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The Essential Resource for Today’s Busy Insolvency Professional
Financial Statements
By Mark P. Kronfeld, Vincent Indelicato and Chris Theodoridis1
The Murkiness of Corporate
Separateness in Chapter 11
T
he doctrine of corporate separateness is one of
the bedrock principles of American corporate
law and has long served as the default pre-
sumption where courts adjudicate matters involving
multiple legal entities.2
As a general rule, a corpora-
tion is not liable for the debts of another corporate
entity (even its parent, subsidiaries or affiliates).3
The principle of corporate separateness is gener-
ally only challenged when debtors encounter finan-
cial distress. Not surprisingly, the question of corpo-
rate separateness has emerged as a fertile source of
debate in many recent bankruptcy cases, but nothing
about chapter 11 alters the landscape; the default
presumption of corporate separateness continues
to persist in bankruptcy.4
While bankruptcy courts
routinely consolidate chapter 11 cases of affiliated
debtors for administrative purposes, joint admin-
istration does not in any way shatter the corporate
separateness of each debtor.5
A number of exceptions to this default presump-
tion, however, arise in the bankruptcy setting. For
example, affiliated debtors pledge their assets to
secure post-petition financing in most cases, regard-
less of which debtors need or use the proceeds, and
centralized cash-management systems frequently
allow each debtor to use affiliated debtors’ cash,
with intercompany claims only sometimes being
assessed or protected. Further, corporate entities
(typically affiliates) often, by contract, agree to be
liable for the debts of another entity by providing
a guaranty. Alternatively, specific statutes, such as
the Financial Institutions Reform, Recovery and
Enforcement Act (FIRREA) and the Employee
Retirement Income Security Act (ERISA), may give
rise to exceptions from corporate separateness.6
Perhaps the most far-reaching exception to
the doctrine of corporate separateness in chapter
11 lies in the ability of a bankruptcy court to sub-
stantively consolidate the assets and liabilities of
numerous distinct legal entities and treat them as if
they belong to one single entity.7
Some courts have
attempted to make the test for substantive consoli-
dation objective8
while other courts have weighed
benefits against burdens,9
creating confusion about
how a court will weigh different factors. Other
controversial exceptions to corporate separateness
include successor liability, control-person liability
and corporate veil-piercing.
Even in the absence of substantive consolidation
or other exceptions to corporate separateness, various
forms of relief granted in bankruptcy cases some-
times treat entities as if they have been substantively
consolidated. This article highlights four examples
in the bankruptcy context where the lines separating
corporate entities have arguably been blurred.
Section 1129(a)(10):
Per Plan or Per Debtor?
Under § 1129(a)(10) of the Bankruptcy Code,
if a class of claims is impaired under a plan, then
1 The authors thank Martin Bienenstock and Philip Abelson of Proskauer for their assis-
tance in connection with this article.
2 See, e.g., On-Line Servs. Ltd. v. Bradley & Riley PC (In re Internet Navigator Inc.), 301
B.R. 1, 6 (B.A.P. 8th Cir. 2003) (“[T]his Court is unwilling on this record to capsize the
fundamental bulwark of corporate law that the corporate entity is separate and distinct
from its individual members.”).
3 See, e.g., United States v. Bestfoods, 524 U.S. 51, 61 (1998) (“It is a general principle of
corporate law deeply ‘ingrained in our economic and legal systems’ that a parent corpo-
ration ... is not liable for the acts of its subsidiaries.”).
4 See, e.g., AL Tech Specialty Steel Corp. v. Allegheny Int. Credit Corp., 104 F.3d 601,
608 (3d Cir. 1997) (in bankruptcy, absent certain exceptions, affiliated entities “must be
considered separate entities”).
5 See, e.g., Bunker v. Peyton (In re Bunker), 312 F.3d 145, 153 (4th Cir. 2002) (“Joint
administration does not affect the substantive rights of either the debtor or his or
her creditors.”).
