Longview Aluminum, LLC v Brandt (In re Longview Aluminum, LLC), 2010 WL 2635787 (ND Ill, June 28, 2010)

CASE SNAPSHOT

A member of the Board of Managers of a limited liability company settled a lawsuit against the LLC, receiving partial payment four months prior to the LLC filing its petition for chapter 11 bankruptcy. The bankruptcy trustee sought to recover the payment to the member as a preferential transfer to an “insider.” The Bankruptcy Court held that, despite having been stripped of many of his membership rights prior to the payment, the member was an “insider” of the LLC within the meaning of the Bankruptcy Code, and the payment was a preferential transfer that could be avoided and recovered by the trustee.

FACTUAL BACKGROUND

Longview Aluminum was organized in Delaware as a limited liability company. It was governed by a Limited Liability Company Agreement, which listed five members comprising its Board of Managers. Among these members was Mr. Forte. The LLC Agreement provided that Longview would be managed by the Board, and that Longview was required to promptly furnish members with relevant financial data. Members were also afforded the right to inspect the company’s books and records.

On several occasions, Forte requested that Longview furnish business records and allow him to review the records; all of his requests were denied. Forte eventually sued one of his fellow members of the Board, alleging that the member was using his controlling interest to exclude Forte from any management decisions and any review of records. Longview intervened in that action, and was named as an additional defendant. The other members of the Board adopted a resolution that formally took away Forte’s right to access Longview’s records.

Forte and the defendants reached a settlement, whereby Longview would pay Forte $400,000 plus attorney’s fees and costs, in exchange for Forte’s agreement to leave the Board. On November 7, 2002, Longview delivered $200,000 to Forte as an initial payment. On January 16, 2003, Longview paid $15,000 to Forte as reimbursement for his attorney’s fees. On March 4, 2003, Longview filed a chapter 11 petition.

William Brandt was appointed the trustee in the bankruptcy proceedings, and he filed an adversary action against Forte, seeking to avoid the payments of $200,000 and $15,000, as preferential transfers. Since the $15,000 payment was made within three months of the bankruptcy petition, Forte conceded that it was a preferential transfer, and he returned that money to the estate. The Bankruptcy Court found that Forte was an “insider” within the meaning of the Bankruptcy Code, and ordered Forte to return the $200,000. Forte appealed that decision to the District Court.

COURT ANALYSIS

A bankruptcy trustee, under section 547(b)(4) of the Bankruptcy Code, has the power to avoid any transfer a debtor makes in the 90 days preceding the bankruptcy petition filing. Further, the trustee has the power to avoid any transfer made to an “insider” of the debtor, if the transfer occurs between 90 days and one year prior to the petition filing.

The Bankruptcy Code does not define persons deemed to be an “insider” with respect to a limited liability company. Section 101(31)(B) provides that, if the debtor is a corporation, an “insider” is deemed to include a director of the debtor, an officer of the debtor, and a person in control of the debtor.

Forte argued that he was not an “insider” of the LLC since neither the term “manager” nor “member” is included in section 101(31)(B). Forte further argued that he was not an insider because he was not a person in control of the debtor. Thus, Forte contended that since the $200,000 payment to him occurred more than 90 days prior to Longview’s bankruptcy filing, the trustee should not be able to avoid the payment.

The court looked to a Seventh Circuit case for the proposition that the term “insider” encompasses anyone with a “sufficiently close relationship with the debtor that his conduct is made subject to closer scrutiny than those dealing at arm’s length with the debtor.” The court then looked to Delaware law, which requires that a corporation generally must be managed by a board of directors. “Thus, in referencing a director, section 101(31)(B) was intended to refer to the party that ‘managed’ the debtor corporation.” Further, Delaware law regarding LLCs states that the management of a limited liability company shall be vested in its members. Putting all of this together, the court found that a member of an LLC is analogous to a director of a corporation under Delaware law, and that Forte was, therefore, an “insider” under bankruptcy law.

Forte argued that, as early as 2001, he was no longer effectively a managing member of Longview since he was denied access to its books and records. Further, he argued, the August 2002, Board consent effectively stripped him of his status as a member. The court substantively examined this contention. First, the settlement agreement provided that Forte would remain a member of Longview until the entire $400,000 was paid. Forte had not received full payment, so he was still formally a member of the Board. The court also examined the Board consent, and concluded that, while the consent did strip Forte of his rights to examine the books and records, it did not strip Forte of any other rights, nor did it strip Forte of his status as a member of the Board of Managers of Longview.

Therefore, the court concluded, at the time of the $200,000 payment, Forte was still a member of Longview and a member of the Board of Managers, and that he was an “insider.” Because the payment had been made to an insider, and had occurred within one year of the bankruptcy filing, the trustee could avoid the payment made to Forte.

PRACTICAL CONSIDERATIONS

A party that has a close relationship with a debtor company may be deemed to be an “insider,” regardless of the name or title the party has. This case illustrates that a creditor does not have to be a “director,” or another term set forth in the Bankruptcy Code, in order to be an “insider.” Courts will substantively examine relationships, state laws, and other relevant facts, in order to draw inferences and reach conclusions, especially where there may be some gap in the Bankruptcy Code. A creditor or other party deemed to be an “insider” stands to lose any transfers made to it by a debtor within one year prior to bankruptcy.