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Third Circuit Cuts Substantive Consolidation Risk

By Michael L. Cook and Leslie W. Chervokas

Lenders won a victory on Aug. 15 when the Third Circuit limited the equitable remedy of substantive consolidation in the Owens Corning reorganization case. In re Owens Corning, ____ F.3d ___, 2005 U.S. App. LEXIS 17150*1 (3d Cir. 2005), amended by 2005 U.S. App. LEXIS 18043 (3d Cir. Aug. 23, 2005); further amended Sept. 2, 2005, petitions for reh'g en banc filed Aug. 29, 2005. Reversing the district court, the court held that “affiliated [debtor and non-debtor] entities” could not be “substantively” consolidated on the facts of the case before it. According to the court, the debtor and its allies sought substantive consolidation, a “last-resort remedy,” in order to “deprive one group of creditors [ie, the unsecured lenders] of their rights while providing a windfall to other creditors.” Id. at *5-*6. The future claimants' representative and a creditors' committee filed petitions for rehearing en banc on Aug. 29. Answers to those petitions were due to be filed by Sept. 12.

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