Appeals court overturns Owens Corning

In the March 2005 issue of IFLR, we reported that the US district court in Delaware had ordered the substantive consolidation of the assets and liabilities of Owens Corning and a number of its subsidiaries in the company's bankruptcy case. A syndicate of lenders led by Credit Suisse estimated that the decision would reduce the recovery on their $2 billion loan by as much as $1 billion. Not surprisingly, the lenders promptly appealed the decision.

The US Court of Appeals for the Third Circuit has now reversed the district court's decision in an important and strongly worded decision. The appeals court replaced the district court's legal test for consolidation with a much more demanding standard: its ruling emphasized in broadly cautionary language that consolidation should be ordered only in extraordinary circumstances in which other creditor remedies are inadequate. Even then, consolidation might not be appropriate given the profound...