United States: Grupo Mexicano And The Death Of Substantive Consolidation ~ Part II

In light of Grupo Mexicano , in order for a federal district court (or a bankruptcy court acting as a judicial unit of the district court) to exercise the equitable remedy of substantive consolidation, it must determine whether such remedy existed in 1789. In evaluating the availability of federal equitable remedies after Grupo Mexicano, it is assumed that the Supreme Court would look to the substance of the pre-1789 remedies available from a court of equity, and not the historic name given the remedy. In other words, the absence of the phrase "substantive consolidation" from the 18th Century case law is not dispositive of the continuing validity of the doctrine. Rather, the historical inquiry would be to find 18th Century precedent for an equitable remedy resulting in the assets and liabilities of one bankrupt being combined with those of another bankrupt for purposes of distribution to their combined creditors. Such precedent does not appear to exist.

The English bankruptcy acts were the primary sources used for resolving bankruptcy matters, when the Constitution first authorized Congress to enact "Laws on the subject of Bankruptcies." ⁷⁷ Commissioners appointed by the Lord Chancellor of England made the initial adjudications in a majority of the bankruptcy issues in England. These "bankruptcy commissioners" were not judges. When they adjudicated bankruptcy related matters, the adjudication was not considered a "Case" in law or "Case" in equity. "A bankruptcy matter did not become a 'Case' in law or equity until one of the parties in the initial bankruptcy proceeding sought review of the initial bankruptcy adjudication by a law or equity court." ⁷⁸

When the United States Constitution was adopted, England had a number of acts concerned with bankruptcy. These acts included the 1570 Statute of 13 Elizabeth ⁷⁹, the 1604 Statute of 1 James ⁸⁰, the 1623 Statute of 21 James ⁸¹, the 1705 Statute of Anne ⁸², and the 1732 Statute of 5 George II ⁸³, along with a myriad of extensions and amendments ⁸⁴.

Under these English bankruptcy acts, a bankruptcy case began when creditors filed a petition with the Lord Chancellor alleging that an individual who was a "merchant" had committed an "act of bankruptcy." As a matter of course, the Lord Chancellor issued against the alleged bankrupt a "Commission of Bankrupt." The commission named five commissioners from among a list of standing bankruptcy commissioners, who were lawyers, to conduct the proceedings. The five commissioners, or a quorum of three, determined almost all of the issues arising in the bankruptcy proceeding ⁸⁵.

The first Congress enacted the Judiciary Act of 1789 ⁸⁶. It created two sets of inferior federal courts, a district court for each state, and three circuit courts. It allocated some of the "judicial Power" authorized by section 2 of Article III to the district and circuit courts ⁸⁷. In 1800 the Sixth Congress enacted the first federal bankruptcy law ⁸⁸. This law followed the English bankruptcy acts in substance and procedure. It provided for a petition by creditors against a merchant.

It is doubtful that the 18th Century Lord Chancellor exercised an equitable power to combine the assets and liabilities of one merchant with another for purposes of distributions to their combined creditors. Traditional Anglo-American corporation law rests on the principle that each corporation is a separate legal unit with its own rights and responsibilities separate and distinct from those of its shareholders. This was the law familiar to Lord Coke and later to Blackstone ⁸⁹. With the emergence of limited liability in the third decade of the nineteenth century in the United States and several decades later in England ⁹⁰, the concept that the corporation was a separate entity was strongly reinforced. The 1897 decision of the House of Lords in Salomon v. Salomon & Co ⁹¹ has shaped the English law to this day. In the Salomon case, a leather and boot merchant transferred his business to a corporation he organized and in which he and members of his family were the sole shareholders. As consideration for the business, Salomon took 20,000 £1 shares and secured debentures aggregating £10,000. The corporation failed and the House of Lords upheld Salomon's right to enforce the secured debentures in priority to the unsecured creditors. The House of Lords emphasized the separate entity of the corporation, distinct from the shareholders.

