The Bottom Line: 

In the recent case of In re Longview Aluminum, L.L.C., 10-2780, 2011 WL 3966152 (7th Cir. Sept. 2, 2011), the Seventh Circuit considered a case in which an LLC debtor (“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 Longview's members.  The Bankruptcy Court found that Forte qualified as an “insider” of Longview and that the debtor could void and recover the transfers made more than ninety days but less than one year before the debtor’s bankruptcy petition.  The district court affirmed the Bankruptcy Court and the Seventh Circuit affirmed.

What Happened: 

Dominic Forte was one of five members of Longview.  From 2001 until June 2002, Forte requested access to Longview’s business records.  The other members of Longview denied him such access.  They also formally suspended Forte’s right to access the records on August 20, 2002 until the conclusion of, among other things, discovery in an unrelated lawsuit involving certain members of Longview and Forte.  On November 7, 2002, Forte and the defendants to the lawsuit settled, agreeing that the defendants would pay Forte $400,000 plus attorney’s fees and costs. Longview paid Forte $200,000 the same day and delivered another check for $15,000 on January 16, 2003 for Forte’s attorney’s fees and costs.  Two months after the $15,000 payment and four months after the $200,000 payment, Longview filed its chapter 11 petition on March 4, 2003.

The Bankruptcy Code allows a debtor to avoid certain kinds of transfers made to any party in the ninety days before the debtor’s petition for bankruptcy relief.  11 U.S.C. § 547(b).  Section 547(b)(4)(A) also gives a debtor the right to avoid a transfer to an insider of the debtor as far back as a year before the bankruptcy petition.  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 the monies paid to Forte as a preferential transfer made within one year of bankruptcy to an insider.  Forte acknowledged that the $15,000 payment was a preferential transfer because it was made within ninety days before the petition date, and he returned the funds.  He made two primary arguments, however, that he was not an insider of Longview: (1) he argued that because Longview is an LLC, and not a corporation, he is not an insider as defined by the Bankruptcy Code and is thus not subject to the one year insider lookback period for preference actions and (2) Forte also argued that because he was denied access to Longview’s records, he was not a “person in control of the debtor,” and thus not an insider subject to the one-year lookback.

The Seventh Circuit found that the court must determine “insider” status on a case-by-case basis.  In making this determination, the Court considered Forte’s arguments but rejected them.  First, the Court disagreed that LLC members are excluded from the statutory term “insider,” citing caselaw showing that the examples of various insiders in the statute are not exclusive and include positions analogous to those enumerated in the statute, including status as an LLC member.  The Court also rejected Forte’s argument that because he was denied access to Longview’s records, he was not a “person in control of the debtor.”  Because the other members did not remove Forte from his position as a member of Longview, he retained meaningful rights, included the right to vote even as Longview wrote him a check for $200,000.  He was therefore still “in control of the debtor.”

Therefore, the Seventh Circuit held that Forte was an “insider” as that term is used in the Bankruptcy Code, and that the Bankruptcy Court was correct in its ruling that Longview could recover the $200,000 payment made to Forte four months before Longview’s bankruptcy petition.

Why the Case is Interesting:

The Seventh Circuit's decision represents a further step in treating “corporations” and “LLCs” as similar in bankruptcy cases.  The LLC's member was deemed a person in control (despite underlying litigation with the member on his underlying member rights).  The case also serves as a reminder that bankruptcy courts’ case-by-case determination of “insider” status can be more art than science.