subject To Substantive Consolidation

• In re Pearlman, 462 B.R. 849 (Bankr. M.D. Fla. 2012)

– Adversary defendants seeks to substantively consolidate their clients’ with debtor – § 303’s stringent procedures and protections cannot be “swept away” – Applied to other factual scenarios – Alter ego is the remedy

12

13

The Non-consolidation Opinion

Keith Miles Aurzada

keith.aurzada@bryancave.com (214) 721-8041 December 1, 2015

14

• A Non-consolidation Opinion explains the law concerning

substantive consolidation in bankruptcy and provides assurance that a pertinent party to the transaction would likely not be consolidated with another party

• Required in a variety of transactions

– Particularly when a transaction involves a single-purpose entity (“SPE”) or “special purpose vehicle” (“SPV”)

Non-consolidation Opinions: View at 10,000 feet

15

• Court-made doctrine & equitable remedy in bankruptcy

– Originated with Bankruptcy Act of 1898

• Permits court to consolidate assets and liabilities of multiple business

entities in bankruptcy

• Purpose: Simplify obligations of multiple entities, which look/act as
• ne, for the benefit of [some] creditors
• Effect: Entities are treated in accordance with how they held

themselves out to be pre-bankruptcy & inter-entity obligations are eliminated

– Note: Substantive consolidation is not to be confused with procedural consolidation or joint administration

What is Substantive Consolidation?

16

• Bankruptcy Courts cite:

– “Federal common law” and/or – Section 105(a) of the Bankruptcy Code (i.e. the “Catch-All Provision”)

• Section 105(a): “The court may issue any order, process,
• r judgment that is necessary or appropriate to carry out

the provisions of this title.”

• Akin to piercing the corporate veil or “mere

instrumentality”/“alter-ego” doctrines under state law

Legal Authority

17

• Remedy has severe effects on debtors and creditors

– Typically, creditors of one debtor entity will benefit at the expense

• f creditors of another entity
• Doctrine employed when debtors clearly acted as one & it

would be unjust not to consolidate

– However, no uniform guidelines exist for when to apply doctrine

• Courts use SPARINGLY and only in most EGREGIOUS
• f circumstances

Why Substantively Consolidate?

18

• Majority of Courts

– Permits consolidation of a non-debtor entity with a debtor entity

• Minority of Courts

– Cite lack of jurisdiction over non-debtor in a bankruptcy action – Will not consolidate non-debtor entities with debtor entities

• Burden of Proof: Higher for substantively consolidating a

debtor entity with a non-debtor entity (where permitted)

– Currently, only Ninth Circuit has upheld non-debtor/debtor substantive consolidation

Consolidating Non-Debtors with Debtors

19

• Bankruptcy lawyers

– Issue opinion – Resolve questions about:

• “Entity separateness”
• Whether transaction is at “arms’ length”
• “Value” (less common)
• Why bankruptcy lawyers?

– Substantive consolidation only exists in bankruptcy court

Non-consolidation Opinions: Who Writes?

20

• Rating Agency Requires

– Due to impossibility of predicting outcome of substantive consolidation in bankruptcy

• 3 major “tests” exist at Circuit level (Second, Third, D.C.)
• Other Circuits have adopted a test or added tweaks to existing test

– In CMBS Industry: ratings market determined that mere SPE structure not enough to isolate a mortgaged property from bankruptcy affiliates & poor performance of other properties

• Lenders concerned about risk to them (as creditor)
• Breach of any SPE covenant results in material loan default
• Opinion provides further assurance of remoteness of risk (provided a long set of

assumptions regarding the SPE provisions)

• Example CMBS Transactions Requiring Opinion

– Securitizations – Defeasances – Loan Assumptions

Non-consolidation Opinions: Why Have One?

21

Second Circuit

Augie/Restivo (1988) – (i) if creditors dealt with entities as a single economic unit – (ii) if debtor affairs are so entangled that consolidation will benefit creditors – Focuses on creditors

Third Circuit

Owens Corning (2005) – (i) if creditors relied

• n entity sameness

– (ii) are postpetition assets are so scrambled as to make separation prohibitive, harm creditors – Judge Ambro (lender-friendly jurist)

Non-consolidation Opinions: The Big 3 Tests

D.C. Circuit

Auto-Train (1987) ─ (i) substantial identity exists ─ (ii) necessary to avoid harm or realize benefit ─ Focuses on debtor entities

22

• Balancing Test

– (i) necessity of consolidation – (ii) benefits versus harms – (ii) prejudice resulting from not consolidating – Circuits Adopting: First, Sixth, Eighth

• General Growth Properties (2009-2010)

– S.D.N.Y.: revenue generated at SPE-level flowed upstream into centralized cash management account

• Court granted lien to DIP lenders
• Effect: De facto substantive consolidation

Non-consolidation Opinions: Other Circuits

23

Circled: Newgate Mall Land Acquisition, LLC

Organization Chart

General Growth Properties

24

Takeaway Bad facts can be offset or ameliorated by other indicia of separateness

General Growth Properties: Takeaway

Hypothetical 1 Debtor/mall SPE shares rents with an affiliate – Okay if:

• Well-documented
• Arms-length
• Good reason (justified)
• Short term

– However, attorney may not issue an opinion if any one of the above not present

Hypothetical 2 Property Manger manages more than one SPE affiliate

– Best if everyone pays own freight – At market price

25