Another reason it is doubtful a substantive consolidation remedy type existed in 1789, is the fact that corporate law had not yet permitted the use of multi-tiered corporate enterprises. The late Professor Robinson's study of the early formation of holding companies indicates that it was not until 1832 that the first corporation was given authority to hold stock in another corporation, and, until the last years of the nineteenth century, such stock holdings were extremely rare ⁹². Until the practice of multi-tiered corporate enterprises became commonplace, there was little need for a doctrine of substantive consolidation.

Grupo Mexicano's requirement that federal courts look back to 18th Century English legal practice to determine whether the equitable remedy may be granted is not without precedent in the American legal tradition. It has long been established that the constitutional right to a trial by jury is determined by reference to 18th Century English practice.

Reliance upon historical sources to determine the availability of a right in the 18th Century presents litigants in the 21st Century with practical problems in discerning the past practice. The Supreme Court encountered this problem in deciding Granfinanciera, S.A. v. Nordberg ⁹³. In this case, the trustee sued Granfinanciera, S.A. and another entity to recover a fraudulent conveyance by the debtor. The defendant asserted a right to jury trial. The bankruptcy court denied the jury demand, holding that a fraudulent transfer suit was "equitable" in nature. The Supreme Court reversed and held that the defendant had a right to a jury trial. The Court , concluding that in England, before the adoption of the Seventh Amendment in 1791, actions to recover preferential or fraudulent conveyances were tried at law, the Court held that the defendant had a right to a jury trial ⁹⁴.

According to Granfinanciera, the method to be used to determine the right to jury trial is: "First, we compare the statutory action to 18th-century actions brought in the courts of England prior to the merger of law and equity. Second, we examine the remedy sought and determine whether it is legal or equitable in nature." ⁹⁵ The Court then noted that the historic actions of "trover" and "money had and received "were resorted to for recovery of preferential payments in 18th Century practice, and such suits were conducted before juries. While the Granfinanciera majority opinion notes that several authorities had reached a different conclusion, the Court held that a party may demand a jury in a fraudulent transfer suit, even though fraudulent transfer suits were occasionally triad in courts of equity.

In the absence of 18th Century English law precedent for an order of substantive consolidation, such equitable remedy is not available. As observed in Section I of this article, the federal law remedy of substantive consolidation can be traced back to a series of legal opinions rendered in the 1940's and 1960's. It is not plausible that a similar remedy existed in 18th Century practice before the Chancellor. Under the Grupo Mexicano case, the federal courts are not authorized to predict what the Chancellor might have done if presented with the corporate structures routinely used in the 20th Century. Grupo Mexicano requires an 18th Century precedent before a federal court may fashion equitable remedies not authorized by statute.

It is anticipated that parties requesting the application of substantive consolidation may respond that the source of the power to grant such relief is not only the general equity jurisdiction of the federal courts, but also section 105 of the Bankruptcy Code. In fact, it is in section 105(a) that many courts presently find their grant of general equitable powers ⁹⁶. Section 105(a) which was included within the Bankruptcy Reform Act of 1978, states that:

[t]he court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title. No provision of this title providing for the raising of an issue by a party in interest shall be construed to preclude the court from, sua sponte, taking any action or making any determination necessary or appropriate to enforce or implement court orders or rules, or to prevent an abuse of process ⁹⁷.

While section 105 does not expressly refer to "equity" powers, the legislative history indicates that Congress understood that section 105 implemented the federal equity powers granted the district court and bankruptcy court:

Section 105 . . . grants the power to issue orders necessary or appropriate to carry out the provisions of title 11. The district court and the bankruptcy court as its adjunct have all the traditional injunctive powers of a court of equity ⁹⁸.

The predecessor to section 105, section 2a(15) of the prior Bankruptcy Act, provided that courts of bankruptcy could:

make such orders, issue such process, and enter such judgments in addition to those specifically provided for, as may be necessary for the enforcement of the provisions of this Act; Provided, however, that an injunction to restrain a court may be issued by the judge only ⁹⁹.

