Substantive consolidation is a procedure that can be implemented by a bankruptcy court to treat two or more debtors in bankruptcy as one entity by pooling the assets and claims of the entities, eliminating intercompany claims, and combining the creditors of the entities for purposes of voting and distribution on and under a Chapter 11 plan of reorganization. Because of the inherent issues involved in forcing creditors of one debtor to share with creditors of a potentially less solvent debtor, courts have held that requests for substantive consolidation should be carefully scrutinized. Recently, in a case styled In re Republic Airways Holdings, Case No. 17-CV-03442 (March 18), Judge J. Paul Oetken of the U.S. District Court for the Southern District of New York, sitting as a court of appeal, reviewed a decision of the bankruptcy court approving substantive consolidation a plan of reorganization proposed by a parent and subsidiary (the debtors) over the objection of a creditor who had entered into airplane leases with the subsidiary that were guaranteed by the parent.

Flying High With a Parent Guaranty

The creditors in the case, Well Fargo Bank Northwest, N.A., and ALF VI, Inc., referred to in the opinion collectively as Residco, held claims against Republic Airways Holdings, Inc. and its subsidiary, Shuttle America. Residco’s claims against the debtors arose from seven leases of commercial aircraft. After the debtors filed their bankruptcy cases, they moved to reject the leases, which triggered the leases’ liquidated damages provisions.

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