Source: https://business-finance-restructuring.weil.com/avoidance-actions/did-i-do-that-when-it-comes-to-affiliation-family-matters-so-too-may-the-definition-of-corporation/
Timestamp: 2020-06-06 13:47:56
Document Index: 725699954

Matched Legal Cases: ['§ 101', '§ 101', '§ 101', '§ 547', '§ 547', '§ 101', '§ 101', '§ 101', '§ 101', '§ 101', '§ 101', '§ 101', '§ 101', '§ 101', '§ 101', '§ 101', '§ 101', '§ 101', '§ 101', '§ 101', '§ 101']

Did I Do That? When It Comes to Affiliation, Family Matters. (So, Too, May the Definition of “Corporation.”) - Weil Bankruptcy Blog
In a recent preference action, Sherron Associates Loan Fund XXI (Lacey) L.L.C. v. Thomas (In re Parks), Case No. 12-44011, Adv. No. 13-04026 (Bankr. W.D. Wa. Dec. 18, 2013), the United States Bankruptcy Court for the Western District of Washington expanded the definition of “corporation” under 11 U.S.C. § 101(9)(A) in the insider context to include limited liability companies (LLCs). Pursuant to In re Parks, an LLC can be an “affiliate” of a debtor under 11 U.S.C. § 101(2)(B), and an insider of the LLC can thus be considered an insider of the debtor under 11 U.S.C. § 101(31)(E). In this case, after parsing through the somewhat convoluted facts summarized below, the court found that an individual who had received settlement payments from the debtor pursuant to a prepetition settlement agreement with him resolving litigation between them was an “insider” of the debtor because the individual’s brother controlled 67% of an LLC of which the debtor controlled 33%. Therefore, the preferential transfer look-back period was expanded from the typical 90 days from the date of the filing of the petition to one year.
The debtor, Barrett Parks (an individual, not a place), and Michael Weinand were the two members of South Sound Property Development, L.L.C., which was developing an office building in Washington. Weinand held 67% of the interests in South Sound and the debtor held the remaining 33%. The project was funded by two loans: (1) a loan from Sherron Associates for $693,000 and (2) a loan from Cascade Bank for over $12 million. The latter loan was collateralized by a million dollar investment account owned by Weinand’s sister, Margaret Thomas, who is also the defendant in the above-named adversary proceeding. Thereafter, South Sound defaulted on both loans. Attempting to alleviate some of the pressure from Cascade to secure alternate financing, Weinand withdrew $609,144 from Thomas’s investment account (over which he was investment advisor) and deposited them into South Sound’s account at Cascade.
Nonetheless, Cascade began foreclosure and receivership proceedings in state court and South Sound filed for chapter 11 in May, 2009. In September, 2010, pursuant to an agreement between Cascade, South Sound and Thomas, Thomas was released from any further liability to Cascade for her million dollar pledge, South Sound agreed to dismiss its bankruptcy and allow a receivership, and the property was sold by Cascade in a trustee’s sale.
Meanwhile, Sherron Associates commenced and won a state court litigation against the guarantors of its loan (Weinand, the debtor, and their spouses) in the amount of approximately $800,000. Thereafter, Weinand and his wife filed for chapter 7 and were discharged from the debt they owed to Thomas and Sherron Associates.
With South Sound not available for recovery and Weinand discharged on the debt, Thomas commenced a state court action against the debtor based on his personal guarantee to Thomas, seeking the funds that she had pledged to South Sound, the monies that were withdrawn, and interest in the aggregate amount of over $1.4 million. Thomas and the debtor settled their state court lawsuit in October, 2011, resolving Thomas’s claims for $600,000, with $155,000 payable upon execution of the settlement and monthly installment payments thereafter. Moreover, the debtor granted Thomas a security interest in certain stock he held to secure payment of the settlement. It is this settlement that is the subject of the adversary proceeding.
Current Adversary Proceeding
After the debtor filed a bankruptcy petition, Sherron Associates filed an adversary proceeding seeking to recover the payments made by the debtor to Thomas under the settlement agreement, arguing, among other things, that the payments made and security interest granted under the agreement were preferential payments under 11 U.S.C. § 547(b) and that the one year look-back period applied because Thomas was an insider of the debtor. Section 547(b) provides in pertinent part that
Id. (emphasis added). While certain of the payments were transferred to Thomas within 90 days prior to the debtor’s bankruptcy filing, the bulk of the payments as well as the related security interest were given to Thomas well before such window. Accordingly, Sherron Associates sought to establish that Thomas was an “insider” of the debtor in order to expand its recovery period from 90 days to one year prior to the debtor’s bankruptcy filing under § 547(b)(4)(B).
