J. Maxwell Tucker, a shareholder in the Dallas, Texas office of Winstead Sechrest & Minick P.C., has practiced in matters of business reorganization, bankruptcy, and insolvency law for his entire career. He holds a B.A., 1977, from Trinity University, and a J.D., 1980, from the University of Texas at Austin.
Introduction
Substantive consolidation 1 is an equitable remedy developed during the 20th Century in bankruptcy cases to merge separate entities so that their assets and liabilities may be aggregated 2. Application of the remedy of substantive consolidation in the context of corporations, limited partnerships, and limited liability companies may have the effect of overriding the bedrock principle of limited liability, in favor of creating a common pool of assets for the combined creditors of the affiliated entities. The federal courts that have developed the doctrine acknowledge the absence of express statutory authorization for the extraordinary remedy they have created. Instead, the authority to order substantive consolidation has been implied from general equitable powers vested in the federal courts 3.
A recent decision of the United States Supreme Court indicates that such reasoning is flawed. In Grupo Mexicano de Desarrollo, S.A. v. Alliance Bond Fund, Inc 4., the United States Supreme Court held that a federal district court lacks jurisdiction to enjoin a defendant's transfer of assets prior to judgment, no matter how egregious the risk of irreparable harm 5. In reaching this conclusion, the Supreme Court held that a federal court sitting as a "court of equity" is limited to such equitable remedies as existed in the English Court of Chancery in 1789, the year that Congress enacted the First Judiciary Act 6.
Grupo Mexicano has restricted the federal courts' reliance upon general principles of equity to fashion remedies. While the historical record on the scope of equitable remedies exercised by the English Chancellor in 1789 is murky, a review of the record leaves a definite and firm conviction that the remedy of substantive consolidation was not available.
Furthermore, section 105 of the Bankruptcy Code 7 should not be interpreted to create equitable remedies that do not have a statutory basis, and that did not exist prior to 1789. While section 105 may supplement relief authorized by statute, it does not grant bankruptcy courts a freewheeling "equitable jurisdiction" as exercised by the English Court of Chancery. In light of the Grupo Mexicano decision, the 20th Century doctrine of substantive consolidation should be pronounced dead.
I. The Judge-Made Origins Of Substantive Consolidation
A survey of the law of substantive consolidation demonstrates that our federal courts developed the applicable principles during the 20th Century. The origins of substantive consolidation are found in "piercing the corporate veil" cases. The earliest examples of substantive consolidation type relief involved a finding that the insolvent entity with which consolidation was sought was the "alter ego" or an "instrumentality" of the target affiliate 8. Initially, our federal courts applied state corporate law concepts to a bankruptcy trustee's request for "turnover" relief against the "alter ego" affiliate, such that assets of the affiliate could be administered by the trustee.
There are many different terms ascribed to a state law cause of action seeking to hold a parent corporation, or stockholders, liable for the actions of a corporation. Courts have used a variety of phrases including "alter ego," "instrumentality," "agency," "alias" and "dummy." Justice Benjamin N. Cardozo aptly described this corner of the law as "enveloped in the mists of metaphor." 9
The whole problem of the relation between parent and subsidiary corporations is one that is still enveloped in the mists of metaphor. Metaphors in law are to be narrowly watched, for starting as devices to liberate thought, they end often by enslaving it. We say at times that the corporate entity will be ignored when the parent corporation operates a business through a subsidiary which is characterized as an "alias" or a "dummy". All this is well enough if the picturesqueness of the epithets does not lead us to forget that the essential term to be defined is the act of operation. Dominion may be so complete, interference so obtrusive, that by the general rules of agency the parent will be a principal and the subsidiary an agent. Where control is less than this, we are remitted to the tests of honesty and justice.10
In analyzing whether a bankruptcy trustee's request to compel "turnover" of the assets of a parent corporation to its subsidiary (or vice-versa) is appropriate in a bankruptcy setting, our federal courts initially borrowed the "instrumentality" concept from state corporate law 11. In Taylor v. Standard Gas & Electric Co. 12, decided in 1939, the United States Supreme Court had cited the "instrumentality" theory in affirming the lower court's disallowance of a claim asserted by a corporate parent against its bankrupt subsidiary 13. Two years later, the Tenth Circuit Court of Appeals extended the "instrumentality" theory to a bankruptcy trustee's request for "turnover" relief against the bankrupt's corporate subsidiary. In the seminal substantive consolidation case of Fish v. East 14, the Tenth Circuit cited the following factors as relevant in determining that a corporate subsidiary was a mere "instrumentality" of the parent and, therefore, that the subsidiary's assets should be included in the bankruptcy case of the parent:
While the Tenth Circuit found sufficient facts in the Fish appeal to grant the parent corporation trustee's request for turnover, it did not decide whether the creditors of the subsidiary should be denied priority to the subsidiary's assets 16. Two years later, in Stone v. Eacho (In re Tip Top Tailors, Inc.) 17 the Fourth Circuit Court of Appeals approved the consolidation of the subsidiary (described as a "corporate pocket") into the parent corporation. Moreover, the court held that the creditors of the parent and the subsidiary should share pro rata in the combined asset pool, because there was no evidence that the creditors of the subsidiary relied upon its sole credit 18.
However, in the early years of the doctrine's development, other federal courts were reluctant to grant "turnover" relief in the context of a corporate parent and its subsidiary. For example, while the Fifth Circuit cited approvingly the "instrumentality" factors from the Fish v. East opinion, it declined to approve a bankruptcy referee's turnover order against a corporate subsidiary 19. The Fifth Circuit observed the subsidiary's assets were held by a state court receiver, and thus the bankruptcy referee lacked jurisdiction to grant the consolidation.
To be sure, the early substantive consolidation cases do not indicate whether state law or federal law govern the standards to be applied. Under the Erie 20 doctrine, which was announced just two years before Fish v. East, federal courts must apply state corporate law principles in order to grant "piercing the corporate veil" and "alter ego" relief. So long as the federal courts follow state corporate law "alter ego" principles to a creditor's request to consolidate one corporation into another, the Grupo Mexicano limitation upon the exercise of federal equitable powers as discussed herein is not invoked. The federal courts may pierce the corporate veil to effect a consolidation if fraud or "alter ego" acts recognized under state corporate law are present 21.
It should also be noted at this juncture that many state legislatures eventually acted to reduce the "mist" associated with the "piercing the corporate veil" and related common law doctrines 22. However, a different kind of "mist" has fallen upon parties to bankruptcy cases involving multi-tiered corporate entities.
