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Anyone occupying a key position with a business entity is wise to make provision for when that relationship ends. But the flow of payments triggered by an individual’s termination may give rise to insider preference liability if such payments occur during the year prior to a company’s bankruptcy filing. Bankruptcy Code � 547(b) (4)(B) requires that, for transfers made more than 90 days but less than one year before the petition date to be considered voidable preferences, the transferee must have been an insider “at the time of such transfer” (emphasis added). Most cases hold that the transfer occurs when the transfer is “perfected;” that is, when a creditor on a simple contract cannot acquire a judicial lien superior to the interest of the transferee . See, e.g., Dent v. Martin( In re Trans Air Inc.), 86 B.R. 290, 291 (S.D. Fla. 1988); but see In re Le Cafe Creme Ltd., 244 B.R. 221 (Bankr. S.D.N.Y. 2000), in which Judge Tina Brozman held that the transfer took place when the buyout agreement was signed more than three years prior to the petition date. A person who is a corporate officer or director at the time he or she receives a benefit from the corporation will be held to be an insider. By definition, however, payments made pursuant to a buyout agreement will only commence when the transferee no longer occupies any official position with the transferor. At that point, the question of whether a transferee is an insider becomes much more complicated. An insider of a corporation is defined by � 101(31)(B) to “include” not only an officer or director, but also a “person in control” of the debtor. The use of two open-ended terms (“include” and “person in control”) makes clear that a court’s inquiry is not confined to any bright-line test, but, to the contrary, the court is required to closely examine the totality of the transferee’s relationship with the transferor. See In re F&S Cent. Mfg. Corp., 53 B.R. 842, 848 (Bankr. E.D.N.Y. 1985); In re Camp Rockhill Inc., 12 B.R. 829, 834 (Bankr. E.D. Pa. 1981); In re Babcock Dairy of Ohio Inc., 70 B.R. 657, 662 (Bankr. N.D. Ohio 1986). If the transferee could be said to be dealing with the debtor on other than an arms-length basis, courts will generally find that the transferee was a person in control of the debtor, even though he or she was not a corporate officer or director at the time of the transfer. EARLY CASES ON POINT The earliest cases to deal with this issue were presented with relatively egregious fact patterns in which the courts did not need to construct a rigorous analytical basis for the result they reached. Thus, in the seminal case of In re Vaniman International Inc., 22 B.R. 166, 189 (Bankr. E.D.N.Y. 1982), the court was faced with transfers that were arranged by the principals of the company but did not close until the principals had a few days to resign from most if not all of their corporate posts. Judge Goetz swept past the transferees’ claims that they were not insiders and found that, because they were insiders when the transfers were arranged, it didn’t matter if they were no longer insiders when the transfers were effectuated. The court in F&S Central Manufacturing Corp., supra, followed Vanimanand coined the formulation that “a creditor who is an insider at the time the transfer is arranged is an insider at the time of the transfer.” 53 B.R. at 849. Here, too, the transaction under attack was one in which only a few days elapsed between the execution of the transaction documents and the payment of the consideration. Both this case and Vanimancould have been decided on the ground that the transferees were insiders on the payment date because, although they had resigned their official positions, they still retained effective control over the companies. Indeed, the F & Scourt noted that the transferees did have control on the transfer date because the agreement gave them the ability to rescind the sale of their stock and retake control of the company if payment were not made. In re Vadnais Lumber Supply Inc., 100 B.R. 127, 131 (Bankr. D. Mass. 1989), also involved a sale of the company by its principals where the principals resigned as officers as of the closing date and began receiving payments immediately thereafter. In holding the payments to be voidable preferences, the court noted: “Payments made after technical control ceases, but committed to while it exists, present the same potential for abuse posed by payments to parties then in control. The fact of control prompts the payment and its timing in both situations. There should be no difference between them where, as here, the contractual commitment is made during the one-year period.” (Emphasis added.) As courts began to deal with increasingly diverse fact patterns, the failure to articulate the precise basis for determining a transferee’s insider status began to lead to results less defensible than those in the earlier cases. A striking example occurred in In re EECO Inc., 138 B.R. 260, 265 (Bankr. C.D. Cal. 1992), in which an employee who had been given the title of vice president negotiated, more than a year prior to the bankruptcy filing, a severance package. Although there was no indication that the employee had any effective control