In re Longview Aluminum, L.L.C.

In re Longview Aluminum, L.L.C., No. 10-2780 (7th Cir. Sept. 2, 2011).
Because the question of "insider" status is a mixed question of law and fact, the Court of Appeals reviewed the underlying judgment de novo. If a preference defendant is an "insider" of the Debtor, then the preference reachback period is one year instead of ninety (90) days. 11 U.S.C. section 547(b)(4)(B). Pursuant to 11 U.S.C. § 101(31)(B), if "the debtor is a corporation," the term "insider" is deemed to include 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. . . ." The Code does not expressly provide whether and to what extent members of an LLC are to be treated under this statute. There are two approaches to the determination of "insider" status: (i) the "similarity" approach and (ii) the "closeness" approach. The similarity approach compares the position held by a non-statuutory insider with the list of positions creating statutory insiders and attempts to analogize the non-statutory insider's position with statutory positions. If the court finds sufficient "similarity," the putative insider is viewed as a statutory insider regardless of the degree of control that person may (or may not) exercise over the Debtor. The closeness approach encompasses anyone with a sufficiently close relationship with the debtor such that his conduct is made subject to closer scrutiny than those dealing at arm's length with the debtor. The Bankruptcy Court used the similarity approach and ruled that Delaware LCC members, like directors of a corporation, should be considered "insiders" of an LLC without regard to any "control" analysis. The Court of Appeals held that the bankruptcy court did not err in using the similarity approach to determine that a "member" of a Delaware LLC was similar to a statutory "director" and thus was an insider. The lower court also did not err in choosing not to analyze whether the LLC member was a non-statutory insider via control factors. The court's use of the alternative "similarity approach" was valid, and Bankruptcy Court did not err in granting Trustee's request to set aside and recover $200,000 paid by debtor to Forte made less than one year prior to filing of Chapter 11 bankruptcy petition. Fact that member alleged in underlying lawsuit that he was excluded from exercising any control over the business of the LLC, and therefore "control factors" did not exist, did not preclude finding that member was insider where member still formally retained voting rights in LLC pursuant to the LLC operating agreement and Delaware corporate law.
Procedural context:
The Bankruptcy Court ruled in favor of the trustee, finding that an LLC member was an "insider" similar to a corporate director who is specifically defined as an "insider" by Section 101(31) of the Bankruptcy Code. The District Court affirmed and this appeal followed.
Longview is a Delaware limited liability company (the "LLC") formed by five (5) members, who made up a Board of Managers (the "Board"). The Board consisted of Michael Lynch (50%) interest, Michael Ochalski (13% interest), John Kolleng (20% interest), McCall Enterprises, LLC (5% interest), and Dominic Forte (12% interest). On July 10, 2002, Forte sued Lynch and alleged that Lynch used his controlling interest in Longview to bar Forts from accessing the LLC business records or from otherwise participating in the management of Longview. On November 7, 2002, Forte and the corporate governance defendants entered into a settlement agreement under which Longview was to pay Forte $400,000, plus $15,000 in attorney fees and costs, in exchange for Forte's agreement to resign from the Board. Also on November 7, 2002, Longview paid Forte $200,000 as an initial settlement payment. On January 16, 2003, Longview paid Forte another $15,000 for Forte's agreed attorney fees and costs. On March 4, 2003, Longview filed fro Chapter 11 protection, and the trustee sued Forte to avoid and recover both the $15,000 payment and the $200,000 payment as preferences. Forte conceded that the $15,000 payment was preferential and returned that transfer, but denied that the $200,000 was preferential.
Circuit Judges Bauer, Flaum and Williams, with Judge Bauer writing for the Court. Affirming District Judge Der-Yeghiayan, who affirmed Bankruptcy Judge Wedoff of the Northern District of Illinois.

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