Sherron Associates and Thomas filed cross motions for summary judgment on the issue of whether Thomas was an “insider” of an “affiliate” of the debtor and thus an insider of the debtor under § 101(31)(E). This issue raised the interesting question of whether an LLC may be considered a “corporation” under § 101(9) and, thus, an affiliate of the debtor under § 101(2)(B) such that an insider of the LLC can be deemed an insider of the debtor under 11 U.S.C. § 101(31)(E). In re Parks answers “yes” to this question. Interestingly, as we have previously discussed, some courts have declined to expand the definition of “corporation” to include other business entities such as limited partnership in other contexts, such as in determining venue
Before weighing through the court’s analysis of the aforementioned issue, revisiting the definitions of certain key terms in § 101 is critical. Under § 101(31), the definition of an “insider” includes
(B) if the debtor is a corporation— . . .
(vi) relative of a general partner, director, officer, or person in control of the debtor; . . . [and]
(E) affiliate, or insider of an affiliate as if such affiliate were the debtor.
Id. (emphasis added). Under § 101(2), an affiliate means, among other things,
(B) [a] corporation 20 percent or more of whose outstanding voting securities are directly or indirectly owned, controlled, or held with power to vote, by the debtor, or by an entity that directly or indirectly owns, controls, or holds with power to vote, 20 percent or more of the outstanding voting securities of the debtor, other than an entity that holds such securities—
(ii) solely to secure a debt, if such entity has not in fact exercised such power to vote.
Id. (emphasis added). Under § 101(9), the term “corporation”
(i) association having a power or privilege that a private corporation, but not an individual or partnership, possesses;
(ii) partnership association organized under a law that makes only the capital subscribed responsible for the debtors of such association;
The court began with the statutory construction of the definition of “corporation,” finding that defining “corporation” with the term “includes” was meant to expand rather than limit the definition of “corporation.” Endorsing the reasoning of the Seventh Circuit in In re Longview Aluminum, L.L.C., 657 F.3d 507, 510 (7th Cir. 2011), which we previously blogged about here, in which the court found that, in the insider context, members of an LLC are equivalent to directors of a corporation, thereby expanding the term “director” in § 101(31) to include LLC members, the court concluded that the determination of insider status is a “case-by-case decision based on the totality of the circumstances.” When the “position of an alleged insider is not enumerated in the statute, ‘the relevant inquiry for the court to consider is whether the relationship at issue is similar to or has characteristics of any of the defined relationships.’ ”
Moreover, the court noted that in addition to the significance of the term “includes,” there is a presumption that “equivalent words have equivalent meaning when repeated in the same statute.” Federal courts in non-insider contexts have found that an LLC fits within the Bankruptcy Code’s definition of “corporation” and the term “corporations” has also been interpreted to include LLCs in various other sections of the Bankruptcy Code. While recognizing that federal law controls the interpretation at issue, the court also noted that the treatment of LLCs by Washington State courts in recognizing that LLCs have similar statutory structures with corporations supported the court’s conclusion.
Rejecting the strict construction argued by Thomas, the court held that an LLC can be an affiliate of a debtor as LLCs fall within the definition of “corporation” under § 101(9). Accordingly, because the debtor owned 33% of the interests in South Sound at all relevant times, the court found that South Sound was an affiliate of the debtor for purposes of determining insider status under § 101(31)(E).
Next, the court considered whether Thomas was an insider of South Sound such that she could be held to be an insider of the debtor. Remember, Thomas is Weinand’s sister and Weinand had a 67% ownership interest in South Sound. Accordingly, Thomas was presumptively an insider of South Sound as a relative of a “director, officer, or person in control” of an affiliate under § 101(31)(B)(vi)—the insider test for corporations.
Although Thomas argued that the “individual” test under § 101(31)(A) should have been used to determine whether she was an insider because the debtor was an individual, the court explained that the insider test under § 101(31) is not based on the nature of the debtor, but on the nature of the affiliate. The affiliate South Sound was a corporation and, thus, the court applied the corporation test under § 101(31)(B). Accordingly, Thomas was held to be insider of an affiliate of the debtor and an insider under § 101(31)(E), even though her relationship with the debtor was adversarial in the past.
This decision illustrates a court’s reluctance to limit the Bankruptcy Code and adopt a strict definition of “corporation” when doing so would limit the estate’s causes of action. More importantly, however, In re Parks serves as a warning to creditors everywhere. Usually, insiders and debtors have one degree of separation. However, in this factually convoluted case, a relationship more akin to three degrees of separation sufficed, allowing Sherron Associates to expand the look-back period for preferential transfers from 90 days to one year, and proving that, even in bankruptcy, family matters!