Insider Status for Preference Actions

A New York debtor’s most treasured asset in bankruptcy may be preference claims against creditors. For example, in the Bernard Madoff bankruptcy case many people were sued to return funds received from the bankruptcy estate though they themselves lost money in the ponzi scheme. In bankruptcy, “preference” means the transfer of an interest of the debtor in real or personal property:

• to or for the benefit of a creditor;
• for or on account of an antecedent debt owed by the debtor before making the transfer;
• made while the debtor is insolvent, on or within 90 days before the bankruptcy or within one year before the filing if the transferee creditor is an insider;
• that enables the creditor to get more than such creditor would receive if the debtor filed Chapter 7 bankruptcy.

In In re Longview Aluminum, L.L.C., 10-2780, 2011 WL 3966152 (7th Cir. Sept. 2, 2011), a limited liability company (LLC) debtor, Longview Aluminum LLC (Longview), brought an adversary proceeding to set aside and recover payments made less than a year before its bankruptcy filing to Dominic Forte, one of five Longview members.

The Bankruptcy Court held Forte qualified as an “insider” of Longview and that the debtor could void and recover the transfers made more than 90 days but less than one year before the debtor’s bankruptcy petition. The district court and the Seventh Circuit upheld the Bankruptcy Court decision.

Background facts: From 2001 until June 2002, Forte requested access to Longview’s business records. The other Longview members denied him access. There was an unrelated lawsuit involving some members of Longview and Forte. On November 7, 2002, Forte settled the lawsuit. Forte would be paid $400,000 plus attorney’s fees and costs. Longview paid Forte $200,000 on November 7, 2002, and delivered another check for $15,000 on January 16, 2003 for his attorney’s fees and costs. Two months after the $15,000 payment and four months after the $200,000 payment, Longview filed Chapter 11 on March 4, 2003.

The Bankruptcy Code defines an “insider” of a corporation as a “(i) director of the debtor; (ii) officer of the debtor; (iii) person in control of the debtor; (iv) partnership in which the debtor is a general partner; (v) general partner of the debtor; or (vi) relative of a general partner, director, officer, or person in control of the debtor.” 11 U.S.C. § 101(31)(B).

Longview filed an adversary proceeding to recover monies paid to Forte as a preferential transfer made within one year of bankruptcy to an insider. The $15,000 payment was a preferential transfer because it was made within 90 days before the petition date; Forte returned these funds.

In deciding whether Forte was an insider, the Seventh Circuit decided because the other members did not remove Forte from his position as a member of Longview, he retained rights to vote and was still “in control of the debtor.” The Seventh Circuit held Forte was an “insider”, and that the Bankruptcy Court was proper in ruling Longview could recover the $200,000 made to Forte before Longview’s bankruptcy petition.

When seeking answers on bankruptcies, contact a NY bankruptcy attorney who stays updated on developing case laws.