Beginning in the 1960's, federal courts departed from state corporate law "alter ego" principles, and invented a federal common law of substantive consolidation. The Second Circuit Court of Appeals summarized the difference between state "alter ego" law and federal "substantive consolidation" principles as follows: "The focus of piercing the corporate veil is the limited liability afforded to a corporation;" whereas, the focus of substantive consolidation is "the equitable treatment of all creditors." 23 The distinct federal law doctrine of substantive consolidation begins to emerge in 1964 in Soviero v. Franklin Nat'l Bank of Long Island, 24 in which the Second Circuit rejects a creditor's contention that corporate veils can be pierced only in cases of fraud 25 - which had been a fundamental requirement under most state law. The contours of this new consolidation doctrine were further developed in Chemical Bank New York Trust Co. v. Kheel 26, Flora Mir Candy Corp. v. R. S. Dickson & Co. (In re Flora Mir Candy Corp.) 27, and James Talcott, Inc. v. Wharton (In re Continental Vending Mach. Corp.) 28. Finally, the term "substantive consolidation" itself appears in an opinion authored by Bankruptcy Judge Roy Babitt in 1977. In In re Commercial Envelope Manufacturing Co., Judge Babitt wrote: "[s]ubstantial consolidation, as will be seen, is now part of the warp and woof of the fabric of the bankruptcy process involving related debtors, though to be used sparingly." 29
Subsequent to the advent of the Bankruptcy Reform Act of 1978, a "modern" or "liberal" trend toward allowing substantive consolidation emerged. The Eleventh Circuit observed this "modern" trend had its "genesis in the increased judicial recognition of the widespread use of interrelated corporate structures by subsidiary corporations operating under a parent entity's corporate umbrella for tax and business purposes." 30 At present, two circuit-level tests guide the bankruptcy courts in the application of substantive consolidation, one from the United States Court of Appeals for the District of Columbia Circuit 31, and the other from the Second Circuit 32.
Under the District of Columbia Circuit test, the proponent of substantive consolidation must show: (1) a substantial identity between the entities to be consolidated; (2) that consolidation is necessary to avoid some harm or to realize some benefit; and (3) if a creditor objects and demonstrates that it relied on the separate credit of one of the entities and that it will be prejudiced by the consolidation, then the court may order consolidation only if it determines that the demonstrated benefits of consolidation "heavily" outweigh the harm 33.
Under the Second Circuit test, the proponent must show one of two alternative grounds for substantive consolidation: (1) that the creditors dealt with the entities as a single unit and did not rely on their separate identity in extending credit or (2) that the affairs of the entities are so entangled that consolidation will benefit all creditors because untangling is either impossible or so costly as to consume the assets 34. If a party in interest objects and demonstrates one of the two alternative grounds, then the court may order consolidation only if it determines "that consolidation yields benefits offsetting the harm it inflicts on objecting parties." 35
Unfortunately, there is enough fuzziness and uncertainty in the language of all these tests to allow a court to pick and choose amongst the factors and synthesize its own view of the jurisprudential standards. This inconsistency among courts over the standards to be followed is not surprising since the Bankruptcy Code itself is entirely silent on the issue. As noted in FDIC v. Colonial Realty Co. 36:
There is no express authority for any substantive consolidation in the Bankruptcy Code. As this Court has stated, "[s]ubstantive consolidation has no express statutory basis but is a product of judicial gloss." 37
The Advisory Committee's Note to Bankruptcy Rule 1015 observes there is no express authority under the statute or the rules for substantive consolidation 38.
Lacking a statutory basis, the authority to order a pooling of assets and liabilities of affiliated debtors in appropriate cases rests on the premise that our bankruptcy courts have the powers of a "court of equity." 39 In the seminal Continental Vending case, the Second Circuit concludes the "power to consolidate is one arising out of equity." 40 However, the continuing validity of this premise is called into question by both subsequent statutory developments and the holding of Grupo Mexicano 41.
II. Is A Bankruptcy Court A "Court Of Equity"?
In 1934 the United States Supreme Court declared: "courts of bankruptcy are essentially courts of equity, and their proceedings inherently proceedings in equity." 42 In exercising the jurisdiction conferred upon it, the bankruptcy court "applies the principles and rules of equity jurisprudence." 43 At first blush, it may seem settled that a bankruptcy court is a "court of equity." 44. However, a review of the evolving bankruptcy jurisdictional statutes indicates this is an oversimplification.
The first federal bankruptcy law, the 1800 Act, gave bankruptcy jurisdiction to the district courts 45. The second law, the 1841 Act, also empowered the district courts to exercise this jurisdiction in the nature of summary proceedings in equity 46. The district courts were thereby empowered to effectively act as equity courts for purposes of bankruptcy.
The district courts' equity power in bankruptcy matters was explicitly continued under the 1898 Act 47. The critical language of the 1898 Act was the very first part -- the introductory part -- of section 2:
[T]he district courts of the United States . . . are hereby made courts of bankruptcy, and are hereby invested . . . with such jurisdiction at law and in equity as will enable them to exercise original jurisdiction in bankruptcy proceedings . . . .48
This language meant that "[a] bankruptcy court is a court of equity, . . . guided by equitable doctrines and principles except in so far as they are inconsistent with the [bankruptcy statute]." 49 To be a court of equity means "at least . . . that in the exercise of the jurisdiction conferred upon it . . ., it [the bankruptcy court] applies the principles and rules of equity jurisprudence." 50
In the Bankruptcy Reform Act of 1978, Congress enacted section 1481 of title 28, which provided in pertinent part that "[a] bankruptcy court shall have the powers of a court of equity." 51 However, the United States Supreme Court found unconstitutional Congress' attempt to broadly expand the jurisdiction of the bankruptcy courts in Northern Pipeline Constr. Co. v. Marathon Pipe Line Co.52 As a result of Marathon, Congress repealed section 1481 53 and other jurisdictional provisions of the Bankruptcy Reform Act of 1978 54.
In response to Marathon, in 1984 Congress enacted new jurisdictional statutes with regards to bankruptcy courts. United States Code, title 28 section 1334(a) provides that "the district courts shall have original and exclusive jurisdiction of all cases under title 11." 55 Section 1334(b) of title 28 grants district courts jurisdiction of "civil proceedings arising under title 11, or arising in or related to a case under title 11." 56 Section 157 then allows district courts to refer to bankruptcy judges any and all cases and proceedings arising under title 11 57. Section 151 states that bankruptcy judges constitute a "unit" of the district court, and may as a judicial officer of the district court, exercise the authority conferred under that chapter 58. None of the current provisions make any reference to equity jurisdiction. Unlike pre-1984 law, title 28 at present does not expressly provide bankruptcy courts with equity jurisdiction. Under the post-1984 statutory scheme, a search for the source of the general equitable powers exercised by federal courts leads back to the 18th Century 59.
