Kramer Levin Helps Owens Corning Bank Group Overturn Consolidation Order Potentially Shifting More Than a Billion Dollars to Other Creditors

Kramer Levin, serving as co-counsel to Credit Suisse First Boston, as Agent for the bank lenders to Owens Corning, has helped achieve a significant victory in the Third Circuit Court of Appeals overturning an order in the Owens Corning bankruptcy that threatened to shift more than a billion dollars in value from the banks to other Owens Corning creditors. 

Owens Corning, a Fortune 500 company that has been in bankruptcy since 2000 due to its asbestos liability, had sought an order of "substantive consolidation," under which all the assets and liabilities of Owens Corning and its subsidiaries would have been pooled for purposes of distributions to creditors.  This move, which was supported by Owen Corning's tort claimants and bondholders, was opposed by Owens Corning's bank lenders, which had required guarantees giving them direct claims against the more than one billion dollars in assets held by the company's largest domestic subsidiaries.  Substantive consolidation would have wiped out this bargained-for advantage, giving other creditors of the parent company that had not bargained for direct claims against the guarantor subsidiaries access to their assets anyway.

Kramer Levin was lead counsel for the banks in a month-long trial of the consolidation issue held in April and May of 2003.  Decision of the issue was held up for several months by proceedings leading to the Third Circuit's recusal of the presiding district judge on conflict of interest grounds.  The new district judge on the case, the Hon. John P. Fullam, received post-trial briefing and eventually granted the substantive consolidation motion, finding that consolidation was necessary to avoid having to "untangle" certain intercompany claims and would advance resolution of the bankruptcy.

On appeal, Kramer Levin and co-counsel argued that the district judge applied a legally erroneous "liberal" standard under which substantive consolidation was improperly being used not to remedy corporate misconduct or hopeless commingling of assets, but merely as a weapon to shift value from one set of creditors to certain others.  In a potentially landmark decision issued August 15 and written by Judge Thomas L. Ambro, the Third Circuit agreed, holding that substantive consolidation is a "rare" remedy of "last resort" that can be imposed only where debtors disregarded corporate separateness so significantly that their creditors relied on the breakdown of entity borders and treated them as one legal entity or where assets and liabilities of related companies are so scrambled that separating them is prohibitive and hurts all creditors.  Applying that standard here, the court credited the banks' trial showing that they bargained for separate contract right against each of the Owens Corning guarantor subsidiaries, concluded that Owens Corning had generally observed corporate separateness, and held that mere accounting imperfections did not equate to "hopeless commingling" of assets.

Kenneth Eckstein, head of Kramer Levin's Corporate Restructuring and Bankruptcy department and lead counsel for the firm in representing the bank group, praised the Third Circuit's ruling as "in harmony with past decisions recognizing the limits of the consolidation doctrine" and as constituting "good news not just for the banks in this case but for the commercial markets generally, because it reaffirms lendors' ability to rely on the plain language they negotiate in their documents to establish rights against particular parties." 
 
Kramer Levin's team on the trial and briefing of the substantive consolidation issue in Owens Corning also included Ellen Nadler, Philip Kaufman, Jeff Trachtman, Gregory Horowitz, Gary Becker, Marjorie Sheldon, Joel Taylor, and Grace O'Hanlon.