IN RE CONSUMERS IGA THRIFTWAY, INC.

Full title: IN RE: CONSUMERS IGA THRIFTWAY, INC., an Arkansas Corporation, MARVIN'S…

Court: United States Bankruptcy Court, E.D. Oklahoma

Date published: Sep 2, 2004

Case Nos. 04-71577, 04-71578, 04-71579, 04-71580, 04-71581, 04-71582, 04-71583, 04-71585, Jointly Administered Under Case No. 04-71577 (Bankr. E.D. Okla. Sep. 2, 2004)

Opinion

Case Nos. 04-71577, 04-71578, 04-71579, 04-71580, 04-71581, 04-71582, 04-71583, 04-71585, Jointly Administered Under Case No. 04-71577.

September 2, 2004.

ORDER

TOM CORNISH, Bankruptcy Judge

On the 19^th and 30^th days of August, 2004, the Debtors' Motion for Order of Substantive Consolidation(Docket Entry #243); Objection of CS Acquisitions, LLC to Debtors' Motion for Order of Substantive Consolidation (Docket Entry #300); Objection to Motion for Substantive Consolidation, filed by Fleming Companies, Inc. (Docket Entry #310); Limited Objection to Motion for Substantive Consolidation, filed by Martinous Produce Company, Inc. (Docket Entry #314); and Comment Regarding Debtors' Motion for Substantive Consolidation, filed by Associated Wholesale Grocers, Inc. and AWG Acquisition, LLC (Docket Entry #353) came on for evidentiary hearing. Appearances were entered by Sam Bratton, Attorney for Debtors; Mark Benedict and Neal Tomlins, Attorneys for Associated Wholesale Grocers ("AWG"); Gary Bryant and Sarah Hall, Attorneys for CS Acquisitions, LLC ("CS"); Steven Bugg, Attorney for Fleming Companies, Inc. ("Fleming"); Jackie Hill, Attorney for Oklahoma Grocers Association ("OGA"); Jason Bramlett and Steve McCartin, Attorneys for the Official Committee for Unsecured Creditors ("Committee"); Amy Wilbourn, Attorney for Arvest Bank, Fayetteville ("Arvest"); John Richer, Attorney for Martinous Produce Co., Inc. ("Martinous") and Benenson Capital Company; Terry M. Thomas, Attorney for Harp's; Ron Wright, Attorney for National Bank of Sallisaw; and Paul Thomas, Attorney for the U.S. Trustee. After review, this Court does hereby enter the following findings and conclusions in conformity with Rule 7052, Fed.R.Bankr.P., in this core proceeding.

These above-referenced entities filed for bankruptcy relief on April 26, 2004. Since early June, 2004, the eight cases have been jointly administered. Collectively, the Debtors operate twenty-four (24) retail grocery stores in Oklahoma, Kansas and Arkansas. The Debtors are continuing the operations of the grocery stores as Debtors in Possession.

In the Motion, the Debtors state that they have the same officers, controlling persons, central management, and accounting personnel. The businesses have been operating as a common economic enterprise, and Debtors state that creditors and customers have relied on the credit worthiness of the Debtors' overall enterprise. Debtors state that accounts and funds have been commingled and expenses and costs historically have not been allocated to each grocery store. Debtors note that the formal requirements for maintenance of separate entities have been ignored, and that the financial affairs of the Debtors are "hopelessly intertwined." Even the expenses paid have been commingled.

CS objects, stating that the cases should not be substantively consolidated due to the potential harm in forcing creditors of one debtor to share equally with creditors of other debtors. CS argues that if this Court finds that the cases should be substantively consolidated, certain mechanisms should be put in place to protect the priority and interests of each secured creditor.

Fleming objects largely on the same basis, stating that substantive consolidation would be highly detrimental to some creditors. Martinous objects to the extent that substantive consolidation would impermissibly impair the Perishable Agricultural Commodities Act trust claims that Martinous alleges arose in its favor before the petition date. AWG does not support nor object to substantive consolidation, but does note that substantive consolidation would not cure the adequate protection problem caused by the Debtors' commingling of funds.

Mr. Paul Thomas stated at the August 19, 2004, hearing that the U.S. Trustee supports substantive consolidation. Mr. Thomas noted that substantive consolidation would greatly simplify certain procedures in these cases.

The equitable powers of a bankruptcy court enable it to order substantive consolidation of two or more bankruptcy estates. 11 U.S.C. § 105(a), In re Limited Gaming of America, Inc., 228 B.R. 275, 286 (Bankr. N.D. Okla. 1998). The result of substantive consolidation is a single bankruptcy estate.

In cases in which one or both of the consolidating entities are insolvent, substantive consolidation may well result in a significant change in the amount of distribution which creditors of either entity may expect to receive. Put another way, if a solvent debtor (who could pay all his creditors in full) is substantively consolidated with an insolvent debtor (who cannot make full payment to creditors), the effect of consolidation will be that the creditors of the formerly solvent debtor will receive less than full payment of their claims, while increasing the distribution to creditors of the insolvent debtor.

Limited Gaming, 228 B.R. at 286.

The creditors cite to a Tenth Circuit Court of Appeals case, Matter of Gulfco Inv. Corp., 593 F.2d 921 (10^th Cir. 1979), in support of their objections. In the Gulfco case, the entities at issue had common control and significant accounting difficulties, as in the present case. In vacating the lower court's consolidation order, the Court of Appeals held that substantive consolidation cannot be used to defeat the security interest of a secured creditor, and noted that courts have been reluctant to consolidate entities because of possible unfairness to creditors. Id. at 928. In that case, however, the two entities at issue each paid their own salaries and expenses, had separate personnel and officers, and the Court noted that the assets were not hopelessly commingled. Id. at 929. The books, records and bank accounts of the two entities were completely separate. Id.

A review of the exhibits submitted by the Debtors reveal a compelling picture of a single enterprise made up of eight entities and twenty-four grocery stores. While the Debtors do file separate tax returns, the evidence shows consolidated billing statements from several vendors and creditors. Contracts between creditors and the Debtors as a whole and evidence of inter-company transfers also demonstrate how this operation ran as a single enterprise. The Debtors also have the same officers, central management and accounting personnel. There does appear to be a substantial identity between the Debtors, and substantive consolidation would benefit the Debtors, U.S. Trustee's office, and some creditors. This Court does recognize, however, that some creditors could potentially be harmed by substantive consolidation. With proper mechanisms in place to protect secured creditors, this Court finds that the benefits of substantive consolidation outweigh the potential harms. The Court will do everything in its power to insure that perfected security interests will be protected.

This Court finds that substantive consolidation is justified in this case with certain protections to be afforded the secured creditors. The fact that Mary Burke continues to provide technical and financial assistance to the Debtors bolsters this Court's decision to consolidate these enterprises. In an effort to preserve the interests of the secured creditors, the Debtors shall be required to keep separate profit centers in each store, and shall continue current reporting procedures.

IT IS THEREFORE ORDERED that the Debtors' Motion for Order of Substantive Consolidation is granted.