MEMORANDUM OPINION

DOUGLAS D. DODD, Bankruptcy Judge.

William and Carolyn Carroll filed chapter 13 on May 21, 2008, but within three months had their case converted to a chapter 7 liquidation. RedPen Properties, L.L.C. ("RedPen"), a Louisiana limited liability company whose only members are Mr. and Mrs. Carroll, filed chapter 7 on July 2, 2008.

Samera L. Abide, chapter 7 trustee for both bankruptcy estates, moved to substantively consolidate the two estates. The Carrolls alone oppose consolidation.

The records of the two cases and the evidence support substantive consolidation.

Facts

The Carrolls Formed RedPen to Protect their Property from Creditors

Carolyn Carroll admitted in an August 3, 2010 deposition taken during adversary proceedings the Carrolls' daughters filed in this court that she and her husband formed RedPen intending to give the company all their assets to protect the property from creditors.1 Thus, from almost the moment RedPen came into existence on May 29, 2002, the Carrolls began transferring their immovable and movable assets to it in exchange for ownership interests in the company. In fact, that very day the Carrolls transferred2 their residence (a house and seven acres of immovable property in Ascension Parish) to RedPen in exchange for 10,000 ownership units3 in the company. Only one month later the Carrolls transferred the rest of their property to RedPen,4 briefly retaining only a five acre tract in Ascension Parish against which BankOne had started foreclosure proceedings. They later transferred that land to RedPen after paying the balance owed to the mortgage creditor, taking in exchange one more unit of membership in the limited liability company.5

Over time, RedPen's and Carroll family members' transactions involving the five and seven acre Ascension Parish tracts furthered the Carrolls' scheme to use RedPen to shield their assets. First RedPen transferred all of its interest in the Ascension properties to William Carroll, III, the Carrolls' adult son, in January 2006.6 A few months later William Carroll, III borrowed $50,000 from Central Progressive Bank using the 5-acre tract as collateral,7 and on the same day deposited the loan proceeds into RedPen's checking account. Those funds were accessible to the Carrolls, who used them to defray personal expenses.8

RedPen's land transfers continued after JP Morgan Chase Bank ("Chase") obtained a judgment in state court litigation against the Carrolls.9 Immediately before the sheriffs sale of the Carroll residence, William Carroll, III caused to be recorded in the public record a September 26, 2007 quitclaim deed that re-transferred his interest in the Carroll residence to RedPen.10 A second, separate May 20, 2008 quitclaim deed recorded on May 21, 200811 transferred the residence from RedPen to the Carrolls, who filed their bankruptcy the very next day—May 21, 2008—which stayed the sheriffs sale. By still another quitclaim deed dated September 26, 2007 (but not recorded until July 2, 2008), William Carroll, III re-transferred to RedPen the 5-acre tract it had conveyed to him in January 2006.12 RedPen filed chapter 7 on July 2, 2008, staying the Carrolls' creditors' actions against that property.

The May 20, 2008 quitclaim deed was executed without RedPen's authority; and the stated consideration for the 2006, 2007 and 2008 transfers between and among William Carroll, III, RedPen and the Carrolls was a mere $10.00. The Carrolls and RedPen have offered no evidence in either the Carrolls' or RedPen's bankruptcy cases that William Carroll, III or RedPen, ever displayed any indicia of ownership over the Carroll residential property or the 5-acre tract. Rather, even after the Carrolls transferred their residence to RedPen on May 29, 2002, they continued to occupy the property.13 The evidence established that the Carrolls, as the sole members of RedPen, treated the company's assets as their own.

The Carrolls Never Treated RedPen as a Separate Entity

The trustee's evidence established beyond doubt the Carrolls' utter disregard of the separate corporate identity of RedPen:

The Carroll and RedPen Bankruptcy Cases Feature Commingled Assets and Shared Creditors

Apart from the Carrolls' use of RedPen as a shield against creditors and its casual disregard of corporate formalities, the record of the bankruptcy cases support consolidating the Carroll and RedPen estates.

The Carrolls at first scheduled among their assets their residence, clothing, personal jewelry and a car. Their schedule B, signed under penalty of perjury, recited that they owned no household goods or furnishings. Consistent with this representation, they claimed exemptions only for their immovable property, clothing, jewelry and automobile.19

RedPen's original schedules list among its assets the 5-acre tract of land, an M-35 Bonanza airplane and $8,000 in household goods and furnishings,20 comprising the very same movables RedPen purported to transfer to the Carrolls' daughters in 2005.21 When the Carrolls amended their schedules in September 2011, for the first time they included among their possessions $8,000 in household goods and furnishings, claiming them as exempt.22 These are the "movables" the district court's June 2013 ruling concluded were the property of the estates of the "debtors."23 The Carroll residence, the 5-acre tract of land and the airplane have been sold: the only remaining valuable assets of either bankruptcy estate are the movables.

