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Third Circuit Cuts Substantive Consolidation Risk

August 19, 2005

Lenders won a victory on August 15 when the Third Circuit limited the equitable remedy of substantive consolidation in the Owens Corning reorganization case. Reversing the district court, the court held that "affiliated [debtor and non-debtor] entities" could not be "substantively" consolidated on the facts of the case before it.  According to the court, the debtor and its allies sought substantive consolidation, a "last-resort remedy," in order to "deprive one group of creditors [i.e., the unsecured lenders] of their rights while providing a windfall to other creditors.