UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF KENTUCKY
SUN GLO COAL COMPANY, INC. CASE NO. 92-70014
TROJAN MINING AND PROCESSING, INC. CASE NO. 92-70015
DEBTORS (Joint Administration)
This matter is before the Court on the Motion to Consolidate Claims for Substantive Purposes and to Hold Sun Glo Coal Company Equally and Jointly Liable with Trojan Mining and Processing, Inc., for Labor Debt, filed herein on November 25, 1992 by the International Union, United Mine Workers of America ("UMWA"). The debtors filed their Response on December 7, 1992. This Court has jurisdiction of this matter pursuant to 28 U.S.C.'1334(b); it is a core proceeding pursuant to 28 U.S.C. '157(b)(2)(A).
The UMWA represents employees of the mining operation of debtors. The UMWA's Motion is based on the contention that one of the debtors, Trojan Mining and Processing, Inc. ("Trojan") was formed for the purpose of being relieved of the responsibility for contributing to the 1950 UMWA Pension and Benefit Funds ("the Funds"), and that after it was formed and dispensation from contribution to the Funds was obtained, corporate formalities were disregarded. The UMWA points out that the debtors are involved in the same "integrated" business, namely the mining and processing of coal from the same mines and to the same processing plant.
The debtors respond that each one of them has a separate corporate existence, having filed separate Articles of Incorporation. The debtors view the UMWA's Motion as an attempt to "pierce the respective debtors' corporate veils under the alter ego theory." They contend that because they are Kentucky corporations operating solely in Kentucky, this Court must look to Kentucky common law to find support for the relief of piercing the corporate veil. The debtors note that the Court's power to order substantive consolidation is derived from its general equity power pursuant to 11 U.S.C.'105.
As stated by the court in F.D.I.C. v. Colonial Realty Co., 966 F.2d 57, 60 (2nd Cir. 1992), however, the comparison of the doctrines of consolidation and piercing the corporate veil is "not entirely apt." The court said
Initially, it should be noted that, unlike substantive consolidation, piercing the corporate veil 'does not sound solely in equity.' ... The focus of piercing the corporate veil is the limited liability afforded to a corporation, and '[l]iability therefore may be predicated upon a showing of fraud or upon complete control by the dominating corporation that leads to a wrong against third parties.'... Substantive consolidation, on the other hand, has a narrower focus: 'the equitable treatment of all creditors[,]' ... and it turns on 'two critical factors: (i) whether creditors dealt with the entities as a single economic unit ...; or (ii) whether the affairs of the debtors are so entangled that consolidation will benefit all creditors.' (Citations omitted)
At pp. 60-61. The debtors' characterization of the UMWA's Motion as an attempt to pierce the corporate veil is "not entirely apt", and does not address the critical factors to be considered in determining whether cases should be substantively consolidated. The UMWA fails in this regard as well, since its entire argument is couched in terms either of piercing the corporate veil or determining whether related entities are single or common employers, a labor issue.
The critical factors set out above were enunciated in the leading case of In re Augie/Restivo Baking Co., Ltd., 860 F.2d 515, 518-521 (2nd Cir. 1988). The court therein found that the course of dealing and expectations of the parties did not justify substantive consolidation of the cases of two debtors, where one creditor's loans to one debtor were based solely on that debtor's financial condition. Further, at the time the loans were made, the creditor had no knowledge of negotiations between that debtor and an unrelated debtor to form a combined company, a creditor of the combined companies also operated on the assumption that it was dealing with a separate entity, and consolidation would render the first creditor's undersecured loan subordinate to the second creditor's super-priority administrative debt extended to combine the companies. Consolidation would not result in equitable treatment of all creditors.
Another standard has been set forth in Eastgroup Properties v. Southern Motel Assoc., Ltd., 935 F.2d 245 (11th Cir. 1991). There the court stated that "...the proponent of substantive consolidation must show that (1) there is substantial identity between the entities to be consolidated; and (2) consolidation is necessary to avoid some harm or to realize some benefit." At page 249. The court goes on to state that once this showing is made, the proponent has made a prima facie case for consolidation, and it is then up to an objecting creditor to show reliance on the separate credit of one entity and prejudice by consolidation.
In the case at bar, the usual circumstances surrounding an application for consolidation are not present, as a creditor is seeking consolidation and the debtors are resisting. None of the other creditors of either debtor has registered an objection to consolidation. The UMWA has not addressed the issue of whether consolidation will result in the equitable treatment of all creditors. In re Augie/Restivo Baking Company, Ltd., supra, p. 518. The UMWA has certainly not made a "prima facie case" for consolidation. The debtors, on the other hand, have raised the issue of whether substantive consolidation would impair the claims of debtor Sun Glo's unsecured creditors which dealt solely with it.
In conclusion, having reviewed the controlling case law on the subject and having determined that the UMWA has not, by any of the standards set forth therein, established that substantive consolidation is required in this matter, it is the opinion of this Court that the UMWA's Motion to Consolidate Claims for Substantive Purposes and to Hold Sun Glo Coal Company Equally and Jointly Liable with Trojan Mining and Processing, Inc., for Labor Debt should be overruled. An order in conformity with this opinion will be entered separately.
By the Court -
James R. Hampton, Esq.
James B. Ratliff, Esq.