III. Federal Court Equity Jurisdiction And Grupo Mexicano
A study of the "equitable powers" of our federal courts begins with two 18th Century landmarks-Article III of the Constitution and the Judiciary Act of 1789. The Constitution provides that federal courts may be given jurisdiction over "Cases, in Law and Equity, arising under this Constitution, the Laws of the United States, and Treaties made, or which shall be made, under their Authority." 60 Pursuant to the Judiciary Act of 1789, Congress chose to exercise its power to create inferior federal courts 61. As explained by the Supreme Court in Sprague v. Ticonic Nat'l Bank 62, the Judiciary Act of 1789 granted courts a "body of remedies, procedures and practices which theretofore had been evolved in the English Court of Chancery, subject, of course, to modifications by Congress." 63 However, the Sprague case did not preclude the development of equitable remedies beyond those that existed in 1789 64, as would later be decided in Grupo Mexicano.
Section 1331 of title 28 further implements Article III of the Constitution, by providing that the district courts "have original jurisdiction of all civil actions arising under the Constitution, laws, or treaties of the United States." 65 To be sure section 1331 does not mention actions in "equity." However, because of the merger of law and equity in federal courts 66, the reference to "civil actions" in section 1331 appears to encompass traditional equity actions. Likewise, with the merger of law and equity, it appears the "civil proceedings arising under title 11, or arising in or related to" covered by section 1334 may also encompass traditional equity actions arising in, under, or related to a bankruptcy case 67. However, under the current statutory scheme, the general equity jurisdiction to be exercised by the bankruptcy judges must flow from their status as "units" of the district courts since they no longer have a specific grant of equity jurisdiction 68.
Having shown the bankruptcy judge's equity power should be no greater than that exercised by the district court, the district court's equity powers are examined in light of Grupo Mexicano . In Grupo Mexicano, the Supreme Court was presented with the issue of whether the district court had the authority to issue a preliminary injunction to prevent the dissipation of assets. In deciding the case, the Supreme Court would revisit the discretion of the federal courts to develop equitable remedies.
The facts of the case are not unlike those encountered in the workout of a troubled company. Grupo Mexicano de Desarrollo (GMD), a Mexican holding company that constructs and operates roadways, sold $250 million of 8.25% guaranteed notes (the "Notes") to institutional investors (the "Investors") in order to take care of more than $100 million of high interest debt.
In August, 1997, GMD failed to make the interest payment on the Notes. Because of this default, the plaintiff-Investors caused acceleration of the principal. Ten days later, the Mexican government came to the rescue by implementing the Toll Road Rescue Program. Mexico promised to issue government guaranteed Toll Road Notes to GMD and other toll road operators to reimburse them for unpaid construction receivables and expenses. In addition to the debt owed to the Investors, GMD owed more than $450 million to other creditors. Its five largest creditors were the Mexican government, numerous Mexican banks, additional Mexican financial institutions, trade creditors, and terminated employees (collectively "Mexican Creditors"). Because the Mexican government's program would not fully alleviate its financial difficulties, GMD began to restructure its debt, reduce costs, and seek additional equity contributions. GMD undertook to negotiate with both the Investors and the Mexican Creditors to settle its financial obligations. Later, a press release disclosed that GMD had assigned $117 million in Toll Road Notes to settle other obligations-$100 million to the Mexican government to pay taxes and $17 million to pay severance packages to terminated workers in accordance with Mexican law. Although GMD did not have possession of the Toll Road Notes, it placed certain assets in "trust" for these creditors with the understanding that the encumbered assets would later be exchanged for Toll Road Notes.
On December 12, 1997, the Investors commenced an action in the United States District Court for the Southern District of New York alleging that GMD had defaulted on its obligation under the Notes. The Investors sought, inter alia, damages for GMD's breach of its contractual obligations under the Notes and a preliminary injunction restraining GMD from assigning the Toll Road Notes. By order to show cause, the Investors secured a temporary restraining order precluding the transfer or encumbrance of the Toll Road Notes. One day before the preliminary injunction hearing, GMD revealed that GMD had made additional, previously undisclosed assignments of $38 million in Toll Road Notes to the Mexican banks. GMD also planned to make still further assignments, leaving only $5.5 million in Toll Road Notes to satisfy the $75 million debt owed to the Investors.
Following a hearing, the district court granted the preliminary injunction (under FED. R. CIV. P. 65) restraining GMD from dissipating, transferring, conveying, or otherwise encumbering the Investor's right to receive or benefit from the issuance of the Toll Road Notes. The District Court determined that the Investors satisfied their burden for the issuance of a preliminary injunction because: (1) they would almost certainly succeed on their breach of contract claims against GMD; and (2) without the injunction they faced an irreparable injury since GMD's financial condition and its dissipation of assets would frustrate any judgment recovered. On appeal, the Second Circuit affirmed 69.
The Supreme Court reversed, holding that a federal district court lacked jurisdiction to enjoin GMD's transfer of assets prior to judgment. Justice Scalia, on behalf of the majority, does "not question the proposition that equity is flexible; but in the federal system, at least, that flexibility is confined within the broad boundaries of traditional equitable relief." 70 The Court held that:
the equitable powers conferred by the Judiciary Act of 1789 did not include the power to create remedies previously unknown to equity jurisprudence. Even when sitting as a court in equity, we have no authority to craft a "nuclear weapon" of the law like the one advocated here 71.
The broad reach of the opinion is exemplified by the Court's inclusion of a quote of Joseph Story:
If, indeed, a Court of Equity in England did possess the unbounded jurisdiction, which has been thus generally ascribed to it, of correcting, controlling, moderating, and even superceding the law, and of enforcing all the rights, as well as the charities, arising from natural law and justice, and of freeing itself from all regard to former rules and precedents, it would be the most gigantic in its sway, and the most formidable instrument of arbitrary power, that could well be devised. It would literally place the whole rights and property of the community under the arbitrary will of the Judge, acting, if you please, arbitrio boni judicis, and it may be, ex aequo et bono, according to his own notions and conscience; but still acting with a despotic and sovereign authority. A Court of Chancery might then well deserve the spirited rebuke of Seldon; "For law we have a measure, and know what to trust to-Equity is according to the conscience of him, that is Chancellor; and as that is larger, or narrower, so is Equity. T is all one, as if they should make the standard for the measure the Chancellor's foot. What an uncertain measure would this be? One Chancellor has a long foot; another a short foot; a third an indifferent foot. It is the same thing with the Chancellor's conscience."72
Justice Scalia's majority opinion concludes that the public debate over the formidable equity power over debtors "should be conducted and resolved where such issues belong in our democracy: in the Congress." 73
Justice Ginsburg's dissenting opinion leaves no doubt that the majority intended to freeze the expansion of equitable remedies at their 1789 status:
In my view, the Court relies on an unjustifiably static conception of equity jurisdiction. From the beginning, we have defined the scope of federal equity in relation to the principles of equity existing at the separation of this country from England, (citations omitted); we have never limited federal equity jurisdiction to the specific practices and remedies of the pre-Revolutionary Chancellor 74.
