Court: Court of Appeals for the Tenth Circuit; July 15, 2008; Federal Appellate Court
Plaintiff-Appellant and Trustee Glen R. Anstine appeals a judgment from the Bankruptcy Appellate Panel (BAP) regarding Defendant-Appellee Carl Zeiss Meditec AG's status as a "non-statutory insider" of Debtor U.S. Medical, Inc. The BAP reversed the bankruptcy court's prior determination that Zeiss was a non-statutory insider under 11 U.S.C. § 101(31), which had allowed the Trustee to avoid $147,307 in transfers made within the ninety days to one year before the Debtor filed for Chapter 7 bankruptcy.
The facts established that U.S. Medical acted as Zeiss's exclusive distributor in North America under a distribution agreement, which included provisions for Zeiss to appoint a board member, Dr. Bernard Seitz, who attended all board meetings and had access to financial information but did not participate in voting on payments to Zeiss. Zeiss also held a 10.6% equity stake in U.S. Medical, acquired through a stock-purchase agreement.
Despite the close relationship between the companies, the bankruptcy court found no evidence that Dr. Seitz exerted control or undue influence over U.S. Medical's operations. The bankruptcy court declined to permit an interlocutory appeal and stipulated to a judgment in favor of the Trustee, preserving Zeiss's right to appeal. The final judgment was entered on August 7, 2006. The BAP's ruling, affirming Zeiss's non-insider status, was upheld by the Circuit Judge Paul Kelly, Jr. under 28 U.S.C. § 158(d).
Creditor appealed to the Bankruptcy Appellate Panel (BAP), which reversed the lower court's decision, stating that not all creditor-debtor relationships with personal interaction qualify as insider relationships. The BAP emphasized that mere closeness does not automatically confer insider status. The BAP's judgment was issued on June 12, 2007. The appellate court independently reviewed the bankruptcy court's decision rather than the BAP's, agreeing that whether a creditor is a non-statutory insider is typically a factual question assessed under the clearly erroneous standard. However, in this case, the undisputed facts led to a legal question predominantly based on statutory interpretation, warranting a de novo review.
Bankruptcy law generally prohibits preferential transfers to ensure fair treatment among creditors. A debtor may be motivated to favor certain creditors for personal or business reasons, but the bankruptcy court's oversight aims to prevent such preferential treatment, especially before bankruptcy filings. Under 11 U.S.C. § 547(b), a bankruptcy trustee can avoid transfers made within a specified timeframe if the creditor is deemed an insider. The definition of "insider" includes various corporate roles and relatives but is not exhaustive, as indicated by the term "includes." Courts recognize two types of insiders: those explicitly listed in the statute (per se insiders) and those not listed but having a sufficiently close relationship with the debtor, subjecting their dealings to closer scrutiny.
Insider status under the Code is classified into two categories based on relational classifications. The first category includes entities or relatives of the debtor or related entities, presuming preferential treatment due to affinity or consanguinity. The second category includes individuals or entities with a professional or business relationship with the debtor, allowing for a presumption of advantage based on closeness rather than transactional history. Non-statutory insiders are those who do not meet the statutory definition but share a close relationship with the debtor.
The Trustee argues that a close relationship alone is sufficient to establish non-statutory insider status without needing to prove control or undue influence. Conversely, the Creditor contends that such proof is necessary to confirm non-statutory insider status, arguing that a mere close relationship does not suffice. Both parties acknowledge the scarcity of case law on this issue.
Legislative history emphasizes that insiders are subject to closer scrutiny than those engaged in arm's length transactions, suggesting that courts assess the closeness of relationships and the nature of transactions. Two primary factors for determining insider status include the closeness of the relationship and whether transactions were negotiated at arm's length. Courts also consider any control exerted over the debtor by the creditor and the creditor's access to insider information. The inquiry focuses on the relationship's closeness and any indications that transactions may not have been conducted at arm's length. The Kunz case suggests that a close relationship alone may justify a finding of non-statutory insider status.
Kunz referenced Enterprise, which stated that a per se insider is close enough to the debtor to warrant preferential treatment legally, irrespective of actual control. However, case law, particularly Friedman, indicates that not every creditor-debtor relationship involving personal interaction qualifies as an insider relationship; arm's length transactions do not create insider status, even with some personal ties. Kunz clarified that a creditor can be deemed a non-statutory insider if there is evidence of a sufficiently close relationship that lacks an arm's length dynamic. It noted that a debtor does not need to specify the nature of a statutory insider relationship, but non-statutory insiders must be assessed based on specific case facts. The Kunz decision reiterated that mere closeness is insufficient for insider status, requiring evidence of a lack of arm's length dealings. The bankruptcy court's determination that the Creditor was a non-statutory insider of the Debtor was flawed, as it relied solely on the extreme closeness of their relationship without demonstrating that their transactions were not conducted at arm's length or that the Creditor exerted undue influence or control.
The Trustee's arguments regarding the classification of the Creditor as a non-statutory insider are unconvincing. Key points include:
1. The absence of control or an arm's-length relationship does not determine insider status, but the bankruptcy court's decision was based on the overall facts, not just control.