However, in general pre-1978 substantive consolidation case law does not cite Section 2a(15) as the source of equity power from which to grant the remedy of substantive consolidation. For example, the Continental Vending case, decided in 1975, relies upon section 2(a)(2) of the 1898 Act. Section 2(a)(2) of the 1898 Act expressly granted equity jurisdiction to courts of bankruptcy. This jurisdiction statute, along with the balance of the 1898 Act, has been repealed.

Post-1978 courts have often cited section 2(a)(15)'s successor-section 105-as the source of equity jurisdiction ¹⁰⁰. However, COLLIER ON BANKRUPTCY observes that the initial source of the power to grant an order of substantive consolidation was the "general equitable powers" of the federal courts. COLLIER appears to consider the recent reliance by courts on section 105 as unnecessary but "harmless."

The source of that power [to order substantive consolidation], however, was never settled. Although some courts have looked to the general equitable powers of the bankruptcy court or the Bankruptcy Rules, recently courts have focused on section 105's language to justify the tests and standards which have been previously developed. This usage is probably harmless. The power to consolidate would seem to be inherent in the equitable task of the bankruptcy court. Citations to section 105 for such general equitable powers are thus helpful, but in no way did section 105 add anything to the law of substantive consolidation; at most, it confirmed what powers the court already had ¹⁰¹.

Section 105(a) adds nothing to the "general equitable powers" upon which the doctrine of substantive consolidation is premised. Such "general equitable powers" are the same federal equitable powers limited by the U.S. Supreme Court in Grupo Mexicano. Thus, reliance upon section 105(a) as the source of the power to grant consolidation may no longer be "harmless" error. This is because the text of section 105(a) could be misinterpreted to permit a district court (or its bankruptcy court unit) to exercise equitable remedies which are beyond those permitted by Grupo Mexicano. The argument would be that section 105(a) constitutes an independent grant of equitable power that is not subject to the Grupo Mexicano limitation on the development of post-1789 equitable remedies.

It is plausible that section 105(a) constitutes a direct, fresh, grant of supplemental power to the bankruptcy courts, independent of the judicial power granted to the federal courts under title 28. Under this interpretation, section 105(a) does not re-state equitable powers of federal courts granted under the Judiciary Act of 1789 or otherwise. Perhaps it could be argued that through section 105(a), Congress separately delegated to bankruptcy courts an open-ended authority to formulate equitable remedies. Under this interpretation, bankruptcy courts are free to make remedies as deemed "necessary or appropriate" to carry out the goals of bankruptcy law.

One problem with this argument, is that the text of section 105(a) does not authorize the court to issue any order which is "necessary or appropriate" to carry out the goals of bankruptcy law, rather it requires the order to carry out the "provisions of this title." The statute appears to require the court look back to a specific provision of the Bankruptcy Court which is to be fulfilled by the section 105(a) order. Another problem with the "open ended" interpretation is that it is unconstitutional, delegating what is essentially a legislative function to the courts. The judicial branch should neither be assigned nor allowed tasks that are delegated to another branch of the federal government ¹⁰².

Generally, our courts have rejected the "open-ended" interpretation of section 105, and thus require that the section 105 relief implement or fulfill a specific provision of the Bankruptcy Code. Our courts have held section 105 powers "must and can only be exercised within the confines of the Bankruptcy Code" ¹⁰³ and "cannot be used in a manner inconsistent with the commands of the Bankruptcy Code." ¹⁰⁴ That is, an equitable remedy derived from section 105 must be consistent with the Bankruptcy Code and cannot alter a provision of the Code ¹⁰⁵. A court may exercise its equitable power arising under section 105 only as a means to fulfill some specific Code provision ¹⁰⁶. As stated by the Seventh Circuit in the Fesco Plastics case, "when a specific Code section addresses an issue, a court may not employ its equitable powers to achieve a result not contemplated by the Code." ¹⁰⁷ The Supreme Court recently stated: "Bankruptcy courts are not authorized in the name of equity to make wholesale substitution of underlying law controlling the validity of creditor's entitlements, but are limited to what the Bankruptcy Code itself provides." ¹⁰⁸

The sole reference to "consolidation" in the Bankruptcy Code (outside the context of a joint case filed by a husband and wife ¹⁰⁹), arises in the listing of provisions which may be included in a chapter 11 plan. The issue presented is whether use of section 105(a) is needed to fulfill such section of chapter 11 of the Bankruptcy Code.