over the company when the payments were made, the court nevertheless held that the payments he received during the extended preference period could be recovered because the transferee had been an officer, and thus an insider, when the transfer had been arranged. The court cited the F & Scourt’s articulation of the “once an insider, always an insider” standard as justification for its holding. In re Babcock Dairy, supra, by contrast, focused more directly on the degree of control that would need to be exerted by a former corporate principal before he or she could be considered an insider for preference purposes. There, the former owner had sold the business some years earlier but continued to receive payments into the extended preference period. He also continued to be employed by the company with specific duties, but was clearly not in a position to make or influence corporate policy, could not sign checks or hire and fire employees. The court held that he did not possess a sufficient degree of control to render him an insider at the time he received his payments: “[I]t does appear that the person or entity must exercise sufficient authority over the debtor so as to unqualifiedly dictate corporate policy and the disposition of corporate assets (citation omitted). It is insufficient that the alleged insider had only a superior bargaining position in a contractual relationship with the debtor.” (citation omitted). 70 B.R. at 661. SIMILAR FACT PATTERNS The fact patterns in EECOand Babcock Dairyare sufficiently similar that they could easily have come out the same way. The EECOcourt failed to recognize that the transferee had no effective control over the company when the payments were made. Babcocklooked at the actual relationship of the transferee to the debtor during the extended preference period and found that the lack of control was fatal to the claim of insider status. In a recent case in which I was involved, the confusion as to the proper standard for determining insider status led to a direct clash of these differing approaches to the insider issue. In In re ERD Waste Corp., 97 B 51079 (Bankr. D.N.J.), the debtor had acquired, through a merger, several related companies approximately 15 months before the bankruptcy filing. One of the merged entities’ first acts was to fire the former CEO of the acquired companies. Almost three years earlier, the CEO had entered into a severance agreement that provided for a lump-sum payment to be made to him within 90 days of his termination. Once terminated, he demanded payment of his severance agreement. The debtor refused, and litigation ensued. The litigation was settled approximately nine months prior to the bankruptcy filing, and the debtor made an immediate transfer of assets equal to one-half the amount due and agreed to pay the rest over five years. After the petition was filed, the debtor commenced a preference action, claiming that the transferee was an insider because the obligation that formed the basis for the eventual transfers had been arranged while the transferee had been an insider of the debtors. The transferee defended on the ground that he was not in control of the debtor when the payments were made, and had no opportunity to influence the disposition of corporate assets; that if he had had such power, he would have made sure that the payment was made in a timely fashion under the severance agreement; that if the payment had been made on time, it would have been made more than a year prior to the petition date and thus would not be recoverable at all; and that the fact that he was terminated and had to sue to force the company to pay him was dramatic evidence of his inability to exercise any control whatever over the debtor. In a bench ruling, the bankruptcy court held for the transferee. The court rejected the claim that the former CEO’s execution of the severance agreement years earlier continued his insider status until the date of payment, and held that the transferee’s adversarial relationship with the debtor negated any claim that he should be accorded insider status during the time of the transfers. Buyout or severance agreements present unusual analytical problems, and bankruptcy courts have had a great deal of difficulty in determining the proper standard to be applied when deciding if a former insider transferee should be considered to be an insider for preference purposes. Despite this, the results reached in most of the cases surveyed follow one common theme: A corporate principal who arranges a payday for himself at a time when he knows that the company is or will shortly be in financial distress will not be allowed to avoid preference liability simply because he was not a corporate officer at the time he cashed his check. In this connection, we note that � 547b(4)(B), as originally enacted, required that the insider transferee have reasonable cause to know of the transferor’s insolvency before liability could be imposed. That requirement was taken out of the statute in the 1984 amendments, but for golden-parachute insider claims, it appears that this standard is alive and well. Aaron R. Cahn is of counsel in the bankruptcy practice group at New York’s Carter, Ledyard & Milburn.

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