Why Do We Even Bother with Subs?

So today is Kodak's confirmation hearing, and when the plan is confirmed, as I expect it will be, Kodak will continue to exist, but it will no longer be a film company. That will take some getting used to.

For some strange reason a British pension fund decided it would rather run the film business than get paid, so film will continue to be made, but not by an entity owned by the Eastman Kodak Company.

But as my title suggests, something else about the Kodak plan also caught my attention. The plan calls for the "deemed substantive consolidation" of the debtors. Deemed substantive consolidation is the chapter 11 equivalent of "slightly pregnant."

In Kodak's case, the debtors will be deemed consoildated for purposes of voting, confirmation, and distribution. Oh, is that all? 

Kodak makes the case that its corporate structure is so complex that it would make seperate voting and the like "inefficient" and nobody will be harmed.  If that's the case, then why not just do normal substantive consolidation?

One suspects that once out of bankruptcy, Kodak has a reason to keep that convoluted corporate structure it now disdains. In short, Kodak would like it both ways.

Comments

[David Shemano]

Steve -- as a chapter 11 debtor's counsel, I am a big fan of a "deemed" partial substantive consolidation for plan purposes. It saves me a lot of headache of preparing multiple plans (especially where a subsidiary has few creditors), worrying about duplicate co-obligor claims, etc. The reason we don't do a full consolidation, in addition to the standard being very high to meet:

1. The US Trustee won't complain that you are trying to pay fees for one company as opposed to multiple companies.
2. Some of the entities may be solvent and others insolvent. If you fully consolidate, you may be prejudicing rights in preference and fraudulent transfer litigation where solvency matters. Similarly, you may not want to create (or eliminate) setoff rights.
3. You don't have to worry about all of the corporate law implications, prepare new corporate documents, etc.

David Shemano

[Chris B.]

Mr. Shemano's points are excellent. Also, maybe this is obvious, but "deeming" it allows you to make the classic bankruptcy move of using "consent" (i.e., non-objection to this part of the plan) to escape the court actually having to make the rather tough findings required for a "normal" sub con.

The reason this matters -- even for non-debtor-biased folks -- is that it will greatly increase certainty for the estate and creditors, not relying on the uncertainties of lower court (much less, layers of appellate court) decision-making regarding sub con, hardly a settled area of law. (Also the "deemed" method might allow for some nuance is how the sub con actually functions, which can matter.)

In sum, "deemed" sub con might really be a much superior tool to the jurisprudentially murky "real" sub con, as things stand now. Of course, maybe we want to make "real" sub con more common and reliable...talk to Congress...

[mt]

The other commenters are both quite right. One of the few reforms I think the ABI Commission ought to be focusing on is putting in a presumption in favor of deemed substantive consolidation in plans. Let people take collateral if they want to differentiate their recoveries. Most modern financial functions are totally centalized except for tax effects.