2. The court needed to determine that the Creditor did not actually control the Debtor to classify it as a non-statutory insider under 11 U.S.C. 101(31)(B)(iii). A statutory insider requires actual control, defined as the ability to dictate corporate policy and asset disposition.
3. The Trustee's reliance on In re Three Flint Hill Ltd. P’ship, which states that actual control is not necessary for determining non-statutory insider status, does not apply here since actual control was absent.
4. The Trustee asserts that he does not need to prove the absence of an arm’s-length transfer to classify the Creditor as a non-statutory insider, citing Kunz and In re McIver for support. However, the statutory definitions of insider status apply regardless of transfer conditions, and only specific sections of the Bankruptcy Code address transfers.
5. The "ordinary course of business" defense under 11 U.S.C. 547(c)(2)(A) complicates the argument, as it implies that non-statutory insiders cannot claim this defense if a less-than-arm's-length transfer is required to establish their status.
Overall, the bankruptcy court's ruling stands firm against the Trustee's claims, emphasizing the need for a nuanced understanding of insider classifications.
The definition of "insider" in bankruptcy law indicates that an insider has a close relationship with the debtor, subjecting their conduct to more scrutiny than those dealing at arm's length. Statutory insiders, as defined in 11 U.S.C. 101(31), are presumed to have such a relationship, while non-statutory insiders must demonstrate a connection that implies an advantage due to affinity rather than normal business dealings. For a creditor to be classified as a non-statutory insider, the trustee must prove that their transactions with the debtor were not at arm's length. Congress has established that statutory insiders have no independent interests from their debtors, contrasting with arm’s-length transactions. The bankruptcy court found that all transactions between the creditor and the debtor were at arm's length, undermining the claim that the creditor was a non-statutory insider. The trustee's argument that the creditor's access to inside information through a board member position constituted non-statutory insider status is unsupported, as precedent cases do not align with this assertion. The case cited by the trustee was reversed on appeal and is distinguishable from the current situation, where the creditor's representative acted in the debtor's interests.
Dr. Seitz, as vice president of the creditor, was tasked with acquiring and overseeing the creditor's investments in the debtor, utilizing inside information to benefit the creditor by facilitating purchases of claims against the debtor. Despite this, he maintained an arm's length relationship with the debtor, being aware of potential conflicts of interest. The Trustee references the Krehl case, which established that access to inside information can confer insider status, even without formal control over a corporate entity. In Krehl, the court found that an individual debtor's prior role as an officer and director allowed him to improperly divert assets to a successor corporation, thus granting him insider status due to his exclusive knowledge of the company's affairs. However, the bankruptcy court in the current case determined that Dr. Seitz did not exploit inside information in a similar manner.
The Trustee further argues that the creditor functioned as a "de facto director" of the debtor because Dr. Seitz sat on the debtor's board and that their strategic alliance implied insider status. This argument is weakened by the differing facts in the cited Papercraft case, which involved actions specifically aimed at benefiting the creditor. An unpublished case regarding a strategic alliance acknowledged the challenge of establishing insider status, noting that the responsibilities of strategic partners differ significantly from those of general partners. The Trustee's claims regarding "de facto director" and "strategic alliance" status are deemed unconvincing given the specifics of the case. Lastly, the Trustee asserts that the bankruptcy court did not establish a new category of insider, but the BAP interpreted the decision as indicating that a creditor corporation with an executive on the debtor's board qualifies as a non-statutory insider.
Trustee argues that the bankruptcy court's findings reflect the specific nature of the relationship between Creditor and Debtor and suggest that similar cases should be evaluated based on their own facts. However, Trustee does not adequately address the BAP's concerns that adopting a closeness-alone test could lead to a "de facto director" rule, which would compel corporations to avoid hiring directors from businesses they engage with, effectively creating a new, undefined class of insider. This interpretation contradicts Congressional intent and established case law, leading to the affirmation of the BAP's judgment.
An avoidable preferential transfer, under 11 U.S.C. 547(b), occurs when a debtor transfers property to a creditor for an antecedent debt while insolvent, within specific timeframes, allowing the creditor to receive more than in a Chapter 7 bankruptcy. The preference period is typically 90 days but extends to one year for insider creditors, as they are more likely to be favored in repayment and can influence bankruptcy filing timing.
While Dr. Seitz is a director of Debtor, the critical inquiry is whether Creditor, as a corporation, qualifies as an insider. An arm's-length transaction requires parties to act independently in their own interests. The term "control" should not imply actual legal control over the debtor's operations, which would categorize the creditor as a "person in control" under 11 U.S.C. 101(31).
Furthermore, under 11 U.S.C. 547(c)(2)(A), a transfer cannot be avoided if it was made in the ordinary course of business. Trustee claims that the BAP overlooked the bankruptcy court’s finding that Creditor had access to insider information, but this access does not grant Creditor non-statutory-insider status. The Trustee's argument that Creditor should be deemed a "de facto" director due to Dr. Seitz's position is rejected, emphasizing that a corporation cannot be classified as an insider solely based on the relationship of its executive with the debtor.
