In Re Walter J. Giller, JR., M.D., Debtor. First National Bank of El Dorado v. Walter J. Giller, JR., M.D., P.A., 962 F.2d 796, 1st Cir. (1992)

962 F.
2d 796
22 Bankr.Ct.Dec. 1505, Bankr. L. Rep. P 74,547
In re Walter J. GILLER, Jr., M.D., Debtor.

FIRST NATIONAL BANK OF EL DORADO, Appellant,
v.
Walter J. GILLER, Jr., M.D., P.A., Appellee.
No. 91-1647.
United States Court of Appeals,

Eighth Circuit.
Submitted March 9, 1992.
Decided April 23, 1992.
Charles Robinson Camp, Little Rock, Ark., argued (Hermann Ivester and
Mildred H. Hansen, on brief), for appellant.
Thomas S. Streetman, Crossett, Ark., argued, for appellee.
Before WOLLMAN and MAGILL, Circuit Judges, and WOODS,*
District Judge.
WOLLMAN, Circuit Judge.
First National Bank of El Dorado appeals from the order substantively

consolidating several debtors in a bankruptcy proceeding. We affirm.
I.
2
Walter John Giller, Jr. (Giller) was the sole or majority shareholder of six
corporations. Giller filed a voluntary Chapter 11 bankruptcy petition, and the
trustee for Giller's estate thereafter filed voluntary Chapter 11 bankruptcy
petitions for the six corporations (the Debtors). The Debtors moved to
substantively consolidate their Chapter 11 cases. Only one creditor, First
National Bank of El Dorado (First National), objected to the motion for
consolidation.
At the conclusion of the two-day hearing, the bankruptcy court 1 announced its
findings and conclusions. The court found that Giller had abused the Debtors'
corporate forms and had caused transfers among the Debtors that might give
rise to fraudulent conveyance and preference causes of action. Since only one of
the Debtors was solvent, however, the Debtors could not pay for the
accountants and lawyers necessary to pursue the causes of action. The
bankruptcy court therefore determined that the "only hope" of obtaining monies
to pay the unsecured creditors was to consolidate the Debtors and use the
consolidated entity's assets to finance the lawsuits. The bankruptcy court
recognized the potential harm of consolidation to the creditors of the one
solvent Debtor; consequently, it left open the possibility that those creditors
might be classified separately from, and treated more generously than, the
creditors of the other Debtors. The bankruptcy court ruled that consolidation
would eliminate all causes of action by one Debtor against another, but it
preserved the trustee's avoidance powers as to any transfers made by the
Debtors to third parties for the benefit of other Debtors.
First National appealed the bankruptcy court's decision to the district court,2
which affirmed. First National now appeals to this court, arguing that the
district court erred because: 1) the bankruptcy court did not adequately state its
findings of fact and conclusions of law; 2) the record does not support the
bankruptcy court's findings; 3) the Debtors did not adduce sufficient evidence
to support the conclusion that consolidation was appropriate; and 4) the trustee
should not retain the power to avoid transfers by a Debtor to a third party for
the benefit of another Debtor.
II.
5
First National first argues that the bankruptcy court did not adequately state its
findings of fact and conclusions of law. A bankruptcy court's statement is
adequate if it is "sufficient to give an appellate court a clear understanding of
the grounds of its decision ... so that the parties and reviewing court understand
what it has decided and why." White Indus., Inc. v. Cessna Aircraft Co., 845
F.2d 1497, 1499 (8th Cir.), cert. denied, 488 U.S. 856, 109 S.Ct. 146, 102
L.Ed.2d 118 (1988).
As demonstrated by the factual summary above, we understand what the

