The first test, a three-part burden-shifting test announced in Auto-Train Corp. v. Midland-Ross Corp . ( In re Auto-Train , 810 F.2d 270 (D.C. Cir. 1987)), was applied by the court in Owens Corning . The Auto-Train test requires that a proponent of substantive consolidation show that (i) there is substantial identity between the entities to be consolidated and (ii) that consolidation is necessary to avoid some harm or to realize some benefit. Once this prima facie case is made, a presumption arises that creditors have not relied solely on the credit of one of the entities involved in making their decisions.
The burden then shifts to an objecting creditor to show that (i) it has relied on the separate creditworthiness of one of the entities to be consolidated and (ii) it will be prejudiced by substantive consolidation. Finally, if an objecting creditor sustains its burden, the court may order consolidation only if it determines that the demonstrated benefits of consolidation outweigh the harm. (See Eastgroup Prop. v. Southern Motel Ass’n, 935 F.2d 245, 249 (11th Cir. 1991)).
Courts have articulated several nondeterminative factors to be considered in deciding whether a proponent of substantive consolidation has established a prima facie case:
•The presence or absence of consolidated financial statements
•Unity of interests and ownership between various corporate entities
•Existence of parent and intercompany loan guarantees
•Degree of difficulty in separating and ascertaining individual assets and liabilities
•Transfers of assets without formal observance of corporate formalities
•Commingling of assets and business functions
•Profitability of consolidation at a single physical location (see Bonham v. Compton (In re Bonham), 229 F.3d 750, 766 n.11 (9th Cir. 2000)).
Citing the 3d Circuit in Nesbit v. Gears Unlimited, Inc . (347 F.3d 72 (3d Cir. 2003)), Fullam in Owens Corning described the second test, adopted by the 2d Circuit in Augie/Restivo Baking Co. v. Augie/Restivo Baking Co. ((In re Augie/Restivo), 860 F.2d 515 (2d Cir. 1988)), as condensing the various reported requirements into two fundamental principles: (i) whether the creditors of consolidated entities treated the entities as a single economic unit and did not rely on their separate creditworthiness in extending credit; or (ii) whether the business affairs of the consolidated entities were so hopelessly entangled that substantive consolidation would benefit all creditors. (see, e.g., In re Augie/Restivo , 860 F.2d at 518). Substantive consolidation is proper under this test if either factor is present.
The first factor is based on the concept that, in structuring its loans, a lender typically does not anticipate having access to the assets of some other entity if its borrower becomes insolvent. Nor does a lender expect to compete for its borrower’s assets with a creditor of a less reliable debtor. Consolidation under the second factor involves the commingling of two entities’ assets and business functions. It should be used, however, “only after it has been determined that all creditors will benefit because untangling is either impossible or so costly as to consume the assets.” ( Id . at 519).
'Courts of bankruptcy are essentially courts of equity, and their proceedings inherently are proceedings in equity.'
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