07/11/2011 – Plaintiff’s Memorandum of Law in Opposition to Shorenstein Company LLCs Motion to Dismiss filed in the Sunset Aviation, Inc. Adversary Proceedings by Shorenstein Company LLC before Judge Walsh in the District of Delaware. Plaintiff Alfred T. Giuliano, Chapter 7 Trustee, opposes the Defendant’s motion to dismiss a bankruptcy preference complaint seeking recovery of a single wire transfer made on December 2, 2008 in amount of $443,690.00 (the “Transfer”).   The Defendant’s argument– the Transfer was made by a co-debtor who did not file its petition until May 1, 2009.  The December 2 transfer date is outside of the preference period.   Although the co-debtor cases were substantively consolidated, the Substantive Consolidation Order was not retroactive to the earliest petition date – i.e. nunc pro tunc.  Plaintiff starts its opposition with the observation that the Third Circuit has not addressed the proper calculation of the preference period following the entry of a substantive consolidation order that is “silent” as to its effect on avoidance actions.  Registered users click here to see a copy of this brief.

The Plaintiff outlines the Court’s options as follows:

(1)  Adopt the positions of the Sixth Circuit, announced in First Nt’l Bank of Barnesville v. Rafoth (In re Baker &  Getty Fin. Serv., Inc.), 974 F.2d 712 (6th Cir. 1992).  This adoption would mean that “entry of the Substantive Consolidation Order conclusively established that the earliest petition filing date is the operative date by which the preference period is calculated without the need for a nunc pro tunc analysis.”

(2)  Should the Sixth Circuit approach not be acceptable, hold that Plaintiff may now request nunc pro tunc application of the Substantive Consolidation Order.  Plaintiff argues that the balancing of harms test articulated by the Drabkin v. Midland-Ross Corp. (In re Auto-Train Corp.), 810 F.2d 270 (D.C.Cir.1987) justifies nunc pro tunc relief.

The issue before the Court may not be as broad as framed by the Plaintiff.  The operative language of the order sounds only prospectively and limits the purposes of the substantive consolidation:

“Order Further ORDERED that the findings with respect to the substantive consolidation, consolidation for procedural purposes and joint administration of the Debtors herein are made solely with respect to the Debtors for the purposes of facilitating the orderly liquidation of the Debtors in these proceedings”.  [Emphasis Added]

The brief contains a substantial amount of trustee rhetoric.  For example, in its summary, the Plaintiff gives its legal arguments second billing.  Instead, the Plaintiff stresses the need for “equality of treatment of creditors” and other equitable concerns.

Using the date of the Debtors’ earliest filed case embraces the fundamental principle of equality of treatment of creditors, which principle underlies both the purposes of substantive consolidation and the preference statute. The purpose of substantive consolidation is to ensure the protection and equitable treatment of all creditors by treating related entities as a single entity where pre-petition their assets and liabilities were intertwined and treated the same. Likewise, the preference provisions of the Bankruptcy Code are designed to promote the prime bankruptcy policy of treating creditors equally and not favoring any one creditor over other similarly-situated creditors. It is illogical and unjust to allow substantive consolidation for the benefit of all creditors, while at the same time to not treat the Debtors’ creditors in substantially the same manner for preference recovery purposes. Yet, this is exactly what Defendant asks this Court to do. Defendant wants to enjoy the benefits afforded to all creditors resulting from the order for substantive consolidation, including receiving a distribution from the Debtors’ shared assets. Nevertheless, Defendant now objects to the corresponding burdens resulting from application of the substantive consolidation order; namely, being subject to an avoidance action.

Based on the schedules filed in each respective bankruptcy case, JetDirect Aviation, Inc. has no assets available for distribution, while the assets comprising the consolidated estate are provided by Sunset Aviation, Inc. and Regal Jets, LLC. Defendant is listed as holding an unsecured claim in the amount of $164,450.00 in JetDirect Aviation, Inc.’s schedules, but is not listed in the schedules for the two other Debtors.  Absent substantive consolidation, Defendant would not receive distribution on its scheduled claim.  However, Defendant stands to receive a distribution on its claim from the consolidated assets of the Debtors pursuant to the applicable effects of the substantive consolidation order, the motion for which Defendant did not timely object. Thus, Defendant seeks to maximize its distribution, but escape its preference liability, based upon inconsistent application of the substantive consolidation order. Such inequity is fundamentally at odds with the purposes of the Bankruptcy Code.