IN THE DISTRICT COURT OF THE VIRGIN ISLANDS
BANKRUPTCY DIVISION
ST. CROIX, VIRGIN ISLANDS
In re: ) Chapter 7
)
CARIBBEAN AUTO MART OF )
ST. CROIX, INC. ) Case No. 13-10003 (MFW)
)
)
Debtor. )
_____________________________ )
)
ANNELLE KNIGHT, ESTHER NEWTON, )
FITZROY WILLIAMS, PAULINE PETER, )
JANET RIVERA, RAMS AUTO REPAIR, )
DEREK CAMBRIDGE, ASHEEM CHARLES, )
MONIQUE XAVIER, MICHAEL FELIX, ) Adv. No. 18-01001 (MFW)
BERNARD HAMILTON, )
and LEON RICHARDSON, )
)
Plaintiffs, )
)
)
v. )
)
CARIBBEAN AUTO MART OF ST. CROIX, )
Inc., CAG INTERNATIONAL, INC., )
d/b/a CARIBBEAN AUTO GROUP, )
)
Defendant. ) Rel. Docs. 40, 58, 60
OPINION1
Before the Court is the Motion for Summary Judgment filed by
the Defendant, CAG International, Inc., d/b/a Caribbean Auto
Group (“CAG”). The dispute is whether CAG, the non-debtor parent
of Caribbean Auto Mart of St. Croix (CAMSTX) (the “Debtor”),
disregarded corporate entity separateness, pre-petition,
1 This Opinion constitutes the findings of fact and
conclusions of law of the Court pursuant to Rule 7052 of the
Federal Rules of Bankruptcy Procedure.
warranting substantive consolidation of CAG and the Debtor. The
Plaintiffs oppose the Motion.2 For the reasons stated below, the
Court will grant CAG’s Motion.
I. BACKGROUND
A. Factual History
On March 5, 2001, three individuals, William Lambert,
Charles Lambert, and Sydne Hilton (collectively, the “Initial
Shareholders”) incorporated the Debtor, a car dealership on St.
Croix, U.S. Virgin Islands, for the purpose of acquiring the
assets of an existing automobile dealership and leasing a
commercial facility upon which to operate a General Motors
franchise. (Adv. D.I. 40, at Ex. A ¶¶ 1.1 & 1.2.)3 Between 2001
and 2007, the Initial Shareholders incorporated several other
entities. (Id., at Ex. A ¶¶ 1.1, 5.2, 5.3, & 5.6.) These
entities included two real estate investment vehicles: Triple C
Inc. (“Triple C”) and CT Real Estate Investments Inc., and five
dealerships: (i) Lambert Hilton Inc., d/b/a Toyota of St. Thomas;
2 The Amended Complaint (Adv. D.I. 35) includes Esther Newton
as a Plaintiff. Newton’s claim was settled and dismissed in the
Superior Court of the Virgin Islands on April 26, 2016, and, as a
result, she did not join the Plaintiffs’ Opposition to CAG’s
Motion for Summary Judgment. (Adv. D.I. 58.)
3 References to the record are: “D.I. #” for pleadings filed
in the main bankruptcy proceeding (no. 13-10003) and “Adv. D.I.
#” for pleadings filed in the adversary proceeding (no. 18-
01001).
2
(ii) Caribbean Auto Mart, Inc. (St. Thomas); (iii) Lambert
Brothers Inc., d/b/a Toyota of St. Croix; (iv) Chrysler-Dodge-
Jeep of St. Croix, Ltd.; and (v) the Debtor. The Initial
Shareholders collectively owned 100% of the stock in each
corporation and were the only directors on their respective
boards. (Id.)
On January 2, 2007, CAG was incorporated to serve as the
parent holding company for the seven corporations. The Initial
Shareholders contributed their stock in each of the seven
entities to CAG in exchange for their pro rata share of CAG’s
stock. (Id., at Ex. A ¶¶ 5.5 & 5.6; Adv. D.I. 58, at Ex. 29A.)
The Plaintiffs are unsecured creditors holding tort and/or
contract claims against the Debtor including claims for wrongful
termination, sale of defective vehicles, fraud, failure to
maintain leased property in good repair, breach of good faith and
fair dealing, breach of implied contract of employment, and
fraudulent misrepresentations in insuring and financing vehicles.
None of the Plaintiffs’ claims have been reduced to judgment.
B. Procedural History
On March 5, 2013 (the “Petition Date”), the Debtor filed a
voluntary petition under chapter 7. On November 2, 2013, the
chapter 7 trustee (the “Trustee”) filed a Report of No
Distribution. The U.S. Environmental Protection Agency (“EPA”)
filed an objection to the Trustee’s Report on November 20, 2013,
3
and sought discovery to determine whether there was any basis for
a cause of action against the Debtor and non-debtor parent, CAG,
for fraudulent transfers, substantive consolidation, or piercing
the corporate veil. (D.I. 59.) The Plaintiffs joined in the
EPA’s objection. (D.I. 63.) The Court granted the EPA’s
discovery request (allowing the Plaintiffs to participate).
