Opinion ID: 2798985
Heading Depth: 2
Heading Rank: 1

Heading: Insiders and the Right to Indemnity

Text: As its president and CEO, Simon is an insider of Adamson Apparel, Inc. Adamson took out a loan from CIT Group Commercial Services, Inc. Simon personally guaranteed the loan. Adamson made a partial payment of about $5 million on the loan in December 2003. In September 2004, Adamson filed for bankruptcy. Title 11 U.S.C. § 547(b) authorizes the bankruptcy trustee to avoid certain pre-filing transfers: all transfers made in the 90-day period before filing and all transfers made for the benefit of a “creditor” in the one-year period before filing. Because the December 2003 partial payment occurred less than a year before filing but more than 90 days before filing, the trustee’s ability to avoid the transfer turns on whether Simon was a “creditor” of Adamson in December 2003. Every bankruptcy court to have addressed this issue since the important 1994 amendments to the Bankruptcy Code have agreed: insider-guarantors such as Simon are “creditors” for purposes of the Code even if they nominally have waived their right to indemnity. Miller v. Greystone Bus. Credit II, L.L.C. (In re USA Detergents, Inc.), 418 B.R. 533, 542 (Bankr. D. Del. 2009); Russell v. Jones (In re Pro Page Partners, LLC), 292 B.R. 622, 630–31 (Bankr. E.D. Tenn. 2003); Telesphere Liquidating Trust v. Galesi (In re Telesphere Commc’ns, Inc.), 229 B.R. 173, 176 n.3 (Bankr. N.D. Ill. 1999).1 The courts’ reasoning is important: 1 The bankruptcy courts that decided the issue before the 1994 amendments all addressed the inequitable situation that Congress fixed in 1994—allowing a trustee to seek the funds from the lender. As the IN RE ADAMSON APPAREL, INC. 23 [S]uch a waiver has no economic impact—if the principal debtor pays the note, the insider guarantor would escape preference liability, but if the principal debtor does not pay the note, the insider could still obtain a claim against the debtor, simply by purchasing the lender’s note rather than paying on the guarantee. Thus, the [waiver] could only be seen as an effort to eliminate, by contract, a provision of the Bankruptcy Code. The attempted waiver of subordination rights was thus held to be a sham provision, unenforceable as a matter of public policy. Telesphere, 229 B.R. at 177 n.3; see USA Detergents, 418 B.R. at 542 (quoting and agreeing with that text from Telesphere); Pro Page, 292 B.R. at 630–31 (same). The majority opinion generally agrees with the quoted analysis. But the majority opinion then goes a step further—looking at additional facts in an open-ended inquiry into whether the waiver was a “sham.” Maj. op. at 11–21. I disagree with that approach, which is not supported by precedent or by the logic of what Congress tried to accomplish. The waivers are invalid for purposes of the Bankruptcy Code because they attempt to defeat the one-year look-back period via contract, even though the waivers have no real-world economic impact. The majority opinion searches for clues as to whether Simon actually planned to purchase the note, but that inquiry is irrelevant. Because Simon easily could have purchased the note as of December majority correctly recognizes, those cases plainly do not apply here, where the trustee seeks the funds from the insider. 24 IN RE ADAMSON APPAREL, INC. 2003, the waiver had no real-world effect other than to defeat the Bankruptcy Code’s longer look-back period for insiders. Therefore, Simon was a creditor. I would follow the unanimous view of the bankruptcy courts that have ruled on this issue and would hold that an insider-guarantor is a “creditor” for purposes of the Bankruptcy Code.