In Re Vecco Construction Industries, Inc.
2 Collier Bankr. Cas. 2d 216, 4 B.R. 407, 1980 Bankr. LEXIS 5026 (1980)
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Rule of Law:
A bankruptcy court, using its equity powers, may order the substantive consolidation of a parent company and its subsidiaries when the entities' affairs are so hopelessly commingled that they essentially constitute a single economic unit, and the benefits of consolidation heavily outweigh any potential harm to individual creditors.
Facts:
- Vecco Construction Industries, Inc. ('Vecco') is the parent company of four wholly-owned subsidiaries: Vecco of Va., Vecco of D.C., Vecco of Md., and Vecco Service.
- All five companies share the same directors and operate out of the same office space.
- Prior to 1976, the companies issued consolidated financial reports despite having individual operating accounts.
- In 1976, all individual operating accounts were consolidated into a single account under the name of Vecco Service.
- Since January 1, 1978, Vecco assumed all assets and liabilities of its subsidiaries, commingled all receipts and disbursements in a single account, and made no effort to segregate the assets, liabilities, or business functions of the individual companies.
- Inventory was frequently transferred between the companies and job sites without any formal inter-company accounting to reflect the transfers.
- The subsidiaries have always issued financial statements and tax returns in the name of the parent company, Vecco.
Procedural Posture:
- The parent company, Vecco Construction Industries, Inc. ('Vecco'), filed a petition for relief under Chapter XI of the Bankruptcy Act in the U.S. Bankruptcy Court.
- Subsequently, Vecco’s four subsidiary corporations filed individual petitions for relief under Chapter 11.
- The four subsidiaries filed an application with the Bankruptcy Court seeking to substantively consolidate their individual bankruptcy proceedings with the proceeding of their parent company, Vecco.
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Issue:
Is substantive consolidation of a parent corporation and its wholly-owned subsidiaries appropriate where their assets, liabilities, and operations are so hopelessly commingled that they function as a single economic unit?
Opinions:
Majority - Bostetter, Jr., Bankruptcy Judge
Yes, substantive consolidation is appropriate. A bankruptcy court's power to consolidate is derived from its equity jurisdiction and should be exercised when the affairs of related corporate entities are so entangled that they function as a single unit. Here, the complete commingling of assets and business functions, the unity of ownership and interest, the use of a single operating account, and the issuance of consolidated financial statements demonstrate that the five Vecco companies operated as a single, cohesive economic entity. The difficulty and expense of attempting to segregate their assets and liabilities would be substantial, threatening any potential recovery for creditors, which heavily outweighs any potential inequities to creditors who may have dealt with a single entity.
Analysis:
This case provides a clear framework for applying the equitable doctrine of substantive consolidation in bankruptcy. It demonstrates a judicial trend toward prioritizing economic reality over formal corporate structures, especially when those structures are disregarded by the companies themselves. The decision solidifies the importance of the 'hopelessly commingled' standard from the Second Circuit, establishing that consolidation can be justified even without proof that creditors relied on the consolidated entity. This opinion serves as a guide for courts in determining when to merge the assets and liabilities of related debtors to ensure a more orderly and equitable distribution to all creditors.
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