Following discovery, the EPA, the Debtor, and CAG filed a motion
for approval of a settlement agreement, which the Court granted
on August 17, 2016. (D.I. 158 & 164.) Thereafter, the
Plaintiffs filed a motion for discovery under Rule 2004 of the
Federal Rules of Bankruptcy Procedure on the grounds that the EPA
had not finished reviewing documents and had not conducted any
depositions. (D.I. 165.) On February 9, 2017, the Court allowed
the Plaintiffs to conduct limited discovery (namely,
depositions). (D.I. 174.)
On March 16, 2018, the Plaintiffs filed a complaint alleging
that the Debtor, CAG, and CAG’s majority shareholder, William
Lambert, ought to be substantively consolidated either because:
“(i) pre-petition, [the entities] disregarded separateness so
significantly their creditors relied on the breakdown of entity
borders and treated them as one entity, or (ii) post-petition,
their assets and liabilities are so scrambled that separating
them is prohibitive and hurts all creditors.” (Adv. D.I. 1.) In
re Owens Corning, 419 F.3d 195, 211-12 (3d Cir. 2005).
4
Alternatively, the Plaintiffs sought to pierce the corporate veil
under the alter ego theory. (Adv. D.I. 1.) The Defendants filed
motions to dismiss. (Adv. D.I. 22 & 23.)
After a hearing on February 14, 2019, the Court dismissed
all claims against William Lambert because the complaint failed
to allege that the Plaintiffs viewed Lambert as the Debtor’s
alter ego and dismissed all claims against CAG except the claim
for substantive consolidation under the first test articulated in
the Owens Corning decision. (Adv. D.I. 31 & 34.) The Court
cautioned, however, that there is a high bar for proving
substantive consolidation with a non-debtor. (Id.)
The Plaintiffs thereafter filed an amended complaint (the
“Amended Complaint”). (Adv. D.I. 35.) CAG responded with its
Motion for Summary Judgment on May 28, 2020. (Adv. D.I. 40.)
The Plaintiffs filed their Opposition on August 24, 2020, and CAG
filed its Reply on September 8, 2020. (Adv. D.I. 58 & 60.)
Briefing is complete, and the matter is now ripe for decision.
II. JURISDICTION
The Court has subject matter jurisdiction over this
adversary proceeding, which is a core proceeding concerning the
administration of the estate and liquidation of its assets. 28
U.S.C. §§ 1334(b), 157(b)(2)(A) & (O).
5
The Court has authority to render a final judgment if the
parties consent. See Wellness Int’l Network, Ltd. v. Sharif, 575
U.S. 665, 683-85, 685 n.13 (2015) (holding that even if the
bankruptcy court lacks constitutional authority to enter a final
order, the parties can consent to a final order expressly or
implicitly); In re Tribune Media Co.,
902 F.3d 384, 396 (3d Cir.
2018) (holding that the claimant impliedly consented to entry of
a final order by the bankruptcy court, where he filed several
pleadings without objection to the court’s authority to enter a
final order); True Traditions, LC v. Wu,
552 B.R. 826, 836-39
(N.D. Cal. 2015) (holding non-debtor defendant impliedly
consented to final ruling after it filed a motion for summary
judgment in a fraudulent transfer action without objecting to
entry of a final order).
In this case, CAG expressly consented to the entry of a
final judgment by the Court in its first responsive pleading.
The Plaintiffs implicitly consented by filing a complaint seeking
entry of a final judgment in their favor and by filing a response
to CAG’s Motion for Summary Judgment without objecting to the
entry of a final order by the Court, as required by the national
and local rules. Fed. R. Bankr. P. 7008, 7012(b); VI Local
Bankruptcy Rule 7004-2.
6
III. DISCUSSION
A. Standard of Review
1. Summary Judgment
Summary judgment shall be granted “if the movant shows that
there is no genuine dispute as to any material fact and the
movant is entitled to judgment as a matter of law.” Fed. R. Civ.
P. 56(a); Fed. R. Bankr. P. 7056. Material facts are those facts
that might affect the outcome of the litigation.
Once the moving party has established a prima facie case,
the burden shifts to the non-moving party to present evidence
beyond mere “speculation and conclusory allegations” in “the
pleadings, depositions, answers to interrogatories, and
admissions on file, together with the affidavits, if any” that
the factfinder could use in reasonably finding for the non-moving
party. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986)
(citing Fed. R. Civ. P. 56(c)). The Court construes all evidence
in the record in the light most favorable to the non-moving
party. Matsushita Elec. Indus. Co. v. Zenith Radio Corp.,
475
U.S. 574, 587 (1986) (citing United States v. Diebold, Inc.,
369
U.S. 654, 655 (1962)).
2. Substantive Consolidation
a. General Authority
Substantive consolidation is an equitable remedy arising
under federal common law. Owens Corning, 419 F.3d at 206 (citing
7
Sampsell v. Imperial Paper & Color Corp., 313 U.S. 215 (1941)).
Under the Bankruptcy Code, the power to order substantive
consolidation of bankruptcy estates is derived from the court’s
general equitable powers. Owens Corning,
419 F.3d at 208 n.14
(acknowledging that substantive consolidation is a remedy that
may be available in a bankruptcy case although finding that the
facts of the case did not warrant it).
