The Third Circuit Court of Appeals has dealt a major setback to Owens Corning Inc.’s plan to reorganize and emerge from nearly five years of bankruptcy.
The appeals panel overturned a district-court ruling that would have allowed the Toledo, Ohio-based company to consolidate its assets with those of three subsidiaries not in bankruptcy. The measure would have required all creditors of the parent company and its subsidiaries to seek recovery from the consolidated entity, according to TheDeal.com.
Credit Suisse First Boston, which led the appeal by a group of 43 banks, argued that their loans — issued before the company went bankrupt — were guaranteed by Owens Corning’s more financially healthy subsidiaries, reported The Legal Intelligencer. The ruling is a huge victory for the banks, which stand to recover nearly $2 billion, added the newspaper.
The debtor and creditors offered substantive consolidation “as a ploy to deprive one group of creditors of their rights while providing a windfall to other creditors,” the court reportedly stated in its opinion. “No principled, or even plausible, reason exists to undo [Owens Corning’s] and the banks’ arms-length negotiation and lending arrangement.”
“We are very disappointed, and respectfully disagree with the Third Circuit,” said J. Andrew Rahl of Anderson, Kill & Olick PC, who argued on behalf of Owens Corning’s bondholders and trade creditors, according to the Intelligencer. “The implications of this ruling, if it stands unmodified, make it far more difficult than it has been until now to achieve substantive consolidation in a major bankruptcy case. Had this ruling been out there two or three years ago, I don’t think either Enron Corp. or MCI’s bankruptcy plan could have been confirmed. I don’t think either of them could have met this standard.”
The court “got it just right with this decision,” Andrew R. Cardonick of Goldberg, Kohn, Bell, Black, Rosenbloom & Moritz Ltd., told the Intelligencer. He had filed an amicus brief in the case on behalf of the Commercial Financial Association in support of CSFB.
“It underscores the principle that a contract is a contract,” Cardonick reportedly added. “It upholds contract rights, while the district court’s decision would impact the availability of commercial credit.”