Consolidated Rock Products Co. v. Du Bois

In 1929, Consolidated Rock Products Company (Consolidated) acquired two subsidiaries, Union Rock Co. and Consumers Rock and Gravel Co., Inc. (debtors). The subsidiaries maintained their corporate existence and kept some accounts separate, but Consolidated assumed all management, operation, and financing functions and managed the subsidiaries directly as departments of its own business. When Consolidated took control, the subsidiaries’ properties were appraised at more than $16 million secured by indentures. Consolidated retained all revenues and paid the subsidiaries only amounts necessary to pay interest and maintain their indentures. Upon termination, the operating agreement said Consolidated would return the properties to the subsidiaries and provide a final settlement of accounts. The agreement specified that it was not made “for the benefit of any third person.” Consolidated was profitable only the first year, losing about $1.2 million and paying only five dividends over the next eight years. When the three companies filed to reorganize in bankruptcy in 1938, Consolidated’s books showed debt to its subsidiaries of over $5 million, while the subsidiaries owed bondholders about $3.6 million. The parties’ reorganization plan proposed transferring all the assets to a new corporation that would issue securities to the subsidiaries’ bondholders in proportion to their holdings and simply cancel the $500,000 debt on Consolidated’s books. The district court found that the value of the assets exceeded the subsidiaries’ debt, but not by enough to pay the face value of the bonds with interest. However, the court found it could not determine and separate which properties belonged to each subsidiary because Consolidated’s unified operation commingled all their properties, making accurate appraisal impossible. Instead, the district court summarily disposed of the $500,000 intercompany debt, reasoning the operating agreement could not benefit third parties including bondholders, and confirmed the plan. The appellate court reversed, and the Supreme Court granted review.