USA Law and Practice Contributed by: Bjorn Bjerke, Corey Reis and Joshua Kopel, A&O Shearman
Multi-Factor Analysis Under older practice, which still applies in some circuits, the courts may rely on a multi-factor analysis. Consequently, the risk of substantive consolidation is generally addressed by requir - ing the SPE and its credit to be separate from its affiliates based on factors that speak for sub - stantive consolidation identified in the case law. One list of such factors is collected in the Tenth Circuit opinion of Fish v East, 114 F2d 117 (10th Circuit 1940), as follows: • the parent corporation owns all or a majority of the capital stock of the subsidiary; • the parent and subsidiary corporations have common directors or officers; • the parent corporation finances the subsidi - ary; • the parent corporation subscribes to all the capital stock of the subsidiary or otherwise causes its incorporation; • the subsidiary had grossly inadequate capital; • the parent corporation pays the salaries or expenses or losses of the subsidiary; • the subsidiary has substantially no business except with the parent corporation, or no assets except those conveyed to it by the parent corporation; • in the papers of the parent corporation and in the statements of its officers, the subsidiary is referred to as such or as a department or division; • the directors or executives of the subsidiary do not act independently in the interest of the subsidiary, but take direction from the parent corporation; and • the formal legal requirements of the subsidi - ary as a separate and independent corpora - tion are not observed.
A second commonly cited list of such factors appears in the case of in re Vecco Constr Indus 4 BR 407, 410 (Bankr ED Va 1980), as follows: • the degree of difficulty in segregating and ascertaining individual assets and liabilities; • the presence or absence of consolidated financial statements; • the profitability of consolidation at a single physical location; • the commingling of assets and business func - tions; • the unity of interests and ownership between the various corporate entities; • the existence of parent or intercorporate guarantees or loans; and • the transfer of assets without formal obser- vance of corporate formalities. An additional factor, articulated by the Fourth Circuit Court of Appeals in Stone v Eacho, 127 F2d 284, 288 (4th Circuit 1942), has also been cited by a number of cases, namely whether “by... ignoring the separate corporate entity of the [subsidiaries] and consolidating the proceed - ings... with those of the parent corporation... all the creditors receive that equality of treatment which it is the purpose of the bankruptcy act to afford”. The presence or absence of some or all of these factors does not necessarily result in substantive consolidation. In fact, many of these elements are present in most bankruptcy cases involving holding company structures or affiliated com - panies, without thereby leading to substantive consolidation. Various courts have noted that some factors may be more important than oth - ers; in particular, the “consolidation of financial statements”, “difficulty of separating assets”, “commingling of assets” and “profitability to all creditors”.
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