While they apply slightly different standards, virtually
every Circuit has recognized that substantive consolidation of
debtors is available in a bankruptcy case. See, e.g., In re
Bonham,
229 F.3d 750 (9th Cir. 2000); In re Giller,
962 F.2d 796,
799 (8th Cir. 1992); In re Hemingway Transp., Inc.,
954 F.2d 1,
li n.15 (lst Cir. 1992); Eastgroup Props. v. Southern Motel
Ass’n, Ltd.,
935 F.2d 245 (llth Cir. 1991); S.I. Acquisition,
Inc. v. Eastway Delivery Serv., Inc. (In re S.I. Acquisition,
Inc.),
817 F.2d 1142, 1144 n.2 (5th Cir. 1987). See also In re
Augie/Restivo Baking Co., Ltd.,
860 F.2d 515, 518 (2d Cir. 1988)
(finding facts of that case did not justify consolidation but
acknowledging it was an available remedy in bankruptcy cases); In
re Auto-Train Corp., Inc.,
810 F.2d 270, 276 (D.C. Cir. 1987)
(same); In re Gulfco Invest. Corp.,
593 F.2d 921 (10th Cir. 1979)
(same).
b. Non-Debtor Consolidation
The Third Circuit left open the possibility that bankruptcy
courts could consolidate non-debtors with debtors. Owens
Corning, 419 F.3d at 208 n.13. Many other courts have held that
a court can grant substantive consolidation of debtors and non-
debtors. See, e.g., Bonham, 229 F.3d at 769-71; Off. Comm. of
Unsecured Creditors v. Comvest Grp. Holdings (In re HH
Liquidation, LLC), Adv. No. 16-51204 (KG),
2017 WL 4457404, at *3
(Bankr. D. Del. Oct. 4, 2017) (holding that it had jurisdiction
to consolidate a non-debtor with a debtor); Morse Operations,
Inc. v. Robins LE-COCQ, Inc. (In re Lease-A-Fleet, Inc.),
141
B.R. 869, 873-74 (Bankr. E.D. Pa. 1992) (finding authority to
consolidate debtor with a non-debtor but concluding the facts in
that case did not support it).
The courts have set a high burden for granting substantive
consolidation of a debtor with non-debtors, inter alia, to avoid
the circumvention of the strict standards for filing involuntary
petitions or harm to creditors of the non-debtor. lLease-A-Fleet,
141 B.R. at 872-74. See also Simon v. ASIMCO Techs., Inc. (In re
Am. Camshaft Specialties, Inc.),
410 B.R. 765, 786, 791 (Bankr.
E.D. Mich. 2009) (granting motion to dismiss complaint for
substantive consolidation with non-debtor because trustee failed
to state sufficient facts to support a claim that was plausible
on its face).
The effect of substantive consolidation is to merge all
assets and liabilities of individual entities into a single
survivor such that “claims of creditors against separate debtors
morph [into] claims against the consolidated survivor.” Owens
Corning,
419 F.3d at 205 (quoting Genesis Health Ventures, Inc.
v. Stapleton (In re Genesis Health Ventures, Inc.),
402 F.3d 416,
423 (3d Cir. 2005)). “[B]ecause substantive consolidation is
extreme (it may affect profoundly creditors’ rights and
recoveries) and imprecise, this ‘rough justice’ remedy should be
rare[ly used].” Owens Corning,
419 F.3d at 211.
c. Standard in the Third Circuit
Whether to order substantive consolidation requires a fact-
intensive inquiry on a case-by-case basis. The Third Circuit has
articulated two alternative tests for granting substantive
consolidation, only the first of which is at issue in this case:
“(i) [whether] pre-petition, [the entities sought to be
consolidated] disregarded separateness so significantly [that]
their creditors relied on the breakdown of entity borders and
treated them as one legal entity.” Id. at 211.
Under this test, the proponent of substantive consolidation
must show both (1) “corporate disregard creating contractual
expectations of creditors that they were dealing with [the
entities to be consolidated] as one indistinguishable entity” and
(2) “in their prepetition course of dealing, they actually and
reasonably relied on [the] supposed unity [of these entities].”
Id. at 212 (emphasis added).
10
The test for reliance is both subjective (“actually relied”)
and objective (“reasonably relied”). In re Lisanti Foods, Inc.,
C.A. No. 04–3868, 2006 WL 2927619, at *8 (D.N.J. Oct. 11, 2006);
aff’d,
241 F. App’x 1 (3d Cir. 2007).
Furthermore, those opposing consolidation can defeat a
proponent’s prima facie case by presenting evidence that other
creditors relied on the separate existence of the entities to be
consolidated and would be adversely affected by substantive
consolidation. Owens Corning,
419 F.3d at 212.
B. Application
1. Corporate Disregard
Under the first element, the Plaintiffs must demonstrate
that the Debtor and CAG ignored their corporate separateness.
See, e.g., Owens Corning, 419 F.3d at 212; Lisanti,
2006 WL
2927619, at *8.
