Owens Corning substantive consolidation overturned by appeals court

By Caroline Salls

Pittsburgh, Aug. 16 - Owens Corning's use of substantive consolidation in its Chapter 11 case was overturned by the U.S. Court of Appeals for the Third Circuit, which called the legal maneuver "a ploy to deprive one group of creditors of their rights while providing a windfall to other creditors."

The company had obtained approval from the U.S. Bankruptcy Court for the District of Delaware in October 2004 to treat the parent and subsidiaries as a single unit. At the time, judge John Fullam described it as "a virtual necessity."

After the October ruling, Credit Suisse First Boston, the agent bank for the company's lenders group, appealed, saying the ruling was a big setback to the group of 43 banks, led by CSFB, which fought against consolidation in pressing their claim that their approximately $1.6 billion in loans to the parent company and its units had priority over the claims presented by the bondholders and other creditors.

"Should we approve this non-consensual arrangement, the plan process would proceed as though assets and liabilities of separate entities were merged, but in fact they remain separate with the twist that the guarantees to the banks are eliminated," the appeals court said in its ruling filed Tuesday with the U.S. Bankruptcy Court for the District of Delaware.

In 1997, Owens Corning negotiated a credit agreement expressly to limit the ways in which the company could deal with its subsidiaries, according to the appeals court ruling.

Under the credit agreement, Owens Corning's subsidiaries "agreed explicitly to maintain themselves as separate entities," to keep separate books and financial records and to prepare separate financial statements.

According to the ruling, in this case, substantive consolidation fails to lead to an equitable result, "communizing assets of affiliated companies to one survivor to feed all creditors of all companies."

In his October order allowing the substantive consolidation, bankruptcy court judge Fullam said there was no basis for a finding that, in extending credit, the banks relied on the subsidiaries being separate.

Fullam also said the consolidation would greatly simplify and expedite the case.

Owens Corning, a Toledo, Ohio, building materials company, filed for bankruptcy on Oct. 5, 2000. Its Chapter 11 case number is 00-3837.

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