Bankruptcy Code section 1123(a)(5)(C) states that a chapter 11 plan shall provide adequate means for the plan's implementation, such as "merger or consolidation of the debtor with one or more persons." ¹¹⁰ However, this statute does not authorize a bankruptcy judge to order the remedy of substantive consolidation, absent the proponent of such plan first "scaling the hurdles" of chapter 11 ¹¹¹. The Bankruptcy Code requires that before a court confirms a plan, including a plan that provides for consolidation, the court must find the impaired classes have accepted the plan by the requisite majorities ¹¹². The powers granted under section 105 are not necessary to implement a substantive consolidation if the parties to a chapter 11 plan have consented by the requisite majorities. It is section 1123(a)(5)(c)-not general federal court equity powers-that permits the consolidation.

The text of section 1123(a)(5)(C) provides no authority for the exercise of the remedy of substantive consolidation independent of the confirmation of the plan. A court may not impose the equitable remedy of substantive consolidation pursuant to a plan unless (i) classes of impaired creditors have accepted the plan's proposed consolidation, or (ii) the "best interest test" and "absolute priority rule" protection granted dissenting creditors have been met by the plan proponent ¹¹³. Section 105 cannot be used to expand the use of section 1123(a)(5)(C) outside the context of a chapter 11 plan since "when a specific Code section addresses an issue, a court may not employ its equitable powers to achieve a result not contemplated by the Code." ¹¹⁴

In sum, section 105(a) of the Bankruptcy Code does not grant bankruptcy courts an independent equitable power to order substantive consolidation. Section 105 "does not authorize the bankruptcy courts to create substantive rights that are otherwise unavailable under applicable law," ¹¹⁵ nor does it allow bankruptcy courts to act as "roving commission[s] to do equity." ¹¹⁶ The bankruptcy court, as a unit of the district court, lacks authority to fashion equitable remedies greater than those which may be exercised by a federal district court. The bankruptcy court, as a unit of the district court, is subject to the limitations imposed by Grupo Mexicano ¹¹⁷.

Resort to equitable remedies may appear to be a reasonable approach to the difficult problem of collecting debts. Frequently, it may appear reasonable to enjoin an alleged debtor from conveying assets where the creditor faces the risk of irreparable injury. Likewise, it may seem reasonable under certain facts and circumstances to permit a creditor of one entity to have recourse to the assets of an affiliated entity under the doctrine of substantive consolidation. The law of many states recognizes similar remedies, such as pre-judgment injunctive and "alter-ego" relief. Prior to Grupo Mexicano, it was plausible that the federal equity power was available to create such remedies in the absence of state law. However, in light of Grupo Mexicano , the development of new federal equitable remedies has been curtailed. As a result of Grupo Mexicano, the merits of new remedies for creditors should be a matter of debate and decision in legislatures and Congress ¹¹⁸.

The remedy of substantive consolidation was fashioned by our federal circuit courts during the 20th Century. The courts that established the doctrine relied upon an implicit assumption that the federal equity power could evolve as needed to meet the challenges of modern business organizations. In In re Vecco Construction Industries, Inc.¹¹⁹, a bankruptcy court observed that the utilization of substantive consolidation was a judicial response to the recently encountered phenomena of multi-tiered corporate groups:

Due to the organizational make-up evidenced by the now common-place multi-tiered corporations in existence today, substantive consolidation of a parent corporation and its subsidiaries has been increasingly utilized as a mechanism to deal with corporations coming within the purview of the Act. This relatively recent development has been given judicial effect without the benefit of statutory authority or approval by way of rule of procedure. Rather, courts which have allowed substantive consolidation have done so based upon equitable principles ¹²⁰.