The Plaintiffs offer a list of activities by CAG and the
Debtor that they argue demonstrate this disregard. CAG responds
that it was not involved in many of the listed activities and the
others are typical activities of corporate families. Therefore,
CAG argues it should not be subject to substantive consolidation.
a. Activities before CAG Incorporated
The Plaintiffs reference several activities and
interrelationships between the Debtor and its other affiliates
11
that occurred before CAG was incorporated in 2007.4 CAG argues
these activities cannot possibly be evidence that CAG disregarded
corporate separateness. The Court agrees with CAG that
activities which occurred before its formation cannot be evidence
of corporate disregard between CAG and the Debtor.
b. Activities Involving Affiliates Other than
CAG
The Plaintiffs contend that activity between the Debtor and
other affiliates that occurred after CAG was incorporated is
evidence of corporate disregard. These activities include: (i) a
lease between the Debtor and Keystone Properties (an entity
controlled by a CAG minority shareholder) with excessive rent
(Adv. D.I. 58, at Ex. 23B); (ii) a consignment agreement between
the Debtor and another CAG affiliate in July 2012 (Adv. D.I. 58,
at Ex. 24); (iii) redistribution to the Debtor of customer
payments for fleet vehicles allegedly owed to other CAG
affiliates (Adv. D.I. 40, at Ex. 17 & Ex. A ¶ 8.3); (iv) a
transfer by the Debtor of ten vehicles to another CAG affiliate
4 These activities include: (i) the Debtor guaranteeing loans
for Triple C in 2001 (Adv. D.I. 40, at Ex. 3), (ii) the Debtor
obtaining floor plan financing from a lender controlled by
Charles Lambert in 2002 and 2004 (D.I. 29; Adv. D.I. 40, at Exs.
11 & 12), (iii) the Debtor providing back-office services
(payroll, insurance, HR and management) to other affiliates, pre-
2007 (Adv. D.I. 40, at Ex. A), (iv) the alleged
undercapitalization of the Debtor in 2001 (Adv. D.I. 35, at ¶
40), and (v) the Debtor causing customers to issue notes payable
jointly to it and the other affiliates, for obligations due to
the Debtor alone (Adv. D.I. 58, at Ex. 3).
12
in February 2013 (Adv. D.I. 58, at Ex. 27D); and (v) the payment
of late rent to Triple C immediately before the bankruptcy case
was filed (Adv. D.I. 58, at p. 9; Adv. D.I. 35, at ¶ 120.).
CAG argues that these transactions are not evidence of
corporate disregard between CAG and the Debtor because CAG was
not a party to any of them.
The Court agrees that, because CAG was not a party to the
alleged transactions, they are not evidence of corporate
disregard between the Debtor and CAG. (Adv. D.I. 58, at Exs.
23B, 24, & 27D; Adv. D.I. 40, at Ex. 17.)
c. Intercompany Transfers in the Ordinary Course
The Plaintiffs argue, however, that there were intercompany
transfers and unaccounted payments made between CAG, the Debtor,
and the other affiliates, within ninety days of the bankruptcy
filing, which supports the conclusion that CAG “siphoned” money
from the Debtor. For example, the Plaintiffs assert that the
Debtor could not account for checks issued by the Debtor within
ninety days of the Petition Date, relying on email correspondence
between CAG and the EPA during the initial discovery phase in
2014. (Adv. D.I. 58, at Ex. 28H.) The Court does not find that
an inability to respond to a question posed by the EPA during
discovery is compelling evidence of disregard of corporate
separateness. Notwithstanding that email, the EPA ultimately
settled its dispute with the Debtor. (D.I. 158 & 164.)
13
The Plaintiffs also rely on an internal spreadsheet that
they contend shows that the Debtor made payments on intercompany
transfers without properly accounting for them. (Adv. D.I. 58,
at Ex. 33.) CAG responds that the internal spreadsheet, which
lists outstanding payables for exchanges of parts and services
among the affiliates, was an internal report maintained by CAG
and actually demonstrates that CAG, the Debtor, and the other
affiliates engaged in intercompany exchanges in the normal course
of business that were reimbursed. (Adv. D.I. 40, at Ex. A.)
CAG presented further evidence that all transfers from the
Debtor to CAG within ninety days of the Petition Date and since
its incorporation were made in the ordinary course of business
for value. (Adv. D.I. 40, at Exs. 14, 19, 27, & Ex. A ¶¶ 6 & 11;
Adv. D.I. 47, at Ex. 4 ¶¶ 12 & 22; Adv. D.I. 58, at Ex. 29.)
Additionally, CAG presented evidence that the Debtor was able to
remain operational despite losing money for six years because CAG
(as parent), and related entities, Triple C (the Debtor’s
landlord), and FSFS (the Debtor’s floor plan financier), offered
loans and concessions that an arms-length counterparty would not
have offered. (Adv. D.I. 58, at Exs. 23C & 25A-D.)
The Court concludes that, rather than show a disregard, the
evidence presented demonstrates that corporate separateness was
maintained. The intercompany transfers were accounted for in the
Debtor’s records and in board resolutions authorizing the Debtor
14
to issue promissory notes on some of the outstanding transfers.
(Adv. D.I. 58, at Exs. 25C, 25D, 28D, & 33.)
The Court further concludes that the alleged transactions
between the Debtor and the affiliates (other than CAG) are not
evidence of a disregard of corporate entity separateness between
CAG and the Debtor for several additional reasons. First, CAG
was not a party to many of the alleged intercompany transfers.
(Adv. D.I. 58, at Exs. 23B, 24, 27D, & 33; Adv. D.I. 40, at Exs.