The dissenting justices also expressed a concern that this static approach would hinder the ability of federal courts to avoid the modern trend toward "judgment proofing" strategies:
Moreover, increasingly sophisticated foreign-haven judgment proofing strategies, coupled with technology that permits the nearly instantaneous transfer of assets abroad, suggests that defendants may succeed in avoiding meritorious claims in ways unimaginable before the merger of law and equity 75.
However, this point of view was not persuasive to a majority of the Court. Accordingly, it appears the United States Supreme Court has delegated the development of equitable remedies to counteract so-called "judgment proofing" strategies to legislatures 76.
1 The doctrine of substantive consolidation has been the subject of many articles. See , e.g., Jeffrey E. Bjork, Note & Comment, See king Predictability in Bankruptcy: An Alternative to Judicial Recharacterization in Structured Financing, 14 BANKR. DEV. J. 119, 136-40 (1997) (discussing effects of substantive consolidation doctrine on structured financing); Committee on Bankruptcy and Corporate Reorganization of the Association of the Bar of the City of New York, Structured Financing Techniques, 50 BUS. LAW. 527 (1995) (offering background and analytical framework for structured financing and listing issues for substantive consolidation analysis); Joy Flowers Conti, An Analytical Model for Substantive ConsolIdation of Bankruptcy Cases, 38 BUS. LAW. 855 (1983) (proposing "analytical model for deciding whether substantive consolidation should be ordered for bankruptcy cases"); Patrick C. Sargent, Bankruptcy Remote Finance SubsIdiary: The Substantive ConsolIdation Issue, 44 BUS. LAW. 1223 (1989) (addressing hurdle of trying to avoid substantive consolidation when bankruptcy occurs); TriBar Opinion Committee, Opinions in the Bankruptcy Context: Rating Agency, Structured Financing, and Chapter 11 Transactions, 46 BUS. LAW. 717, 725-27 (1991) (discussing use of legal opinions to explain effects of substantive consolidation on certain transactions). As an increasing number of structured finance transactions came to market in the 1990's, rating agencies routinely have required legal opinions on whether the doctrine would be applied to a particular transaction. Since substantive consolidation would defeat one of the fundamental goals of the structured financing-investors and rating agencies looking to a "special purpose vehicle's" isolated asset pool apart from claims related to the affiliate's bankruptcy-opinions as to substantive consolidation are requested by the rating agencies in such financing. See Id. at 726.
2 See , e.g., Reider v. FDIC (In re Reider), 31 F.3d 1102, 1105-09 (11th Cir. 1994) (discussing historical background of substantive consolidation); Woburn Assocs. v. Kahn (In re Hemingway Transp., Inc.), 954 F.2d 1, 11 (1st Cir. 1992) (distinguishing substantive consolidation from joint administration and noting that "substantive consolidation merges the assets and liabilities of the debtor entities into a unitary debtor estate"); Id. at 12 (stating that by placing burden to show consolidation will foster net benefit for all holders of unsecured claims on party requesting substantive consolidation, "the order for substantive consolidation . . . constitutes an implicit determination by the bankruptcy court that any inequity to particular claimants would be overborne by the benefits to claimants generally"); Chemical Bank New York Trust Co. v. Kheel, 369 F.2d 845, 847 (2d Cir. 1966) (reasoning that "equity is not helpless to reach a rough approximation of justice to some rather than deny any to all" and affirming order of consolidation since it would create common assets, which would eliminate duplicate claims by creditors, thereby allowing trustees to work more effectively).
3 See In re ReIder, 31 F.3d at 1105 (noting that while Bankruptcy Act of 1898 did not expressly provide for substantive consolidation, "the authority to order substantive consolidation was implied from the bankruptcy court's general equitable powers").
4 527 U.S. 308 (1999).
5 See Id. at 333.
6 See Id. at 332-33; See also Act of Sept. 24, 1789, ch. 20, 1 Stat. 73. This Act will be referred to as the "Judiciary Act of 1789" in this article.
7 11 U.S.C. § 105 (1994) (setting forth bankruptcy court's powers).
8 See In re Reider, 31 F.3d at 1105 ("Early decisions in the corporate context applied essentially an alter ego or pierce the corporate veil test in assessing the propriety of substantive consolidation."); In re Standard Brands Paint Co., 154 B.R. 563, 567 (Bankr. C.D. Cal. 1993) (commenting that first cases of substantive consolidation applied tests similar to "alter ego" tests).
9 Berkey v. Third Ave. Ry. Co., 155 N.E. 58, 61 (N.Y. 1926), reh'g denied, 155 N.E. 914 (1927).
10 Id. at 61. See also Henry W. Ballantine, Separate Entity of Parent and Subsidiary Corporations, 14 CAL. L. REV. 12, 18-20 (1926) (exploring relationship between parent corporation and subsidiary in terms of agency, alter ego, alias, and dummy for example).
11 State courts will disregard the fiction of separate legal entity where a corporation is a "mere instrumentality of another." See, e.g., Swiss Cleaners, Inc. v. Danaher, 27 A.2d 806, 809 (Conn. 1942) (noting that court will look beyond corporation and look instead at individuals comprising corporation when corporation is "a mere sham or device . . . or is a mere instrumentality or agent") (quoting Hoffman Wall Paper Co. v. Hartford, 114 Conn. 531, 534 (1932)); Woods v. Commercial Contractors, Inc., 384 So. 2d 1076, 1079 (Ala. 1980) (stating that court will not recognize existence of separate corporations which function as another's instrumentality). See generally 18 AM. JUR. 2D Corporations § 45 (1985) (discussing instrumentality theory).
12 306 U.S. 307 (1939).