The Vecco Construction court could not have known that 19 years later the U.S. Supreme Court wold freeze the development of equitable principles to their status in 1789. The equity power foundation upon which substantive consolidation is premised has been shattered under the rationale of Grupo Mexicano. Perhaps early in the 21st Century the doctrine of substantive consolidation will be pronounced a dead letter ¹²¹.

⁷⁷ U.S. CONST. art. I, § 8, cl. 4. See generally Tabb, supra note 74, at 6 (noting "framers of the United States Constitution had the English bankruptcy system in mind when they included the power to enact 'uniform laws on the subject of bankruptcies'")

⁷⁸ Thomas E. Plank, Why Bankruptcy Judges Need Not and Should Not Be Article III Judges, 72 AM. BANKR. L.J. 567, 573 (1998); See also Richard H. Fallon, Jr., Of Legislative Courts, Administrative Agencies, and Article III, 101 HARV. L. REV. 915 (1988) (stating that review by Article III judges of adjudications by non-Article III adjudicators satisfies requirements of Article III).

⁷⁹ 13 Eliz., ch. 7 (1570) (Eng.) (detailing first act to allow creditors to begin bankruptcy case against those, generally considered to be merchants, who committed acts of bankruptcy).

⁸⁰ 1 Jam., ch. 15 (1604) (Eng.) (amending Statute of 13 Elizabeth).

⁸¹ 21 Jam., ch. 19 (1623) (Eng.) (amending Statute of 13 Elizabeth and Statute of 1 James).

⁸² 4 Anne, ch. 17 (1705) (Eng.) (introducing concept of discharge for debtors).

⁸³ 5 Geo. 2, ch. 30 (1732) (Eng.) (revising 1705 Statute of Anne).

⁸⁴ See Plank, supra note 78, at 576 n.54 (providing list of English bankruptcy related laws); Tabb, supra note 74, at 10 n.30 (listing English bankruptcy related laws up to ratification of United States Constitution).

⁸⁵ Plank, supra note 78, at 576.

⁸⁶ Act of Sept. 24, 1789, ch. 20, 1 Stat. 73.

⁸⁷ See Id. §§ 9, 11, 1 Stat. at 76-79.

⁸⁸ Act of Apr. 4, 1800, ch. 19, 2 Stat. 19 (repealed 1803).

⁸⁹ See 3 FIRST PART OF THE INSTITUTE OF THE LAWS OF ENGLAND OR A COMMENTARY ON LITTLETON 6, 412 (1628); 2 Id. at 250a; Case of Sutton's Hospital, 10 Coke 23a, 77 Eng. Rep. 960, 970-71 (1612) (recognizing that principles of corporations are distinct); 1 WILLIAM BLACKSTONE, COMMENTARIES 469 (1st ed. 1765) (discussing aspects of sole corporations); 2 STEWART KYD, A TREATISE ON THE LAW OF CORPORATIONS 103 (1793) (focusing discussion on corporations).

⁹⁰ See Limited Liability Act, 1855, 18 &19 Vict., ch. 133; The Companies Act, 1862, 25 & 26 Vict., ch. 89.

⁹¹ 75 L.T.R. 426 (1897).

⁹² Edward V. Robinson, The Holding Corporation -I, 18 YALE REV. 390, 400-07 (1910). Further evidence that a doctrine of substantive consolidation did not exist prior to the 20th Century, is that in 1889, the Illinois Supreme Court declared that a corporation could not, as one of its incidental powers, hold stock in other corporations. People v. Chicago Gas Trust Co., 22 N.E. 798, 799-800 (Ill. 1889) (in the 19th Century, generally a corporation could not, as one of its incidental powers, hold stock in other corporation; thus it is unlikely that the substantive consolidation doctrine would evolve in such legal environment). By 1910, only thirteen states had passed statutes definitely authorizing corporations to hold stock in other companies. See Edward V. Robinson, The Holding Corporation -II, 19 YALE REV. 13, 29 (1910). Thus, it is not until the 20th Century that the remedy of substantive consolidation began to emerge in the context of multi-tiered corporate organizations.

