By: Matthew Donoghue
St. John's Law Student
American Bankruptcy Institute Law Review Staff
Recently in Longview Aluminum, L.L.C. v. Brandt (“Longview”),[1] an Illinois district court held that a member of a limited liability corporation (“LLC”) is an “insider” under 11 U.S.C. § 101(31) of the Bankruptcy Code (“the Code”) regardless of the member’s control over the LLC.[2] The court reached this conclusion by analogizing a member of an LLC to a director of a corporation,[3] which is listed as a per se “insider” under section 101.[4]
The Code defines an “insider” as “an entity whose close relationship with the debtor subjects any transactions made between the debtor and such entity to heavy scrutiny.”[5] In Longview, an expelled member of the debtor/LLC received a $200,000 settlement from the debtor five months before it filed a chapter 11 petition.[6] The trustee asserted that the payment was a preference because the former member qualified as an “insider,” extending the preference period to one year.[7] The expelled member argued that he was not an “insider” because (1) a “member of an LLC” is not listed as an example of an insider under section 101, and (2) the bankruptcy court should have considered the extent of his actual control over the LLC before determining his “insider” status.[8]
The district court held that the member was a per se “insider.”[9] It explained that the lists in section 101 “are intended to be illustrative rather than exhaustive.”[10] Therefore, since directors of corporations are analogous to members of LLCs in terms of their legal authority over their respective entities, a member of an LLC is an “insider” as well.[11] Moreover, since “director of the [corporation]” and “person in control of the [corporation]” are separately listed as examples of “insiders” under section 101(31),[12] the lower court did not have to examine the member’s actual control over the entity before determining it was a statutory “insider.”[13]
In holding as it did, the district court followed the Seventh Circuit in viewing this statutory list of per se insiders as “illustrative rather than exhaustive.”[14] Therefore, in the Seventh Circuit, if a member or manager of an entity holds a position virtually indistinguishable from one of the positions listed in section 101(31), then that person is an insider.[15] Conversely, in the Ninth Circuit, “those who do not qualify as per se insiders because they are not within the categories specifically listed in the definitional statute can qualify as insiders only if they meet the test for non-statutory insiders, which requires some showing of control of the debtor.”[16]
The differing interpretations of how to determine whether or not a party is an insider is significant for both debtors and creditors because several privileges are dependant upon a party’s insider status, particularly a trustee’s power to avoid a preferential transfer of property to insiders.[17] Taking into account the rise of LLCs as a popular corporate structure,[18] combined with the increase in bankruptcy filings following the recent recession,[19] practitioners, debtors, and creditors need Supreme Court guidance on how to properly analyze a member of an LLC’s insider status.
[1] 431 B.R. 193 (N.D. Ill. 2010).
[2] Id. at 197.
[3] Id.
[4] See 11 U.S.C. § 101(31)(B)(i) (2006) (“The term ‘insider’ includes--if the debtor is a corporation--director of the debtor.”).
[5] 2 Collier on Bankruptcy, ¶ 101.31 (16th ed. 2009).
[6] Longview Aluminum, L.L.C. v. Brandt, 431 B.R. 193, 195 (N.D. Ill. 2010).
[7] Id.; See 11 U.S.C. § 547(b)(4)(B) (2006) (“[T]he trustee may avoid any transfer of an interest of the debtor in property--made--between ninety days and one year before the date of filing of the petition, if such creditor at the time of such transfer was an insider.”).
[8] See Longview, 431 B.R. at 196–197.
[9] See id. at 197.
[10] Id. at 196 (quoting In re Krehl, 86 F.3d 737, 741–742 (7th Cir. 1996)).
[11] See id. at 197 (“Directors are generally provided with authority for managing the corporation and members are generally provided with authority for managing the limited liability company.”).
[12] Longview Aluminum, L.L.C. v. Brandt, 431 B.R. 193, 195, 197 (N.D. Ill. 2010); see 11 U.S.C. § 101(31) (2006).
[13] Longview, 431 B.R. at 197.
[14] In re Krehl, 86 F.3d 737, 741–742 (7th Cir. 1996).
[15] In re Longview Aluminum, 419 B.R. 351, 355–356 (Bankr. N.D. Ill. 2009) (explaining it is not the title itself that deems someone an “insider,” but the transferee’s legal rights over the entity).
[16] In re Enter. Acquisition Partners, 319 B.R. 626, 633 (B.A.P. 9th Cir. 2004) (citing In re Schuman, 81 B.R. 583, 586 (B.A.P. 9th Cir. 1987)).
[17] See 2 Collier on Bankruptcy, ¶ 101.31 (16th ed. 2009).
[18] See Robert C. Clark, Major Changes Lead Us Back to Basics, 31 J. Corp. L. 591, 592 (2006) (discussing how the law needs to adapt to the increase of LLCs).
[19] See Porcher L. Taylor, III, Fernando M. Pinguelo & Timothy D. Cedrone, The Reverse-Morals Clause: The Unique Way to Save Talent’s Reputation and Money in a New Era of Corporate Crimes and Scandals, 28 Cardozo Arts & Ent. L.J. 65, 81 (2010) (“The Great Recession has triggered a flood of business bankruptcies, and many more are expected.”).
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