bankruptcy court found and the reasons supporting its decision. It follows that
the bankruptcy court's statement is adequate. We therefore reject First
National's first argument.
First National next argues that the record does not support the bankruptcy
First National next argues that the record does not support the bankruptcy
court's findings of fact. We review the bankruptcy court's findings of fact using
a clearly erroneous standard. In re Phillips, 882 F.2d 302 (8th Cir.1989).
The record amply supports the bankruptcy court's findings. The abuses of the
corporate form, including the potentially fraudulent or preferential transfer of
assets, is apparent from Giller's own testimony. Giller stated, for example, that
one of the Debtors financed the other Debtors, but no regular repayment
schedule had been established, and that all the Debtors had headquarters in a
building owned by one of the Debtors, but none paid rent. In addition, at least
one of the Debtors used its assets to secure loans to another Debtor, and
employees hired by two of the Debtors performed uncompensated services for
all the Debtors. The bankruptcy court's finding as to the insolvency of five of
the six Debtors finds support in, among other things, the schedules filed with
the Debtors' bankruptcy petitions. The schedules also support the bankruptcy
court's finding that the only hope for paying the bulk of the creditors was to use
the assets of the one solvent Debtor to pursue fraudulent conveyance and
preference causes of action. We find no clear error.
First National also argues that the bankruptcy court erred in ordering
consolidation because the Debtors did not introduce sufficient evidence to
justify it. The Debtors assert that we should review the propriety of the
bankruptcy court's substantive consolidation order under a clearly erroneous
standard; First National does not state what the standard of review should be.
Since the bankruptcy court's power to order substantive consolidation is
equitable, an abuse of discretion standard may be appropriate. See In re Gulfco
Inv. Corp., 593 F.2d 921, 926 (10th Cir.1979) ("we must determine whether the
district court abused its discretion in ordering the consolidation, or, stated
differently, do the facts justify consolidation" under the appropriate legal
standard). We need not resolve this question, as we conclude that consolidation
was appropriate under any standard of review.
10
Factors to consider when deciding whether substantive consolidation is

appropriate include 1) the necessity of consolidation due to the interrelationship
among the debtors; 2) whether the benefits of consolidation outweigh the harm
to creditors; and 3) prejudice resulting from not consolidating the debtors. In re
N.S. Garrott & Sons, 48 B.R. 13 (Bankr.E.D.Ark.1984). As described above,
there is evidence in the record indicating the necessity of consolidating the
interrelated Debtors. Failure to consolidate the Debtors would prejudice the
creditors of the insolvent Debtors because the insolvent Debtors could not
afford to bring legal actions to recover transferred assets. Finally, the benefits of
consolidating the Debtors outweigh the harms because the lawsuits may
generate sufficient funds to pay creditors of the insolvent Debtors while still
preserving the recovery by the creditors of the solvent Debtor. We perceive no

error in the bankruptcy court's decision to consolidate the Debtors.
11
First National next argues that the trustee should not retain the power to avoid
transfers by one Debtor ("Debtor A") to a third party for the benefit of another
Debtor ("Debtor B"). First National notes that the avoidance power is intended
to allow the recovery of assets transferred without fair consideration, thus
protecting creditors who counted on those transferred assets for repayment.
After consolidation, however, the benefit Debtor B received from a conveyance
becomes a benefit to Debtor A, since consolidation renders them both part of
the same entity. Thus, First National argues, the benefit Debtor B received
supports the transfer Debtor A made, eliminating the necessity to undo the
transaction. It follows, First National maintains, that the creditors of Debtor A
suffer no harm following consolidation because the loss of Debtor A's asset is
offset by the elimination of Debtor B's liability. See In re Parkway Calabasas
Ltd., 89 B.R. 832 (Bankr.C.D.Cal.1988), aff'd, 949 F.2d 1058 (9th Cir.1991).
12
We recognize that substantive consolidation normally would eliminate the

justification for the exercise of the trustee's avoidance power. Nonetheless, the
bankruptcy court retains the power to order a less than complete consolidation.
See id. at 837. Here, eliminating the trustee's avoidance power after
consolidation would also eliminate the very reason for ordering consolidation in
the first place, that is, to obtain the funds required to recover transferred assets.
The bankruptcy court therefore did not err in preserving the avoidance power of
the trustee.
13
We reject First National's remaining argument as without merit.
14
The judgment of the district court is affirmed.
The HONORABLE HENRY WOODS, United States District Judge for the
Eastern District of Arkansas, sitting by designation
The Honorable James G. Mixon, United States Bankruptcy Judge for the
Eastern and Western Districts of Arkansas
The Honorable Oren Harris, United States Senior District Judge for the Eastern
and Western Districts of Arkansas

In Re Walter J. Giller, JR., M.D., Debtor. First National Bank of El Dorado v. Walter J. Giller, JR., M.D., P.A., 962 F.2d 796, 1st Cir. (1992)

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962 F.

In re Walter J. GILLER, Jr., M.D., Debtor.

United States Court of Appeals,

First National Bank of El Dorado appeals from the order substantively

As demonstrated by the factual summary above, we understand what the

Factors to consider when deciding whether substantive consolidation is

preserving the recovery by the creditors of the solvent Debtor. We perceive no

We recognize that substantive consolidation normally would eliminate the

We reject First National's remaining argument as without merit.

The judgment of the district court is affirmed.

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