April 27, 2019 Articles

Substantive Consolidation Whether You Like It or Not?

The lesson from the Ninth Circuit for creditors in jointly administered cases is that you should raise de facto substantive consolidation when objecting to plan confirmation, or the issue will be waived.

By Andrew M. Toft

In 2018, the Ninth Circuit issued its decision in JPMCC 2007-C1 Grasslawn Lodging LLC v. Transwest Resort Properties Inc. (In re Transwest Resort Properties Inc.) (Transwest), 881 F.3d 724 (9th Cir. 2018). In 2010, the Transwest debtors filed Chapter 11 petitions and the five cases were jointly administered but not substantively consolidated. The appellant was a lender holding claims under a secured operating loan and a secured mezzanine loan. The debtors under the operating loan were not the same as the debtors under the mezzanine loan. Indeed, the lender constituted the only creditor class for the mezzanine loan debtors. The lender was undersecured and it elected, pursuant to 11 U.S.C. ยง 1111(b)(2), to have its entire claim treated as secured.

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