13 See Id. at 322 ("[The instrumentality rule] is not, properly speaking, a rule, but a convenient way of designating the application . . . of the broader equitable principle that the doctrine of corporate entity . . . will not be regarded when so to do would work fraud or injustice."). The "instrumentality" term was apparently first used in a bankruptcy context, in a dispute concerning the allowance of an affiliate's claim against a bankrupt corporation in In re Watertown Paper Co., 169 F. 252 (2d Cir. 1909).
14 114 F.2d 177 (10th Cir. 1940).
15 See Id. at 191 (recognizing ten factors to consider since "[t]he determination as to whether a subsidiary is an instrumentality is primarily a question of fact and degree").
16 1 See Id. at 199 (stating that creditors of subsidiary "may be entitled to be paid. . . .[and that] [s]uch questions may be raised and protection sought"). The Tenth Circuit restated this point in FDIC v. Hogan (In re Gulfco Investment Corp.), 593 F.2d 921, 929 (10th Cir. 1979).
17 127 F.2d 284 (4th Cir.), cert. denied, 317 U.S. 635 (1942).
18 See Id. at 290.
19 Maule Indus., Inc. v. Gerstel, 232 F.2d 294 (5th Cir. 1956). The Fifth Circuit noted that "[c]ourts are reluctant to pierce the corporate veil and destroy the important fiction under which so much of the business of the country is conducted, and will do so only under such compelling circumstances as require such action to avoid protecting fraud, or defeating public or private rights." Id. at 297.
20 Erie R.R. Co. v. Tompkins, 304 U.S. 64 (1938). See also City of Milwaukee v. Illinois, 451 U.S. 304, 312 (1981) ("Federal courts, unlike state courts, are not general common-law courts and do not possess a general power to develop and apply their own rules of decision.").
21 See, e.g., United States v. Cordova Chem. Co., 59 F.3d 584 (6th Cir. 1995) (stating that conduct did not rise to level necessary to pierce corporate veil under Michigan law because there was no evidence of fraudulent intent); Carte Blanche (Singapore) Pte., Ltd. v. Diners Club Int'l, Inc., 2 F.3d 24, 26 (2d Cir. 1993) (noting that exceptions to corporate separateness are made "to prevent fraud or other wrong, or where a parent dominates and controls a subsidiary"); Estate of Daily v. Lilipuna Assocs. (In re Daily), 107 B.R. 996, 1006 (D. Haw 1989) (stating that Hawaii's corporate law allows for piercing of corporate veil when fraud or injustice is present), rev'd on other grounds, 940 F.2d 1306 (9th Cir. 1991); Murphy v. Stop & Go Shops, Inc. (In re Stop & Go of America, Inc.), 49 B.R. 743, 747 (Bankr. D. Mass. 1985) ("In determining whether there are grounds sufficient to consolidate, reference to state law concerning the concept known as 'piercing the corporate veil' is appropriate."); In re Tureaud, 45 B.R. 658, 662-63 (Bankr. N.D. Okla. 1985), aff'd, 59 B.R. 973 (N.D. Okla. 1986) (applying factors established in Fish v. East to determine if corporate veil should have been pierced).
As an aside, while creditors may request "alter ego" relief based upon state law principles, the issue remains whether the bankruptcy trustee of the debtor corporation has the requisite standing to bring a state law "alter ego" action on behalf of creditors. At present, some of our federal circuit courts permit the bankruptcy trustee to assert "alter ego" claims, others do not. The Eighth Circuit has interpreted Arkansas law to deny the trustee standing. See Mixon v. Anderson (In re Ozark Restaurant Equip. Co.), 816 F.2d 1222, 1225 (8th Cir.) (stating that "the nature of the alter ego theory of piercing the corporate veil makes it one personal to the corporate creditors rather than the corporation itself"), cert. denied, 484 U.S. 848 (1987). In contrast, the Fifth Circuit has interpreted Texas law to permit the bankruptcy trustee to bring an alter-ego action. See S.I. Acquisition, Inc. v. Eastway Delivery Serv., Inc. (In re S.I. Acquisition, Inc.), 817 F.2d 1142, 1152-53 (5th Cir. 1987) (finding nothing in Texas law that prohibited corporation from asserting an alter ego claim); See also Schimmelpenninck v. Byrne (In re Schimmelpenninck), 183 F.3d 347, 359-60 (5th Cir. 1999), reh'g denied, 1999 U.S. App. LEXIS 22035, which provides the following test of a trustee's standing to sue:
To capsulize this legal framework for determining whether the trustee or an individual creditor is the appropriate actor, we categorize three kinds of action:
1) Actions by the estate that belong to the estate;
2) Actions by individual creditors asserting a generalized injury to the debtor's estate, which ultimately affects all creditors; and
3) Actions by individual creditors that affect only that creditor personally.
The trustee is the proper party to advance the first two of these kinds of claims, and the creditor is the proper party to advance the third.
The See ming inconsistency among the federal circuit courts on this issue is due to the variety of state laws which govern the outcome. The dispositive issue is whether a corporate debtor could bring an "alter ego" action on its own behalf under the applicable state law. State law is frequently unclear on this issue, since outside the bankruptcy context it is unlikely that a corporation would sue an affiliate under an "alter ego" theory. If the remedy is available, the bankruptcy trustee may bring such "alter ego" claim on behalf of the corporate debtor. If the remedy is not available to the corporation, the test becomes whether under state law the "alter ego" remedy is available to creditors generally, or is only available to individual creditors based upon specific acts of fraud or misconduct. The Bankruptcy Code grants the bankruptcy trustee the powers to assert certain claims that could be asserted by creditors, however as a general rule, a bankruptcy trustee lacks standing to sue for injuries sustained by a creditor. See Caplin v. Marine Midland Crace Trust Co., 406 U.S. 416 (1972); Richard L. Epling, Trustee's Standing to Sue in Alter Ego or Other Damage Remedy Actions, 6 BANKR. DEV. J. 191 (1989).
22 By way of example, in 1989 the Texas Legislature amended the Texas Business Corporation Act to eliminate constructive fraud and failure to observe corporate formalities as a basis to hold shareholders liable. See TEX. BUS. CORP. ACT ANN. art. 2.21(A)(2)-(3) (West 1980 & Supp. 2000). As noted in Farr v. Sun World Sav. Ass'n, 810 S.W.2d 294, 296 (Tex. App. 1991, no writ), the Texas Legislature sought pursuant to the 1989 amendments to overturn the common law of alter-ego as established in Castleberry v. Branscum, 721 S.W.2d 270 (Tex. 1986). The Fifth Circuit recently recognized that the 1989 amendments require actual fraud, not constructive fraud, to permit a "piercing of the veil." See Randall & Blake, Inc. v. Evans (In re Canion), 196 F.3d 579, 587 (5th Cir. 1999) (stating shareholder cannot be held liable for corporate obligations unless actual fraud is shown). Whether the 1989 amendments impact the reasoning of the Fifth Circuit's prior holdings in S.I. Acquisition, Inc. and Schimmelpenninck remains to be See n.