6 See 12 U.S.C. § 1815(e)(1)(A) (FIRREA cross-guarantee provision imposing liability on any
bank owned by bank-holding company for losses caused by failure of sister bank); 29
U.S.C. § 1082(b)(2) (ERISA provision imposing joint and several liability on all members of
controlled group).
7 See FDIC v. Colonial Realty Co., 966 F.2d 57, 58 (2d Cir. 1992).
8 See, e.g., In re Owens Corning, 419 F.3d 195 (3d Cir. 2005); In re Augie/Restivo Baking
Co., 860 F.2d 515 (2d Cir. 1988).
9 See, e.g., Eastgroup Properties v. Southern Motel Assoc. Ltd., 935 F.2d 245 (11th
Cir. 1991).
Vincent Indelicato
Proskauer; New York
Mark P. Kronfeld
BlueMountain Capital
Management LLC
New York

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at least one noninsider impaired class must vote
to accept the plan. Although the Code is arguably
clear that each debtor’s plan must have at least
one impaired accepting class, some decisions have
raised the question of whether in a multi-debtor
case § 1129(a)(10) imposes a “per debtor” or “per
plan” requirement.
The courts in In re Tribune Co.10
and In re JER/
Jameson Mezz Borrower II LLC11
explicitly reject-
ed the joint plan or “per plan” approach and ruled
that the impaired accepting class requirement of
§ 1129(a)(10) applies to each individual debtor. In
Tribune, the court noted that the plan emphasized
the separateness of the debtors’ estates and did not
provide for substantive consolidation.12
The court
further noted that other sections of § 1129(a) clear-
ly include all debtors under a joint plan and that
§ 1129(a)(10) must be read consistently.13
Lastly,
the court observed that administrative convenience
is simply insufficient to “disturb the rights of
impaired classes of creditors of a debtor not meet-
ing confirmation standards.”14
By contrast, in In re Transwest Resort
Properties,15
the court confirmed a joint plan with
one impaired accepting class of creditors for only
one of the debtors under the plan, over the objec-
tion of the mezzanine lender. Although the mezza-
nine lender appealed, the district court dismissed the
appeal on equitable-mootness grounds, leaving the
§ 1129(a)‌(10) issue undecided.
Similarly, in In re Charter Communications,16
the
court adopted a “per plan” approach to § 1129(a)‌(10)
permitting use of one impaired accepting class for
one debtor to count as an impaired accepting class
for an affiliated debtor.17
The court reasoned that the
“evidence support[ed] a finding that the business
of Charter [was] managed by CCI on an integrated
basis, making it reasonable and administratively
convenient to propose a joint plan.”18
Charter settled
before an appellate court ruled.
The relevant inquiry in the context of
§ 1129(a)‌(10) jurisprudence focuses on whether bank-
ruptcy courts should respect the corporate separateness
of multiple debtors for the purposes of fulfilling plan-
confirmation requirements. As corporate separateness
is “the rule [and] not the exception,”19
corporate sep-
arateness should be respected barring an established
exception supported by evidence. Moreover, absent
substantive consolidation, permitting creditors of one
debtor entity to cram down creditors of an entirely
different debtor entity arguably causes an untenable
disenfranchisement of those aggrieved creditors and
does not encourage consensual global plans.
Bankruptcy-Remote SPVs
Within a corporate enterprise, special-pur-
pose vehicles (SPVs) are often created to be
insulated from the financial condition of the
remaining enterprise. SPVs are commonly struc-
tured to be “bankruptcy-remote” in an effort to
protect creditors from becoming entangled in a
bankruptcy case, but recent case law shows that
bankruptcy remoteness does not equate to being
bankruptcy-proof.
In Gen. Growth Props. Inc.,20
the debtors com-
prised a large commercial real estate enterprise.
Among the affiliated entities were numerous bank-
ruptcy-remote SPVs. The SPV lenders believed the
SPVs to be bankruptcy-proof because the SPVs’
independent boards of directors were picked by
the lenders, and those directors could not authorize
a bankruptcy filing without the lenders’ consent.
