The concept of insider is defined in 11 U.S.C. § 101(a)(31). If a debtor is an individual, the term “insider” includes: relatives, any partnership in which the debtor is a general partner, any general partner of the debtor or any corporation in which the debtor is a director, officer, or person in control. If the debtor is a corporation, insiders include: directors, officers, persons in control, partnerships in which the debtor is a general partner, a general partner of the debtor, and the relatives of a general partner, director, officer, or person in control of the debtor. If the debtor is a partnership, insiders include: general partners, relatives of a general partner in, general partner of, or person in control of the debtor, partnerships in which the debtor is a general partner, persons in control of the debtor. If the debtor is a municipality, insiders include: elected officials of the debtor or relatives of elected officials of the debtor. An insider of an affiliate of a debtor is an insider of the debtor. Managing agents of debtors are also treated as insiders.
The list set forth in §101(31) of the Bankruptcy Code is not exhaustive because it is prefaced by the word “includes”. Courts have recognized non-statutory insiders that fall within the definition but outside of any of the enumerated categories. The Third Circuit held in Winstar that: when the relationship between a debtor and a creditor is sufficiently close to suggest that transactions were not conducted at arm’s length, the creditor may be considered a non-statutory insider. Schubert v. Lucent Techs., Inc. (In re Winstar Comm’ns, Inc.), 554 F.3d 382 (3d Circuit 2009). Mere participation or influence may not be sufficient even if it includes a seat on a debtor’s governing body. In Capmark Fin. Grp. Inc., v. Goldman Sachs Credit Partners L.P., 491 B.R. 335 (S.D.N.Y. 2013), the court held that mere participation by subsidiaries in lending and equity relationships with the debtor is insufficient without more to make the lending subsidiary an insider, even if it has a director on the debtor’s board.
We care about the insider designation because a debtor in possession or a trustee may avoid and recover preferential transfers made by a debtor to a creditor only within the 90-day period preceding the filing of the debtor’s bankruptcy petition unless the creditor is an insider. If the creditor is an insider, the Bankruptcy Code authorizes the avoidance and recovery of preferential transfers made during the one-year period preceding the filing of the debtor’s bankruptcy petition. 11 U.S.C. § 547.
Samuel D. Hodson
Partner, Taft Stettinius & Hollister LLP