23 FDIC v. Colonial Realty Co., 966 F.2d 57, 61 (2d Cir. 1992). See Union Sav. Bank v. Augie/Restivo Baking Co. (In re Augie/Restivo Baking Co.), 860 F.2d 515, 518 (2d Cir. 1988) (stating that "[t]he sole purpose of substantive consolidation is to ensure the equitable treatment of all creditors").
24 328 F.2d 446 (2d Cir. 1964).
25 See Id. at 448 (stating that corporate veil may be pierced for reasons other than fraud).
26 369 F.2d 845, 847 (2d Cir. 1966) (affirming issuance of substantive consolidation order where interrelationships of corporate group are hopelessly obscured and time and expense necessary even to attempt to unscramble them is so substantial as to threaten realization of any net assets for all creditors); Id. at 847 (indicating that traditional fraud factors not dispositive).
27 432 F.2d 1060, 1062-63 (2d Cir. 1970) (finding that because creditors relied upon separate credit, consolidation was denied).
28 517 F.2d 997, 1000-02 (2d Cir. 1975) (approving hybrid form of consolidation), cert. denied, 424 U.S. 913 (1976).
29 3 Bankr. Ct. Dec. (CRR) 647, 648, 14 Collier Bankr. Cas. (MB) 191, 192 (S.D.N.Y. 1977).
30 Eastgroup Properties v. Southern Motel Assoc., Ltd., 935 F.2d 245, 248-49 (11th Cir. 1991) (quoting In re Murray Indus., Inc., 119 B.R. 820, 828-29 (Bankr. M.D. Fla. 1990)). See In re Vecco Construction Indus., Inc., 4 B.R. 407, 409 (Bankr. E.D. Va. 1980) (asserting that liberal trend of allowing substantive consolidation, "as evidenced by recent case law," is due to judicial recognition of widespread use of interrelated corporate structures by subsidiaries operating under parent corporation for tax and business purposes).
31 See Drabkin v. Midland-Ross Corp. (In re Auto-Train Corp.), 810 F.2d 270 (D.C. Cir. 1987).
32 See Union Sav. Bank v. Augie/Restivo Baking Co. (In re Augie/Restivo Baking Co.), 860 F.2d 515 (2d Cir. 1988).
33 See In reAuto-Train Corp., 810 F.2d at 276 (presenting three prong test to determine when substantive consolidation can be ordered); See also Reider v. FDIC (In re Reider), 31 F.3d 1102, 1107-09 (11th Cir. 1994) (adopting D.C. Circuit standard as modified for the spousal contract); First Nat'l Bank of El Dorado v. Giller (In re Giller), 962 F.2d 796, 799 (8th Cir. 1992) (adopting similar test considering: (1) the necessity of consolidation due to the interrelationship among the debtors; (2) whether the benefits of consolidation outweigh the harm to creditors; and (3) prejudice resulting from not consolidating the debtors); Eastgroup Properties, 935 F.2d at 249 (adopting D.C. Circuit test); In re Standard Brands Paint Co., 154 B.R. 563, 571-73 (Bankr. C.D. Cal. 1993) (applying Auto-Train test to facts of case and finding test to be satisfied).
34 See In reAugie/Restivo Baking Co., 860 F.2d at 518 (issuing two factor test for substantive consolidation consideration); See also FDIC v. Colonial Realty Co., 966 F.2d 57, 61 (2d Cir. 1992) (reaffirming test espoused by Augie/Restivo); In re Standard Brands Paint Co., 154 B.R. at 571-72 (finding that facts of case satisfy Second Circuit test).
35 Colonial Realty Co., 966 F.2d at 61 (quoting In re Auto-Train Corp., 810 F.2d at 276). See In re Snider Bros., Inc., 18 B.R. 230, 238 (Bankr. D. Mass. 1982) (asserting that although need for consolidation is shown, "there is still the matter of the defense that the benefits of consolidation do not outweigh the harm to be caused to the objector").
36 966 F.2d 57 (2d Cir. 1992).
37 Id. at 59 (quoting In re Augie/Restivo Baking Co., 860 F.2d at 518). See In re Standard Brands Paint Co., 154 B.R. at 567 ("There is very little express[ed] in the Bankruptcy Code or the Federal Rules of Bankruptcy Procedure regarding the subject of substantive consolidation."); Id. (observing that Bankruptcy Rule 1015 refers to joint administration of cases but does not refer to "the subject of substantive consolidation").
38 FED. R. BANKR. P. 1015 advisory committee's note (1983) (stating that Bankruptcy Rule 1015 "does not deal with the consolidation of cases involving two or more separate debtors" and that "[c]onsolidation [of the estates of separate debtors]. . . is neither authorized nor prohibited by this rule"). However, the Advisory Committee Note does state that [c]onsolidation of the estates of separate debtors may sometimes be appropriate, as when the affairs of an individual are so intermingled that the court cannot separate their assets and liabilities." Id. See In re Standard Brands Paint Co., 154 B.R. at 567 (noting that while nothing is expressed in either Bankruptcy Code or Bankruptcy Rule, Advisory Committee Note to Bankruptcy Rule 1015 appears to address substantive consolidation).
39 See Local Loan Co. v. Hunt, 292 U.S. 234, 240 (1934) (stating that "courts of bankruptcy are essentially courts of equity, and their proceedings inherently proceedings in equity"); Reider v. FDIC (In re Reider), 31 F.3d 1102, 1105 (11th Cir. 1994) (recognizing that early authority to order substantive consolidation came from "bankruptcy court's general equitable powers"); James Talcott, Inc. v. Wharton (In re Continental Vending Mach. Corp.), 517 F.2d 997, 1001 (2d Cir. 1975) (noting bankruptcy court's equity powers) , cert. denied, 424 U.S. 913 (1976).