⁹³ 492 U.S. 33 (1989).

⁹⁴ See Id. at 43.

⁹⁵ Id. at 42 (quoting Tull v. United States, 481 U.S. 412, 417-18 (1987)).

⁹⁶ See Louisiana Pub. Serv. Comm'n v. Cajun Elec. Power Coop. (In re Cajun Elec. Power Coop.), 185 F.3d 446, 452 n.9 (5th Cir. 1999) (stating that § 105(a) is "where bankruptcy courts find their general equitable powers"); FDIC v. Colonial Realty Co., 966 F.2d 57, 59 (2d Cir. 1992) ("Courts have consistently found the authority for substantive consolidation in the bankruptcy court's general equitable powers as set forth in 11 U.S.C. § 105."); In re Standard Brands Paint Co., 154 B.R. 563, 567 (Bankr. C.D. Cal. 1993) ("The caselaw often refers to § 105 of the Code (the catch-all section stating the court can issue orders necessary to carry out the provisions of the Code) as being the source of authority to substantively consolidate.").

⁹⁷ See 11 U.S.C. § 105(a) (1994).

⁹⁸ S. REP. NO. 95-989, at 51 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5837; H.R. REP. NO. 95-595, at 342, reprinted in 1978 U.S.C.C.A.N. 5963, 6298 (1977) (stating that bankruptcy courts have power of court of equity pursuant to All Writs Statute). Contemporaneously with enactment of § 105(a), Congress explicitly vested bankruptcy courts with the powers of a "court of equity" pursuant to 28 U.S.C. § 1481. However, this jurisdictional grant was later repealed in the Congressional response to the Marathon case. See supra note 55 and accompanying text.

⁹⁹ Act of July1, 1848, ch. 541, 30 Stat. 544.

¹⁰⁰ See , e.g., Union Sav. Bank v. Augie/Restivo Baking Co. (In re Augie/Restivo Baking Co.), 860 F.2d 515, 518 n.1 (2d Cir. 1988) ("Courts have found the power to consolidate substantively in the court's general equitable powers as set forth in 11 U.S.C. § 105"); In re Donut Queen, Ltd., 41 B.R. 706, 708-09 (Bankr. E.D.N.Y. 1984) (stating that power of court comes from § 105(a)); In re Richton Int'l Corp., 12 B.R. 555, 557 (Bankr. S.D.N.Y. 1981) (identifying authorization under § 105 for general equity jurisdiction of bankruptcy courts).

¹⁰¹ 2 COLLIER supra note 54, 105.04[2], at 105-62 to 105-63.

¹⁰² See Mistretta v. United States, 488 U.S. 361, 383 (1989) (observing that Judicial Branch should not be assigned tasks better suited for other branches); See also Robert F. Nagel, Separation of Powers and the Scope of Federal Equitable Remedies, 30 STAN. L. REV. 661, 667 (1978) ("Because the federal judiciary was never delegated any power other than the 'judicial Power,' the language of the 10th amendment strongly implies that the states are protected from the judicial exercise of legislative or executive powers."). Furthermore, the constitutional problem with the delegation of judicial powers directly to an Article I court was identified in Marathon. See supra note 52 and accompanying text.

¹⁰³ Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 206 (1988).

¹⁰⁴ In re Plaza de Diego Shopping Ctr., Inc., 911 F.2d 820, 830-31 (1st. Cir. 1990).