17 & 27.) Second, the Plaintiffs have not presented any credible
evidence that any funds were improperly “siphoned” from the
Debtor to CAG. On the contrary, CAG presented evidence that all
transfers made by the Debtor to CAG or its affiliates were
payments made in the ordinary course of business for goods or
services provided by them to the Debtor. (Adv. D.I. 40, at Ex. A
¶ 7.) The failure of the Plaintiffs to present any rebuttal
evidence in support of their allegations is fatal to their
argument at the summary judgment stage. Fed. R. Civ. P.
56(e)(3). See, e.g., Ford v. Bureau of Prisons, 570 F. App’x
246, 250 n.1 (3d Cir. 2014) (affirming grant of summary judgment
because plaintiff failed to rebut, through affidavits or other
evidence, the moving party’s evidence).
d. Activities Typical in Corporate Families
CAG also contends that many of the examples that the
Plaintiffs cite are activities engaged in by many corporate
15
entities which do not support substantive consolidation. The
Plaintiffs argue, however, that many of these activities have
been found in other cases to satisfy the first test for
substantive consolidation. These include: (i) having the same
directors, officers, and management at each entity in the family;
(ii) consolidating accounting, tax filing, payroll, and training
services; (iii) sharing employees between entities (and
permitting sales at any dealership to count toward the sales
quota of any entity’s employee); (iv) carrying group liability
insurance, which lists each entity as just a different “location”
of the same company; and (v) operating under the same or similar
tradenames, while advertising as “a family of dealerships.”5
See, e.g., In re ADPT DFW Holdings, LLC, 574 B.R. 87, 102-04
(Bankr. N.D. Tex. 2017); Lisanti,
2006 WL 2927619, at *1.
CAG does not dispute that these activities are extant in
this case but argues that those facts, alone, are insufficient to
establish corporate disregard of separateness. CAG argues that
it consolidated certain back-office services (accounting, human
resources, and management) for convenience, efficiency, and lower
costs. It also contends that buying joint insurance for all
entities allowed them to obtain substantial discounts. CAG notes
5 The Plaintiffs note that several dealer term sheets and
customer financing applications list “CAG” in the header with the
specific dealership also displayed in the center. (Adv. D.I. 58,
at Ex. 2.)
16
that even before it was incorporated, the Debtor and the other
affiliates shared many of these same services for the same
reasons. (Adv. D.I. 40, at Ex. A ¶ 6; Adv. D.I. 58, at Ex. 2.)
CAG also presented evidence that all the back-office services
were reimbursed by the other affiliates for whom the services
were performed, on a pro rata basis. (Adv. D.I. 40, at Ex. 14 &
Ex. A ¶ 6.) CAG argues, and the record reflects, that non-
executive employees were moved among the affiliate dealerships
but not between the Debtor and CAG. (Adv. D.I. 58, at Ex 28D.)
Finally, while the corporate family filed consolidated income tax
returns, CAG presented evidence that each entity kept separate
accounting records. (Adv. D.I. 40, at Exs. 18-23 & Ex. A ¶ 6.2.)
CAG further argues that many companies share officers and
directors, consolidate services for cost-saving purposes, and
refer to the affiliates as a family of companies, without
creating a basis for substantive consolidation. See, e.g.,
United States v. Bestfoods, 524 U.S. 51, 69 (1998) (acknowledging
that the presence of common directors and officers typically does
not, alone, warrant corporate veil piercing); Japan Petroleum Co.
(Nigeria) Ltd. v. Ashland Oil, Inc.,
456 F. Supp. 831, 841 (D.
Del. 1978) (holding that parent was not liable for subsidiary’s
contract breach despite the presence of common directors and
officers, an umbrella insurance policy, representations that
subsidiary is a division of parent, and shared intercompany
17
services for administrative convenience, such as consolidated
payroll).
The Court agrees with CAG that the factors cited by the
Plaintiff are insufficient evidence that corporate separateness
was disregarded in this case. See, e.g., R2 Investments, LDC v.
World Access, Inc. (In re World Access, Inc.), 301 B.R. 217, 276
(Bankr. N.D. Ill. 2003) (denying substantive consolidation
despite (i) inter-company transfers and claims, (ii)
incorporation of the subsidiary by the parent, (iii) consolidated
financial statements, administrative functions, and insurance,
and (iv) common ownership, management, directors and officers,
because these facts are typical of most affiliated corporations
and do not demonstrate that vendors dealt with the entities as a
single unit); Lease-A-Fleet,
141 B.R. at 876, 878 (denying
substantive consolidation despite overlapping directors, shared
office space, intercompany loans without documentation, and the
disregard of formalities when sharing services).
The corporate disregard inquiry is fact-intensive, and no
one factor weighs greater than another. In fact, the Third
Circuit rejected the use of so-called alter-ego checklists as
they “fail to separate the unimportant from the important. . . .”
Owens Corning,
419 F.3d at 210.
In this case, the Court concludes that the facts do not
support a finding of corporate disregard. While entities in the
18
corporate family had similar trade names, the proper corporate
names were used on corporate documents, including customer
financing applications. (Adv. D.I. 58, Ex. 2.) While the
entities had overlapping officers and directors, CAG presented
evidence that the Debtor and CAG observed corporate formalities
by holding separate board meetings, issuing separate board and
shareholder resolutions, documenting inter-company loans, and
maintaining separate bank accounts and books and records. (Adv.
