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Insiders

by Adam Mack, J.D.
Who Is an Insider?
In bankruptcy, an “insider” is a creditor whose influence allows him or her to receive a more favorable repayment at the expense of other creditors [1] and is usually someone with whom the debtor has an especially close relationship. The term “insider” is defined by 11 USC § 101(31) as a relative or business partner of the debtor filing bankruptcy, but the definition has also been expanded and analyzed in case law. For instance, a professional relationship (such as with an accountant) isn’t automatically an insider relationship [2] but the insider relationship, if not one defined by 11 USC § 101(31), must be determined on a case by case basis. In other cases[3], the courts have found:

that a “Debtor’s ex-wife did not exert sufficient influence over him to render her an insider where debtor had remarried at the time of the transfer, his relationship with ex-wife was hostile, and negotiations between debtor and ex-wife were adversarial in nature”; [4]
that “‘friendship’ alone is insufficient to confer insider status; creditor needs to dominate the debtor in order to rise to the insider level”;[5]
that a “Debtor’s spouse held not to be an insider regarding transfers made pursuant to a antenuptial agreement during the course of acrimonious divorce proceedings even though transfers were made before divorce was final”;[6]
that the “mere fact that debtor and transferee were engaged to be married was not enough to confer insider status in the absence of other evidence”;[7]
that “buyer who had previous business transactions with debtor including construction of home and a loan, and debtor’s classmate and friend, did not have sufficiently close relationship with debtor to constitute insider”;[8]
and that an “attorney for debtor who represented debtor and debtor’s corporation in complex litigation was not insider of debtor.”[9]

On the other hand, cases in which the court found an individual to be an insider include ones in which:

a “former wife of debtor who loaned him money after divorce deemed insider in view of their continuing friendly relationship and joint hostility toward other party in litigation”;[10]
a “debtor and insider had a personal and financial relationship and lived together for over two years; insider financed the debtor’s investments, debtor appointed insider to be a director of his corporation, insider allowed debtor to use her credit cards, and debtor executed holographic will to insure that the insider would be repaid”;[11]
a “debtor and insider lived together in an intimate homosexual relationship which was marked by a ceremony where one partner was dominant and exerted control over debtor”;[12]
a “former brother-in-law of debtor’s principal deemed insider even after divorce because of continued friendship as evidenced by loan and status as long-time general manager of debtor”;[13]
a “debtor and insiders were personal friends and over $400,000 of loans were exchanged between the parties over a four year period on an informal basis with no documentation”;[14]
a “debtor and insider were close friends for many years and many loans were made between them without any signed promissory notes”;[15]
and a “debtor lived with the insiders’ daughter and indicated they were his relatives in a deed conveying real property to them.”[16]

Why Does It Matter?
When a bankruptcy is filed, the trustee has the authority to seize from creditors money that the debtor recently paid them. So if you made a car payment to your bank or if you repaid your parents money that you owed them, the trustee can go to your bank or your parents and demand the money. The “look-back period” for seizing the repayment money is 90 days for most creditors, but for insiders, it is a full year.

This aspect of bankruptcy law is often very frustrating for my clients and particularly for their families. If the person filing bankruptcy repaid money to their parents 10 months ago, those parents likely spent it already but the trustee will expect them to turn it over anyway.
The Most Important Part
Bankruptcy is a powerful tool to help you get a fresh start, but it also has far-reaching consequences for you and for those closest to you. You owe it to them and to yourself to consult a qualified Kansas bankruptcy lawyer to help minimize any negative consequences of filing while maximizing the benefits.

[1] In re Tankersley, 382 B.R. 522 (Bkrtcy.D.Kan. 2008)

[2] In re Boot Hill Biofuels, LLC, 08-13128 (KSBC)

[3] In re Farson, 387 B.R. 784, 792-793 (Bkrtcy.D.Idaho 2008)

[4] In re Schuman, 81 B.R. 583 (9th Cir. BAP 1987)

[5] Pfeiffer v. Thomas (In re Reinbold), 182 B.R. 244 (D.S.D.1995)

[6] Barnhill v. Vaudreuil (In re Busconi), 177 B.R. 153 (Bankr.D.Mass.1995)

[7] Thrush v. Marvin (In re Hollar), 100 B.R. 892 (Bankr.N.D.Ohio 1989)

[8] Jackson Purchase Prod. Credit Ass’n v. Taylor (In re Taylor), 29 B.R. 5 (Bankr.W.D.Ky.1983)

[9] Bahas v. Sagen (In re Durkay), 9 B.R. 58 (Bankr.N.D.Ohio 1981)

[10] Browning Interests v. Allison (In re Holloway), 955 F.2d 1008 (5th Cir.1992)

[11] Freund v. Heath (In re McIver), 177 B.R. 366 (Bankr.N.D.Fla.1995)

[12] Wiswall v. Tanner (In re Tanner), 145 B.R. 672 (Bankr.W.D.Wash.1992)

[13] Rush v. Riddle (In re Standard Stores, Inc.), 124 B.R. 318 (Bankr.C.D.Cal.1991)

[14] Grant v. Podes (In re O’Connell), 119 B.R. 311 (Bankr.M.D.Fla.1990)

[15] Castellani v. Kohne (In re Kucharek), 79 B.R. 393 (Bankr.E.D.Wis.1987)

[16] Loftis v. Minar (In re Montanino), 15 B.R. 307 (Bankr.D.N.J.1981)