Immediately before the corporate enterprise filed
for bankruptcy, however, the debtors replaced the
SPVs’ independent directors with new directors
who then authorized the bankruptcy filings for the
SPVs without the lenders’ consent.
Although many of the SPVs did not need bank-
ruptcy relief, the court denied the lenders’ motion
to dismiss the bankruptcy cases of the SPVs, hold-
ing, among other things, that the interests of the
enterprise as a whole could be considered in deter-
mining whether to file individual SPVs. While
“[n]othing in [the court’s] opinion implie[d] that
the assets and liabilities of any of the [debtors]
could properly be substantively consolidated with
those of any other entity,”21
the court was clear
that individual chapter 11 cases are not to be
viewed in a black box simply because the debt-
ors are separate corporate entities. Whether future
cases will take the holding in General Growth one
step further remains to be seen.
Section 510(b)
When applied in the multi-debtor context,
§ 510(b) of the Bankruptcy Code can potentially
lead to outcomes that conflict with the notion of
corporate separateness. Section 510(b) provides:
For the purpose of distribution under this
title, a claim ... for damages arising from the
purchase or sale of a security of the debtor
or an affiliate of the debtor ... shall be sub-
ordinated to all claims or interests that are
senior to or equal to the claim or interest rep-
resented by such security, except that if such
security is common stock, such claim has the
same priority as common stock.22
In Lernout & Hauspie Speech Products NV
(L&H),23
the court held that the claim against the
subsidiary debtor arising from the purchase by the
10 464 B.R. 126 (Bankr. D. Del. 2011).
11 461 B.R. 293 (Bankr. D. Del. 2011).
12 In re Tribune Co., 464 B.R. at 182.
13 Id.
14 Id.
15 No. 10-37134 (Bankr. D. Ariz. Dec. 16, 2011).
16 419 B.R. 221 (Bankr. S.D.N.Y. 2009).
17 Id. at 226.
18 Id.
19 Anderson v. Abbott, 321 U.S. 349, 362 (1944).
20 409 B.R. 43 (Bankr. S.D.N.Y. 2009).
21 Id. at 69.
22 11 U.S.C. § 510(b).
23 264 B.R. 336 (Bankr. D. Del. 2001).
Chris Theodoridis
Proskauer; New York
Mark Kronfeld is a
managing director of
BlueMountain Capital
Management LLC in
New York. Vincent
Indelicato and Chris
Theodoridis are
associates in the
Business Solutions,
Governance,
Restructuring and
Bankruptcy Group
at Proskauer in
New York.

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claimant of the parent debtor’s equity securities must be
subordinated to general unsecured claimants in the subsid-
iary, but may be treated pari passu for distribution purposes
with other equity security-holders of the subsidiary, even
though the claimant never owned any of the subsidiary’s
equity. The court acknowledged the ambiguity in the lan-
guage of § 510(b) but relied on policy arguments, its inter-
pretation of legislative history and pre-Code case law.24
The ambiguity in § 510(b) arises from two phrases: “aris-
ing from the purchase or sale of a security of the debtor or an
affiliate of the debtor” and “represented by such a security.”
The key question is, against which debtor entity should the
subordinated claim be asserted? The language “such a secu-
rity” suggests that one should “follow the security” to assert
the subordinated claim against the same entity that issued the
underlying security. This was the argument advanced by the
debtor in L&H.25
However, the language “debtor or an affiliate” has been
interpreted by some, including the claimant in L&H, to
permit a claim subordinated under § 510(b) to be asserted
against one debtor entity even though the security giving
rise to the § 510(b) claim was issued by a different debtor
entity (albeit an affiliate).26
The L&H court ruled in favor
of the claimant.