40 In re Continental Vending Mach. Corp., 517 F.2d at 1000.
41 A survey of the law of substantive consolidation would be incomplete without reference to the only decision of the United States Supreme Court perhaps relevant to the issue. In Sampsell v. Imperial Paper & Color Corp., 313 U.S. 215 (1941), a bankruptcy court had directed assets of an affiliated corporation be marshaled into an individual bankrupt's estate. The bankruptcy court granted such relief after finding the transfer of property by the individual to the corporation was not in good faith, was made for the purpose of placing it beyond the reach of the individual's creditors, and where the effect of the transfer was to hinder, delay or defraud the individual's creditors. See Id. at 217-18 (holding despite Court of Appeals finding that, under California law, non-debtor corporation could not be deemed "alter ego" of individual bankrupt). A creditor of the corporation, who was not a party to the turnover proceeding, later filed a claim asserting priority to the corporate assets. The Supreme Court noted that the initial bankruptcy court order granting the turnover had not adjudicated the priority of creditors of the corporation vis-a-vis the creditors of the stockholder. While noting that creditors of the corporation would normally be entitled to satisfy their claims out of corporate assets prior to any participation by the creditors of the individual stockholder, the corporate creditor here was found to have had knowledge regarding the fraudulent transfer of assets from the stockholder to the corporation. Furthermore, the corporate creditor was neither a "lien creditor nor an innocent grantee for value." See Id. at 220. Thus having concluded that the bankruptcy court had jurisdiction to direct the turnover, the Court held that the creditor could not collaterally attack the order, and held that the bankruptcy court correctly determined the creditor should have no priority to the corporate assets under the facts presented. See Id. It should be noted that the Supreme Court in Sampsell did not reach the issue of whether the turnover order would have been proper, if the request had been timely challenged by the corporate creditor. Furthermore, a bankruptcy court, exercising an equitable power to determine the allowance and priority of claims, would not run afoul of the limitations established by Grupo Mexicano. It was clearly the pre-1789 practice for the Chancellor to allow or disallow claims. See , e.g., Ex parte Groome, 1 Atk. 115, 26 Eng. Rep 75 (Ch. 1744) (involving husband's promise to pay wife 600 pounds if she survived him; husband was declared bankrupt and died before dividend made; bankruptcy commissioners disallowed wife's claim; Lord Chancellor dismissed wife's petition that she be allowed as creditor before commissioners because debt was not due at time of act of bankruptcy).
42 Local Loan Co. v. Hunt, 292 U.S. 234, 240 (1934).
43 Pepper v. Litton, 308 U.S. 295, 304 (1939). See United States v. Energy Resources Co., 495 U.S. 545, 549 (1990) ("These statutory directives are consistent with the traditional understanding that bankruptcy courts, as courts of equity, have broad authority to modify creditor-debtor relationships."). However, as noted by Judge Marcia S. Krieger, in "The Bankruptcy Court Is a Court of Equity": What Does That Mean?, 50 S.C. L. REV. 275 (1999), the "court of equity" characterization of the bankruptcy court may be misleading.
44 Equity has been defined as "the correction of the law wherein it is defective by reason of its universality." 1 STORY'S EQUITY JURISPRUDENCE 3 (W.H. Lyon, Jr., ed., 14th ed. 1918). Because "[e]very system of laws must necessarily be defective[,] cases must occur to which the antecedent rules cannot be applied without injustice, or to which they cannot be applied at all." Id. at 9.
45 See Act of Apr. 4, 1800, ch. 19, 2 Stat. 19 (repealed 1803).
46 See Act of Aug. 19, 1841, ch. 9, 5 Stat. 440 (repealed 1843).
47 See Act of July 1, 1898, ch. 541, 30 Stat. 544 (repealed 1978).
48 Id. (emphasis added).
49 SEC v. United States Realty & Improvement Co., 310 U.S. 434, 455 (1940) (citing Bankruptcy Act § 2).
50 Pepper v. Litton, 308 U.S. 295, 304 (1939).
51 Bankruptcy Reform Act of 1978, Pub. L. No. 95-598, § 241(a), 92 Stat. 2668, 2671 (repealed 1984).
52 458 U.S. 50, 87 (1982) (holding that § 1481 of Bankruptcy Reform Act of 1978 was unconstitutional because it impermissibly granted Article III judicial powers to non-Article III tribunal). See Celotex Corp. v. Edwards, 514 U.S. 300, 320 (1995) (Stevens, J., dissenting) (noting that § 1481 was found to be unconstitutional in Marathon primarily because it gave bankruptcy judges broad powers reserved for Article III judges without making them Article III judges, specifically by denying life tenure and salary protection); Commodity Futures Trading Commission v. Schor, 478 U.S. 833, 838-39 (1986) (maintaining that Marathon found § 1481 unconstitutional because it allowed non-Article III judges to adjudicate contract claim arising under state law).
53 Pub. L. No. 98-353 § 122, 98 Stat. 333, 346 (1984).
54 See Kelley v. Nodine (In re Salem Mortgage Co.), 783 F.2d 626, 628 nn.3-4 (6th Cir. 1986) (outlining various revisions to Bankruptcy Reform Act of 1978 made in 1984); Helm v. Helm (In re Helm), 48 B.R. 227, 228 & n.2 (Bankr. W.D. Ky. 1985) (discussing 1984 revisions to § 402 of Bankruptcy Reform Act); See also 1 COLLIER ON BANKRUPTCY 3.01[2][b][i], at 3-7 (Lawrence P. King et al. eds., 15th ed. rev. 1997) (discussing Marathon).
55 28 U.S.C. § 1334(a) (1994).
56 28 U.S.C. § 1334(b) (1994).
57 Section 157(a) provides:
Each district court may provide that any or all cases under title 11 and any or all proceedings arising under title 11 or arising in or related to a case under title 11 shall be referred to the bankruptcy judges for the district.
28 U.S.C. § 157(a) (1994). See Parklane Hosiery Co. v. Parklane/Atlanta Venture (In re Parklane/Atlanta Joint Venture), 927 F.2d 532, 534 n.1 (11th Cir. 1991) (asserting that 1984 revisions to 28 U.S.C. § 157 give district court discretionary authority to refer bankruptcy cases to bankruptcy courts and to withdraw that authority for cause shown); Land-O-Sun Dairies, Inc. v. Florida Supermarkets, Inc. (In re Finevest Foods, Inc.), 143 B.R. 964, 966 (Bankr. M.D. Fla. 1992) (noting that new version of § 157(a) empowers district court to refer bankruptcy matters to bankruptcy courts, but does not require them to do so).
58 Section 151 states:
In each judicial district, the bankruptcy judges in regular active service shall constitute a unit of the district court to be known as the bankruptcy court for that district. Each bankruptcy judge, as a judicial officer of the district court, may exercise the authority conferred under this chapter with respect to any action, suit, or proceeding and may preside alone and hold a regular or special session of the court, except as otherwise provided by law or by rule or order of the district court.