D.I. 58, at Exs. 25A-D; Adv. D.I. 50, at Ex. 21; Adv. D.I. 47, at
Ex. 4; Adv. D.I. 40, at Ex. A & Exs. 18-23.) Thus, the Court
concludes that the evidence presented by the Plaintiffs is
insufficient to establish corporate disregard. See Japan
Petroleum, 456 F. Supp. at 841; World Access,
301 B.R. at 276;
Lease-A-Fleet,
141 B.R. at 876, 878. Cf. ADPT,
574 B.R. at 102
(granting substantive consolidation where entities failed to
maintain separate bank accounts).
Similarly, while the entities in this case shared services
and other resources, that too does not justify substantive
consolidation because it is very common and done for legitimate
business reasons, such as cost-cutting and efficiency. Further,
CAG presented evidence that any services it or the Debtor
provided were reimbursed by the corresponding affiliate. (Adv.
D.I. 40, at Ex. AW 6.1.) See Japan Petroleum,
456 F. Supp. at
844. Compare In re Opus East LLC,
528 B.R. 30, 49, 64 (Bankr. D.
19
Del. 2015) (finding evidence of shared services that were
reimbursed — corporate accounting, human resources, legal risk
management, payroll, office services, and tax services — did not
warrant corporate veil piercing) with Lisanti,
2006 WL 2927619,
at *7 (granting substantive consolidation where shared services
were not reimbursed).
In summary, the Court concludes that the facts on which the
Plaintiffs rely to establish that CAG and the Debtor ignored
corporate separateness are either unproven or are insufficient to
establish a basis for substantive consolidation.
2. Reliance
Even if the Plaintiffs had established that CAG and the
Debtor ignored corporate separateness, the Plaintiffs must still
demonstrate that their reliance on that disregard was actual and
reasonable. The Plaintiffs argue that they reasonably relied on
the corporate “sameness” or unity of the Debtor and CAG when
deciding where to purchase a vehicle or seek employment. (Adv.
D.I. 58, at Exs. 2-6.)
a. Before CAG was Incorporated
CAG responds that eight of the eleven Plaintiffs could not
have relied on the corporate “sameness” of the Debtor and CAG
when deciding where to purchase a vehicle or seek employment
because CAG was not incorporated until January 2, 2007, after
those eight Plaintiffs had already commenced their relationship
20
with the Debtor.6 (Adv. D.I. 40, at Ex. A & Ex. 13.)
The Plaintiffs respond that if the entity engaging in the
disregard of corporate boundaries, pre-2007, was not CAG, then it
was a “CAG Affiliate,” because the Initial Shareholders were the
owners and board members for each of the seven entities as well
as CAG, after it was incorporated in 2007.
The Court rejects the Plaintiffs’ argument. An essential
element of the test for substantive consolidation is the
creditor’s actual reliance on the supposed unity of the Debtor
and the entity to be consolidated. Owens Corning, 419 F.3d at
212. Because CAG did not exist at the time their relationship
with the Debtor commenced, these eight Plaintiffs have not
established that they relied on the corporate unity of the Debtor
and CAG. See, e.g., Am. Camshaft,
410 B.R. at 789 (dismissing
complaint for substantive consolidation where there were no
allegations of creditor reliance on corporate disregard).
Consequently, the Court will grant summary judgment in favor of
CAG on these eight Plaintiffs’ claims for substantive
consolidation.
6 Those eight Plaintiffs are: (i) Derek Cambridge (became an
employee in 2005); (ii) Annelle Knight (became a customer in May
2006); (iii) Bernard Hamilton (became an employee in 2004); (iv)
Michael Felix (became an employee in 2004); (v) Pauline Peter
(became a customer in 2005); (vi) Janet Rivera (a non-customer
involved in an accident with a customer of the Debtor in 2005);
(vii) Fitzroy Williams (became a customer in 2005); (viii) Rams
Auto Repair (entered a lease agreement with Debtor in 2005).
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b. Post-Petition Corporate Conduct
CAG further argues that the three remaining Plaintiffs, who
commenced their relationship with the Debtor after CAG was
incorporated, rely on evidence of post-petition activities7 to
support their claim for substantive consolidation. CAG contends
that post-petition activities are irrelevant to determining
whether the Plaintiffs relied on the alleged disregard of
corporate entity separateness between CAG and the Debtor pre-
petition when the Plaintiffs’ relationship with the Debtor
commenced. The Plaintiffs respond that the post-petition
activities are evidence of the effect of CAG’s pre-petition
control over the Debtor and the disregard of entity separateness.
The Court agrees with CAG that post-petition activities are
not relevant to the reliance factor required by Owens Corning.
419 F.3d at 212. Rather, what is relevant are the activities of
the Debtor and CAG on which the Plaintiffs actually relied at the
time they entered into their relationship with the Debtor, which
occurred pre-petition.
Id. See also Mary Elisabeth Kors, Alter
Egos: Deciphering Substantive Consolidation,
59 U. Pitt. L. Rev.
7 These post-petition activities include: (i) one of the
Debtor’s landlords, Keystone Properties (owned by a minority
shareholder of CAG), relet the Debtor’s automotive body shop to
CAG at a substantially reduced rate ($500 per annum versus
$12,000 per month charged to the Debtor); (ii) communications
among CAG executives regarding what debts to include on the
Debtor’s bankruptcy schedules; and (iii) the invoicing of the
Debtor’s bankruptcy legal costs to CAG. (Adv. D.I. 58, at Exs.