¹⁰⁵ See Feld v. Zale Corp. (In re Zale Corp.), 62 F.3d 746, 760 (5th Cir. 1995) (explaining how § 105 injunction exceeded authority of bankruptcy court because it acted to discharge debts of nondebtor); Landsing Diversified Properties-II v. First Nat'l Bank & Trust Co. of Tulsa (In re Western Real Estate Fund, Inc.), 922 F.2d 592, 601 (10th Cir. 1991) (pre-empting exercise of § 105 when inconsistent with other more specific Code provisions); Southern Ry. Co. v. Johnson Bronze Co., 758 F.2d 137, 141 (3d Cir. 1985) (holding that § 105 application does not authorize rights not otherwise available under applicable law).

¹⁰⁶ See In re Fesco Plastics Corp., 996 F.2d 152, 154 (7th Cir. 1993) (stating that court may exercise its equitable powers only for specific areas of Code); In re Morristown & Erie R.R. Co., 885 F.2d 98, 100 (3d Cir. 1989) (exercising equitable power under § 105 is valid as long as it is consistent with Bankruptcy Code).

¹⁰⁷ In reFesco Plastics Corp., 996 F.2d at 154.

¹⁰⁸ Raleigh v. Illinois Dep't of Revenue, 120 S. Ct. 1951, 1957 (2000). The Raleigh case concerned the burden of proof as between a bankruptcy trustee and the Illinois Department of Revenue. While the Court did not interpret § 105 in the Raleigh decision, its limitations on the exercise of equitable relief is consistent with the § 105 caselaw cited above.

¹⁰⁹ An individual debtor and spouse may file a "joint case" under § 302 of the Code. In such event, the court is given discretion to order the debtors' estates be consolidated. See 11 U.S.C. § 302(a) (1994) (outlining when joint case in bankruptcy may be filed). See e.g, Chan v. Austin Bank of Chicago (In re Chan), 113 B.R. 427, 428 (N.D. Ill. 1990) (discussing consolidation in bankruptcy and explaining that it should be decided on case by case analysis); In re Knobel, 167 B.R. 436, 439-41 (Bankr. W.D. Tex. 1994) (discussing joint filing of claims and substantive consolidation).

¹¹⁰ 11 U.S.C. § 1123(a)(5)(C) (1994).

¹¹¹ See Pension Benefit Guaranty Corp., Continental Air Lines, Inc. v. Braniff Airways, Inc. (In re Braniff Airways, Inc.), 700 F.2d 935, 940 (5th Cir. 1983) (explaining that before reorganization plan may be passed parties and courts must satisfy requirements set forth in § 1129); See alsoIn re Gillette Assoc., Ltd., 101 B.R. 866, 872 (Bankr. N.D. Ohio 1989) ("To qualify as confirmable, a plan must satisfy all the requirements of 11 U.S.C. Sec. 1129."); In re Trail's End Lodge, Inc., 54 B.R. 898, 902-03 (Bankr. D. Vt. 1985) (holding that court has duty to determine whether reorganization plan has met requirements of Code prior to confirmation and that burden of proof is on proponent of plan).

¹¹² See 11 U.S.C. § 1129(a)(8) (1994) (outlining one requirement necessary to pass reorganization plan); 11 U.S.C. § 1126(c) (1994) (setting forth requisite majorities necessary to affirm reorganization plan); See also In re Fur Creations by Varriale, Ltd, 188 B.R. 754, 758 (Bankr. S.D.N.Y. 1995) (explaining that reorganization plan may be affirmed by affirmative vote of impaired classes).

¹¹³ See 11 U.S.C. § 1129(a)(7) (1994) (setting forth "best interest test" utilized to determine if plan should be confirmed); 11 U.S.C. § 1129(a)(8) (1994) (setting forth requirement of vote of impaired creditors in reorganization); 11 U.S.C. § 1129(b) (1994) (outlining "cramdown" alternative to § 1129(a)(8) if debtor cannot meet required voting which requires debtor to meet "best interest test" as well as "absolute priority rule"). See generally Robert A. Sauro, Chapter 11 Confirmation: Increasing Judicial Discretion, 4 BANKR. DEV. J. 191, 192, 213-14 (1987) (discussing § 1129(b) and requirements which must be satisfied to confirm reorganization plan).