A similar outcome was reached in VF Brands Inc.,27
in which the court appeared to take the position that
§ 510(b) mandates that subordinated claims held by a
subsidiary’s shareholders be treated on a par with the
claims of the parent’s shareholders. The court noted
that “[t]he language of section 510(b) applies equally to
claims arising from purchase of the stock of an affiliate,
including a subsidiary, of the debtor as it does to the pur-
chase of stock of the debtor itself.”28
Based on this interpretation, courts may interpret
§ 510(b) to allow subordinated claims against any debt-
or entity as long as the underlying security was issued by
one of that debtor’s affiliates. This broad interpretation of
§ 510(b) seems to treat separate debtor entities as inter-
changeable, which some may argue is inconsistent with the
principle of corporate separateness.
Multiple Claims Arising from a Transaction
The notion that different debtors may be liable for the
same obligation because of joint and several liability or
guarantees is not controversial. In such instances, all of
the creditor’s claims will generally be allowed in their full
amount subject to the qualification that the creditor may not
recover in the aggregate more than the full amount owed to
the creditor.29
But what happens when a single transaction triggers a
series of transfers, causing multiple claims by different
creditors to be asserted against a single debtor? In such
instances, commonly seen in the “double-dip bond” context,
multiple claims are typically allowed even when they arise
from a single originating transaction because the claims are
asserted by separate creditor entities.30
Yet recoveries from
multiple claims arising from a single transaction continue to
emerge as sources of dispute in recent high-profile chapter
11 cases, including Lehman Brothers, General Motors and
AbitibiBowater.
A common example is where a creditor possesses (1) a
direct claim against a debtor finance subsidiary based on the
subsidiary’s issuance of debt held by the creditor and (2) a
guaranty claim held by the same creditor against the sub-
sidiary’s parent, also a debtor entity, based on the parent’s
guaranty of the debt issued by the subsidiary. The same sub-
sidiary will often assert a separate claim against the parent
guarantor either because the subsidiary has loaned the pro-
ceeds of the debt issuance to the parent guarantor or because
the subsidiary was a Nova Scotia “Unlimited Liability
Company.”31
This incremental claim asserted by the subsid-
iary against the parent guarantor enhances recoveries of the
subsidiary’s creditors.
In cases similar to the aforementioned example, some
have argued that the guarantee claim held by the creditor
is duplicative of the intercompany claim asserted by the
subsidiary against the parent. Although courts have not yet
ruled directly on this issue, to conflate the two distinct claims
would arguably require the court to consider the concept of
corporate separateness mere form and not substance.
Conclusion
Despite the bedrock principle of corporate separateness,
modern bankruptcy jurisprudence demonstrates several irrec-
oncilable viewpoints that blur the lines separating corporate
entities. An awareness and understanding of where the lines
blur is critical to a creditor’s ability to assess and calculate
the risks inherent in the bankruptcy process. abi
Reprinted with permission from the ABI Journal, Vol. XXXII, No. 5,
June 2013.
The American Bankruptcy Institute is a multi-disciplinary, non-
partisan organization devoted to bankruptcy issues. ABI has
more than 13,000 members, representing all facets of the
insolvency field. For more information, visit ABI World at www.
abiworld.org.
24 Id. at 341-45.
25 Id. at 341.
26 Id.
27 275 B.R. 725, 726-27 (Bankr. D. Del. 2002).
28 Id. at 727.
29 See In re Gessin, 668 F.2d 1105, 1107 (9th Cir. 1982) (creditor’s claim against guarantor not reduced by
amount received from principal debtor).
30 See In re Delta Air Lines Inc., 608 F.3d 139, 149 (2d Cir. 2010) (ruling that where “claims arise under
agreements (1) between different parties, (2) addressing different events and (3) providing for different
remedies,” claims are allowed in full against debtor, and rejecting proposition that “a single loss can only
give rise to a single claim in bankruptcy”); see also Mark P. Kronfeld, “The Anatomy of a Double-Dip,”
XXXI ABI Journal 2, 24-25, 68-69, March 2012.
31 Companies Act, R.S.N.S., 1989, c. 81, s. 135.