23D, 20, & 27B-C.)
22
381, 430 (1998) (arguing that factors on which creditors have not
relied are irrelevant to determination of substantive
consolidation). Therefore, the Court’s inquiry focuses on those
pre-petition activities on which the three remaining Plaintiffs
actually relied.
c. Actual Reliance by Remaining Plaintiffs
The three remaining Plaintiffs — Monique Xavier, Asheem
Charles, and Leon Richardson — became customers of the Debtor
after CAG was incorporated in 2007. While they all filed
complaints, no one has a judgment.
Xavier and Charles allege that the Debtor sold them the
wrong vehicle and recorded the wrong VIN number on their sale
agreement and insurance paperwork, which forced them to accept a
lesser model when the error was discovered. (Adv. D.I. 58, at
Ex. 17.) Their claim is for fraud, misrepresentation, and breach
of contract. (Id.) Richardson alleges that the Debtor sold him
a previously owned defective vehicle, while representing that it
was new, and that the Debtor failed to honor his warranty. (Adv.
D.I. 58, at Ex. 13.)
Only Monique Xavier submitted an affidavit to support her
contention that she relied on the unity of the Debtor and CAG.
It states, in part:
I made the decision to purchase a vehicle from
Caribbean Auto Group and its family of dealerships
based on the relationships they indicated they had with
23
Scotia Bank [one of the Debtor’s lenders] and Marshall
and Sterling [the Debtor’s insurance provider] and the
fact that by going to Caribbean Auto Group’s sale I
could choose from a variety of car manufacturers.
The representations as to the relationship with
Scotia Bank and Marshall and Sterling were not specific
only as to [the Debtor]. It was clear that Caribbean
Auto Group made the representation as to applying to
its family of dealerships. . . .
(Adv. D.I. 58, at Ex. 4.)
Xavier further stated in her response to CAG’s
interrogatories, attached to her affidavit, that:
I understood Caribbean Auto Mart, St. Croix Dodge
Jeep and Chrysler, and Caribbean Auto Group to be one
company. I dealt with the same employees at Caribbean
Auto Mart and St. Croix Doge [sic] Jeep and Chrysler
there was no difference between the companies. I
understood Caribbean Auto Group to be the same. All of
the named groups were located at the same place. They
were all just divisions of one company. And therefore,
they were all privy to the same information and
directives.
(Id.)
CAG argues that the affidavit and interrogatory response are
inadmissible evidence that Monique Xavier actually relied on the
unity of CAG and the Debtor. CAG argues that the statements are
conclusory, not based on fact or personal knowledge. Instead,
CAG contends that the statements are mere speculation and
personal opinion that Xavier would have declined to purchase a
vehicle from the Debtor had she known the Debtor was not the same
entity as CAG. Fed. R. Civ. P. 56(c)(4) & 12(f). See, e.g.,
Automatic Radio Mfg. Co. v. Hazeltine Rsch., Inc., 339 U.S. 827,
24
831 (1950) (finding that the allegation of patent misuse in the
affidavit was based solely on information and belief and
therefore did not comply with the requirements of Fed. R. Civ. P.
56). Therefore, CAG argues that the Court must disregard or
strike the affidavit.
The Court disagrees with CAG. This case is distinguishable
from Automatic Radio, because in that case reasonable reliance on
corporate disregard was not one of the elements of patent misuse.
339 U.S. at 830-31. In contrast, it is an element necessary for
substantive consolidation. Owens Corning, 419 F.3d at 212;
Lisanti,
2006 WL 2927619, at *8. Xavier’s affidavit is relevant
to the issue of whether she actually relied on a belief that CAG
and the Debtor were unified at the time she purchased the
vehicle. That belief was based on interactions with employees of
the Debtor and, as a customer of the Debtor, she certainly had
personal knowledge of corporate advertisements, which are facts
supported by the record. (Adv. D.I. 58, at Exs. 2, 4, & 17 ¶ 8.)
CAG further contends that Xavier does not articulate any
harm she suffered as a result of any reliance on her perception
of corporate unity between the Debtor and CAG. CAG argues that
her alleged reliance on corporate unity in becoming a customer
did not relate in any way to the ultimate harm she suffered
(being required to accept a different vehicle because the Debtor
mishandled the paperwork on the one she bought).
25
The Court disagrees with CAG’s argument. Actual reliance
for substantive consolidation purposes merely requires a
demonstration that the Plaintiff relied on the unity of the
Debtor and CAG in becoming a creditor. The creditor is not
required to establish that she was specifically harmed by a
misuse of the corporate form to warrant the remedy of substantive
consolidation. See, e.g., In re Tureaud, 59 B.R. 973, 976 (N.D.
Okla. 1986) (affirming grant of substantive consolidation over
creditor’s argument that a finding of fraudulent formation is
necessary for substantive consolidation); Munford, Inc. v. TOC
Retail, Inc., (In re Munford, Inc.),
115 B.R. 390 (Bankr. N.D.
Ga. 1990) (denying motion to dismiss because substantive
consolidation does not require an allegation that the entity to
be consolidated with the debtor was formed with intent to hinder,
delay or defraud creditors).
