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When a panel of 3rd U.S. Circuit Court of Appeals judges handed down a sharp rebuke of Fiberglas insulation maker Owens Corning’s attempted use of a controversial mechanism in its reorganization, ripple effects became immediately evident. The ruling may have a major impact on how some of the largest debtors now in Chapter 11 will proceed with their cases. In the bankruptcies of Thaxton Group Inc. and USG Corp., the ruling has already been discussed in either the courtroom or through filings. Judge Peter J. Walsh of the U.S. Bankruptcy Court for the District of Delaware asked parties in the Thaxton case to file memos assessing what the Owens Corning’s decision means for that case. Walsh is expected to rule shortly on whether the bankrupt operator of small loan and lease offices will be able to substantively consolidate over the objections of its lender, Finova Capital Corp. Meanwhile, in USG Corp.’s bankruptcy, also in the Delaware court, visiting Judge Judith K. Fitzgerald didn’t ask for a formal memo, but the appellate decision came up in discussion in a recent status conference. At issue is the Aug. 15 ruling by the 3rd Circuit that reversed a district court ruling, disallowing Owens Corning’s plan to consolidate the assets of the parent with its subsidiaries to repay creditors. The company filed a reorganization plan predicated on substantive consolidation, or the pooling of the assets and liabilities of the parent company with its subsidiaries. All creditors that have claims against the company or any of its subsidiaries would then seek recovery from the consolidated estate. Owens Corning’s creditors, in the company’s Aug. 29 motion for a rehearing of the case, said the appellate ruling set an entirely new standard of substantive consolidation for the 3rd Circuit that is far more stringent than the standard of other courts of appeal. Yet the decision supports the contentions of Thaxton Group’s lenders, as well as of USG, a bankrupt building products maker felled by asbestos liabilities, which all argue against substantive consolidation in their respective cases. “We think the 3rd Circuit panel got it right, and we don’t see any basis for a rehearing,” said Andrew R. Cardonick of Goldberg, Kohn, Bell, Black, Rosenbloom & Moritz Ltd. in Chicago, who filed an amicus brief in the original case before the appellate court on behalf of the Commercial Financial Association in favor of block substantive consolidation. Meanwhile, Lancaster, S.C.-based Thaxton, an operator of small loan and lease offices, and its unsecured creditors committee want to substantively consolidate. In a recent memo filed with the court, Finova argued that Thaxton’s reasoning for substantive consolidation does not meet the standard set forward in the Owens Corning ruling. Thaxton responded that its case differs from Owens Corning, so substantive consolidation should be allowed. Meanwhile, the appellate decision is viewed as positive for USG, said debtor counsel, David G. Heiman at Jones Day in Cleveland. “It confirms our understanding of the law,” Heiman said. He said in an oral status report to Fitzgerald that the counsel indicated that they are looking at the Owens Corning decision and trying to determine whether it would have any impact on USG’s process leading up to its own hearing on the substantive consolidation. In November 2004, USG filed a lawsuit in the bankruptcy court seeking to block an expected substantive consolidation motion from asbestos creditors. In its lawsuit, USG argues that its U.S. Gypsum Co. subsidiary made products containing asbestos, and therefore only this unit should pay asbestos liabilities, instead of any of its eight other bankrupt units. Fitzgerald has not yet ruled on the matter, which is still in its document discovery stage, Heiman said. To be sure, other bankrupt companies have been able to employ substantive consolidation with relative ease. Speizman Industries Inc. consolidated three subsidiaries in a reorganization plan approved last December in the U.S. Bankruptcy Court for the Northern District of Georgia in Newnan. Even in the Delaware court, BSI Holding Co. was allowed to substantively consolidate the assets and liabilities of all five of the debtors in its approved reorganization plan last year. Yet the tide has obviously turned. Copyright �2005 TDD, LLC. All rights reserved.

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