28 U.S.C. § 151 (1994). See In re Finevest Foods, Inc., 143 B.R. at 967 (noting that under revised § 151, power of bankruptcy court is specifically subject to rules or orders of district court).
59 See Miller v. Mayer (In re Miller), 81 B.R. 669, 676 (Bankr. M.D. Fla. 1988) (holding that bankruptcy court has "long recognized" inherent equitable power, at least to punish for contempt, and that this inherent power is not affected by Marathon or 1984 revisions); cf. Plastiras v. Idell (In re Sequoia Auto Brokers, Ltd.), 827 F.2d 1281, 1288 (9th Cir. 1987) (maintaining that 1984 revisions abrogated bankruptcy courts equitable contempt powers). One other statute deserves passing mention at this point. The All Writs Statute, 28 U.S.C. § 1651 (1994), provides that federal courts may issue "all writs necessary or appropriate in aid of their respective jurisdictions and agreeable to the usage of principles of law." Id. § 1651(a). The All Writs Statute enables courts to address situations for which no specific process has been provided by statute. It is not an independent source of jurisdiction, but rather it grants the court's flexibility to issue orders that preserve and protect their jurisdiction. The All Writs Statute was expressly made applicable to bankruptcy courts, but that applicability was later withdrawn as unnecessary in 1984 due to the enactment of § 105(a) of the Bankruptcy Code, discussed infra Section V, which empowers bankruptcy courts using similar language.
60 U.S. CONST. art. III, § 2, cl. 1.
61 See CHARLES ALAN WRIGHT, LAW OF FEDERAL COURTS § 1 (5th ed. 1994) (noting that under Judiciary Act of 1789 Congress exercised its power to create inferior courts by setting up district courts of original jurisdiction for each state and three appellate courts with both original and appellate jurisdiction); See also U.S. CONST. art. III, § 1 (granting Congress discretionary authority to establish inferior courts); Glidden Co. v. Zdanok, 370 U.S. 530, 551, reh'g denied, 371 U.S. 854 (1962) (asserting that because Congress' power to establish inferior federal courts is discretionary, they also have power to revoke authority of such courts).
62 307 U.S. 161 (1939).
63 Id. at 164-65. See Michaelson v. United States, 266 U.S. 42, 65-67 (1924) (holding that Congress may alter inherent equitable contempt powers of inferior courts by statute); Purcell v. Summers, 145 F.2d 979, 990-91 (4th Cir. 1944) (maintaining that Sprague dictates that federal courts are endowed with same equitable powers as English courts, and that these powers cannot be limited by state legislation).
64 However, as in Grupo Mexicano, the Court has limited the development of equitable remedies in other cases. See e.g., , Butner v. United States, 440 U.S. 48, 56 (1979) (refusing to adopt uniform federal rule regarding property rights on basis of "undefined considerations of equity").
65 28 U.S.C. § 1331 (1994).
66 The merger occurred in 1938 with the implementation of the Federal Rules of Civil Procedure. See FED. R. CIV. P. 1 ("These rules govern the procedure in the United States district courts in all suits of a civil nature whether cognizable as cases at law or in equity . . . ."); See also WRIGHT, supra note 61, §§ 61, 67 (noting that separation of law and equity created constant difficulties for courts that eventually led to merger of both, creating system under which court may give litigant whatever relief it finds to be fair and just).
67 28 U.S.C. § 1334 (1994).
68 See discussion infra Section V (discussing Bankruptcy Code § 105 in greater detail).
69 Alliance Bond Fund, Inc. v. Grupo Mexicano de DeSarrollo, S.A., 143 F.3d 688 (2d Cir. 1998), rev'd and remanded, 527 U.S. 308 (1999).
70 Grupo Mexicano de DeSarrollo, S.A. v. Alliance Bond Fund, Inc., 527 U.S. 308, 322 (1999). See generally Raymond M. Kethledge, U.S. Supreme Court Review: October 1998 Term, 78 Mich. B.J. 1314, 1314 (1999) (noting that equity jurisdiction of district courts is limited to equity jurisdiction exercised by English courts in 1789).
71 Grupo Mexicano , 527 U.S. at 332 . See also Gordon v. Washington, 295 U.S. 30, 36 (1935) (stating that suits in equity are bound by principles applied by English Court of Chancery before 1789).
72 1 COMMENTARIES ON EQUITY JURISPRUDENCE § 19, at 21.
73 Grupo Mexicano, 527 U.S. at 332. See e.g, Snyder v. Harris, 394 U.S. 332, 342, reh'g denied, 394 U.S. 1025 (1969) (stating that expansion of jurisdiction of courts is vested in Congress not courts); Votolato v. Freeman, 8 B.R. 766, 770 (D.N.H. 1981) (noting court's jurisdiction can only be enlarged by Congress).
74 Grupo Mexicano, 527 U.S. at 336 (Ginsburg, J., dissenting). See Charles Jordan Tabb, The History of the Bankruptcy Laws in the United States, 3 AM. BANKR. INST. L. REV. 5, 6 (1995) (stating that first United States' bankruptcy law "virtually copied the existing English law").
75 Grupo Mexicano, 527 U.S. at 338 (Ginsburg, J., dissenting) (citing Lynn M. LoPucki, The Death of Liability, 106 YALE L.J. 1, 32-38 (1996)). The dissent's reference to the LoPucki article is noteworthy, since LoPucki advances several radical reforms, including extending liability from property of the debtor to the debtor's shareholders, and affiliates, under an enterprise liability theory. See LoPucki, supra, at 54-55. Not only has Grupo Mexicano curtailed use of equity powers to attack "judgment proofing strategies," it also may have curtailed other creative uses of equity, such as third party injunctions, See , e.g., MacArthur Co. v. Johns-Manville Corp. (In re Johns-Manville Corp.), 837 F.2d 89, 90 (2d Cir.), cert. denied, 488 U.S. 868 (1988), and orders enjoining an equity committee from pursuing actions to compel shareholders meeting, See, e.g., Manville Corp. v. Equity Sec. Holders Comm., A.F. (In re Johns-Manville Corp.), 801 F.2d 60, 64 (2d Cir. 1986)). See Grupo Mexicano , 527 U.S. at 338.
76 It should be observed that Congress in certain instances, has delegated the development of certain remedies, such as equitable subordination, to the Courts. See 11 U.S.C. § 510(c) (granting courts power to use principles of equitable subordination). No such Congressional intent is indicated with respect to the doctrine of substantive consolidation.
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