Therefore, the Court concludes that Xavier’s affidavit
supports her assertion that she actually relied on the unity of
the Debtor and CAG at the time she entered into a relationship
with the Debtor.
d. Reasonable Reliance
CAG argues, however, that even if Xavier could demonstrate
actual reliance, it was not reasonable. CAG presented evidence
that several of the Debtor’s financial and trade creditors relied
on the Debtor’s separate existence when extending credit or doing
26
business with it.8
The Plaintiffs respond that substantive consolidation will
not prejudice any specific creditor, but, on the contrary, will
benefit all creditors of the Debtor by curing any hardships CAG
created in siphoning the Debtor’s profits and assets and leaving
it a shell company.
The Court rejects the Plaintiffs’ argument. Substantive
consolidation is not appropriate where only one creditor relied
on a belief that the corporations were unified, if several other
creditors relied on the fact that the entities were separate.
Other creditors’ reliance on separateness demonstrates that the
lone proponent’s reliance on corporate sameness is unreasonable.
Compare In re Macrophage, Inc., No. CIV.06 3793 JBS, 2007 WL
708926, at *6 (D.N.J. Mar. 2, 2007) (affirming denial of
substantive consolidation where only one creditor considered the
entities as one) with In re S B Bldg. Assocs. Ltd. P’ship,
621
B.R. 330, 371 (Bankr. D.N.J. 2020) (granting substantive
consolidation where virtually all parties treated the entities as
unified).
8 For example, Falcon Financial, LLC, extended credit to
Triple C and required that the Debtor guarantee that loan. (D.I.
58, at Ex. 22A.) General Motors had a separate franchise
dealership agreement with the Debtor, which precluded other
affiliates from selling GM vehicles. (Adv. D.I. 40, at Ex. A ¶
2.9.) One of the Debtor’s trade vendors, Snap-On, bargained for
a default guaranty from CAG on trade payables incurred by the
Debtor. (Adv. D.I. 47, at Ex. 4.)
27
In this case, CAG presented evidence that several other
entities treated the Debtor and CAG as separate entities, whereas
the Plaintiffs presented evidence that only one creditor, Xavier,
relied on a belief they were the same. While the Plaintiffs
argue that Richardson and Charles relied on separateness, no
evidence of that was presented by affidavit or otherwise. Fed.
R. Civ. P. 56(e)(3). See, e.g., Ford v. Bureau of Prisons, 570
F. App’x at 250 (affirming grant of summary judgment because
plaintiff failed to rebut the moving party’s assertion of fact
through affidavits or other evidence).9 The Court, therefore,
concludes that Xavier’s reliance was not reasonable.
e. Harm to other Creditors
CAG also argues that it has presented evidence to support an
affirmative defense to substantive consolidation, namely, that
other creditors of the Debtor will be harmed by substantive
consolidation. CAG argues that if the Court substantively
consolidates CAG with the Debtor, then creditors of the Debtor,
like Snap-On, which obtained a guarantee of the Debtor’s
obligation from CAG, would have to share any distribution of
CAG’s assets with other creditors of the Debtor who did not
9 The Court also finds it significant that the Trustee did not
move for substantive consolidation at any point during this
bankruptcy case, which is further evidence that Xavier was alone
in her reliance on corporate disregard. As noted, the EPA
initially argued that substantive consolidation might be
warranted, but settled its claims after conducting discovery.
28
bargain for such a guaranty. (Adv. D.I. 47, at Ex. 4.)
The Court agrees that CAG has presented sufficient evidence
to support an affirmative defense to any substantive
consolidation of the Debtor with CAG. Owens Corning, 419 F.3d at
212-13 (refusing to substantively consolidate in light of an
unsecured creditor’s bargained-for loan guaranty, a credit
enhancement that other creditors did not have). See also
Augie/Restivo, 860 F.2d at 519 (denying substantive consolidation
where creditor who had relied on separateness would be harmed).
Finally, the Court finds that the two cases cited by the
Plaintiffs in favor of substantive consolidation are
distinguishable. ADPT,
574 B.R. at 102-04; Lisanti,
2006 WL
2927619, at *8. In both cases, the courts found a disregard of
corporate entity separateness. Additionally, both cases dealt
with substantive consolidation of multiple debtor entities rather
than the consolidation of a debtor with a non-debtor. As noted
above, substantive consolidation of a debtor with a non-debtor
should be used sparingly and has a higher burden of proof than
debtor-to-debtor consolidation. Am. Camshaft,
410 B.R. at 786;
Lease-A-Fleet,
141 B.R. at 872-74. The Court finds that the
Plaintiffs have not met that high burden in this case.
29
IV. CONCLUSION
The Court concludes that the Plaintiffs have failed to prove
(i) that the Debtor and CAG disregarded corporate separateness,
and (ii) that the Plaintiffs actually and reasonably relied on
the unity of CAG and the Debtor. Further, the Court finds that
CAG has proven its affirmative defense that other creditors, who
relied on the corporate separateness of the Debtor and CAG, will
be harmed by substantive consolidation. For these reasons, the
Court will grant summary judgment in favor of CAG.
An appropriate Order follows.
Dated: June 11, 2021 BY THE COURT:
United States Bankruptcy Judge
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