The claims registers for the Carroll and RedPen bankruptcy cases reveal that the creditors entitled to distribution in RedPen are also creditors of the Carroll bankruptcy estate.24 Specifically, the Carroll claims register includes timely claims filed by:

Only three scheduled creditors filed timely proofs of claim in the RedPen case:

Therefore, the only remaining claims entitled to distribution in the RedPen case are held by the IRS (much of which is secured by a lien the remaining assets) and Preis Gordon,27 two creditors that also are creditors of the Carroll estate.

Analysis

The Propriety of Substantive Consolidation Turns on Specific Facts

Substantive consolidation "occurs when the assets and liabilities of separate and distinct legal entities are combined in a single pool and treated as if they belong to one entity." In re Babcock & Wilcox Co., 250 F.3d 955, 959 fn. 5 (5th Cir.2001). Bankruptcy court authority to substantively consolidate two bankruptcy cases lies in 11 U.S.C. § 105(a), providing in relevant part that "[t]he court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title." The Supreme Court long ago recognized that consolidation of related bankruptcy estates is a tool vital to fulfilling a fundamental purpose of bankruptcy. Sampsell v. Imperial Paper & Color Corp., 313 U.S. 215, 219, 61 S.Ct. 904, 85 L.Ed. 1293 (1941). The Fifth Circuit has acknowledged that bankruptcy courts have authority to order substantive consolidation. In re S.I. Acquisition Inc., 817 F.2d 1142, 1145 fn. 2 (5th Cir.1987) (bankruptcy courts may de facto disregard the corporate form through consolidation proceedings).

Determining whether substantive consolidation is appropriate requires factspecific analysis. In re Introgen Therapeutics, Inc., 429 B.R. 570, 582 (Bankr. W.D.Tex.2010), citing In re Permian Producers Drilling, Inc., 263 B.R. 510, 517 (W.D.Tex.2000); In re Coleman, 417 B.R. 712, 726 (Bankr.S.D.Miss.2009) (discussing the preference for case-by-case analysis). Accordingly, courts have developed two distinct tests for applying the remedy: one, a factor-based test and the second, a balancing test.

Courts employing the traditional factor-based test consider several factors to determine the propriety of substantive consolidation. Most commonly they include:

Permian Producers, 263 B.R. at 518, quoting In re Vecco Constr. Indus., Inc., 4 B.R. 407, 410 (Bankr.E.D.Va.1980). See also In re Drexel Burnham Lambert Group Inc., 138 B.R. 723, 764 (Bankr.S.D.N.Y.1992); In re Owens Corning, 419 F.3d 195, 211 (3d Cir.2005) (articulating principles courts should consider when engaging in substantive consolidation analysis).

The second, or balancing, test weighs the effect of consolidating the cases on creditors against the benefits of consolidation. Permian Producers, 263 B.R. at 518, citing In re Snider Bros., 18 B.R. 230, 234 (Bankr.D.Mass.1982). The Second Circuit's balancing test considers two critical factors: "(i) whether creditors dealt with the entities as a single economic unit and `did not rely on their separate identity in extending credit . . .'; or (ii) whether the affairs of the debtors are so entangled that consolidation will benefit all creditors." In re Augie/Restivo Baking Co., 860 F.2d 515, 519 (2d Cir.1988) (internal citations omitted).

The Evidence Supports Substantive Consolidation of the Carroll and RedPen Estates

The traditional test factors support the finding and conclusion that the Carrolls' assets and liabilities are virtually the same as those of RedPen.

First, the transfers, attempted transfers and purported transfers between the Carrolls and RedPen, along with a dearth of financial records for RedPen, make it difficult to ascertain with reasonable certainty the assets and liabilities of each of the two bankruptcy estates. Substantive consolidation will moot the need to establish ownership, as between the Carroll and RedPen bankruptcy estates, of property the debtors purportedly transferred to their daughters, an issue that the district court's ruling leaves unresolved.

No evidence supported a finding that RedPen carried on any business functions unrelated to its transactions at the Carrolls' behest or for their benefit. The trustee proved that the Carrolls and RedPen observed no corporate formalities in RedPen's May 20, 2008 transfer of the Carrolls' residence to William and Carolyn Carroll. Rather, the evidence established that the Carrolls, as RedPen's sole owners, never separated RedPen's interests from their own because they intended, as Carolyn Carroll admitted, to use RedPen to shield their own assets from creditors.

The remaining factors—presence or absence of consolidated financial statements, profitability of consolidation at a single physical location and existence of parent and intercompany loan guarantees—are not relevant to this case. RedPen has no financial statements, there is no difference in physical location between the debtors and there is no credible evidence that the Carrolls and RedPen made loans to each other.

The balancing test also supports substantive consolidation. Abundant evidence established that the "affairs of the debtors are so entangled," Augie/Restivo Baking, above, that substantive consolidation serves the best interests of the remaining creditors by simplifying the trustee's sale of assets and distribution of proceeds. Consolidated estates will also avoid duplication of the trustee's expenes in administering two estates. The potential benefits of consolidating the debtors' cases to facilitate orderly administration outweigh any adverse effect of consolidation on the creditors — none of whom have objected to consolidation.28

Conclusion

Because substantive consolidation is beneficial to the remaining creditors of the Carroll and RedPen estates, the court will order the estates substantively consolidated.