¹¹⁴ In re Fesco Plastics Corp., 996 F.2d 152, 154 (7th Cir. 1993) (holding that courts may not use equitable powers to accomplish any goal not intended by Code). See 11 U.S.C. § 105(a) (1994) (giving courts power to carry out provisions of Bankruptcy Code); Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 206 (1988) (declaring that "whatever equitable powers remain in the bankruptcy courts must and can only be exercised within the confines of the Bankruptcy Code."); In re A.H. Robins Co., 182 B.R. 128, 134 n.5 (Bankr. E.D. Va. 1995) (explaining that equitable provisions exercised by courts must be "strictly confined" within established boundaries set forth by Code); Back Bay Restorations Co. v. City of Boston (In re Back Bay Restorations, Inc.), 118 B.R. 166, 170 (Bankr. D. Mass. 1990) (interpreting § 105 to help courts in carrying out law by limiting them to powers set forth in Code).

¹¹⁵ Southmark Corp. v. Grosz (In re Southmark Corp.), 49 F.3d 1111, 1116 (5th Cir. 1995). See , e.g., Bundy v. Donovan (In re Donovan), 183 B.R. 700, 702 (Bankr. W.D. Pa. 1995) (interpreting § 105 and finding that it restricts right of court to create substantive rights not given to them); Phar-Mor, Inc. v. General Elec. Capital Corp. (In re Phar-Mor, Inc. Sec. Litig.), 166 B.R. 57, 61 (W.D. Pa. 1994) (analyzing restriction on courts prohibiting them from creating substantive rights in favor of debtors).

¹¹⁶ In reSouthmark Corp., 49 F.3d at 1116 (quoting United States v. Sutton, 786 F.2d 1305, 1308 (5th Cir. 1986)).

¹¹⁷ See In re Dow Corning Corp., 244 B.R. 721, 744 (Bankr. E.D. Mich. 1999) (holding that plan's injunction against third party suits could not be enforced against non-consenting creditors); Id. (noting that "the ground rules laid down by Grupo Mexicano " limits the bankruptcy court's discretion to fashion the requested remedy).

¹¹⁸ To be sure, there are reasonable policy arguments, both pro and con, concerning the merits of the remedy of substantive consolidation. See Jonathan M. Landers, A Unified Approach to Parent, SubsIdiary, and Affiliate Questions in Bankruptcy, 42 U. CHI. L. REV. 589, 628-33 (1975) (setting forth policy arguments in favor of substantive consolidation). But See Richard A. Posner, The Rights of Creditors of Affiliated Corporations, 43 U. CHI. L. REV. 499, 524-26 (1976) (presenting counter-arguments to Landers, 42 U. CHI. L. REV. 589). However, in light of Grupo Mexicano , the merits of the doctrine should be resolved by legislatures and Congress, rather than the present sui generis approach developed by the courts. In 1999 legislation was introduced in Congress which would have eliminated the equitable discretion of a bankruptcy court to substantively consolidate assets which were transferred to a properly constituted entity in connection with a securitization. The holding in Grupo Mexicano appears to eliminate the need for such legislation. If Grupo Mexicano is applied beyond the injunction context, post-1789 equitable remedies are not available, except to the extent Congress grants a bankruptcy court the discretion to exercise the remedy, on such terms as Congress may establish.

¹¹⁹ 4 B.R. 407 (Bankr. E.D. Va. 1980).

¹²⁰ Id. At 409.

¹²¹ Obviously, the arguments presented herein have not been tested in the federal courts as of the time of publication. The author does not expect that rating agencies will curtail their appetite for legal opinions on this subject until these contentions are resolved by at least several circuit courts. Until this occurs, parties to bankruptcy cases, and parties to structure finance transactions, will remain subject to the existing legal precedents. Until then, one is reminded of the precarious position of Galileo, who, when rebuffed by the temporal authority, muttered, "Eppur si muove." ("And yet it moves").

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.