Who are we kidding? The topic of statutory insiders has been a blog favorite, year after year. Not only are preference and fraudulent transfer actions common weapons in the bankruptcy arsenal, but the decisions in the area often lead to a new angle to explore — and a lesson to learn for both debtors and creditors at every corner. Weinman v. Walker (In re Adam Aircraft Indus. Inc.), a recent decision by the Bankruptcy Appellate Panel for the Tenth Circuit, does just that. In In re Adam Aircraft Indus. Inc., Bankruptcy Judges Karlin, Jacobvitz, and Hall explore the burning question that is sure to creep into this week’s water cooler conversation: When does an insider stop being an insider?
Debtor Adam Aircraft Industries designed and manufactured carbon composite aircrafts before filing a voluntary chapter 7 petition in 2008. Joseph Walker was Adam Aircraft’s former president and a member of its board of directors from about 2003 or 2004 until early February, 2007. George Adam (i.e., the “Adam” in “Adam Aircraft”) was its CEO and chairman of the board.
The following play-by-play of the events leading up to the trustee’s preference and fraudulent transfer action against ex-president Walker is vital to the court’s decision:
February 1, 2007
Two outside board members informed Adam that the board was terminating Walker’s employment as president and intended to replace him with Duncan Koerbel. That same evening, Walker met with Adam and learned of the board’s decision to terminate him. Meanwhile, Adam Aircraft was negotiating critical debt financing with Morgan Stanley, and it was paramount that nothing disturb the Morgan Stanley negotiations, including Walker’s termination. Thus, the board gave Walker the opportunity to resign rather than be terminated. This option was discussed by Adam and Walker at their meeting.
February 2, 2007
After the meeting, and just minutes after midnight, Walker sent an email to Adam resigning as president and from the board. He proposed certain severance terms and, in exchange, offered (i) to be a “strong supporter” of Adam Aircraft, (ii) to be available as a consultant for two years, (iii) not to work for any competitor, and (iv) to tell all parties that he resigned for personal reasons. After sending the email, Walker left and never returned to Adam Aircraft’s premises.
When morning broke, Koerbel assumed the role of president and announced Walker’s resignation and Koerbel’s election as the new president.
February 5, 2007
On the following Monday, the board accepted Walker’s resignation and elected Koerbel as the new president. Walker’s resignation and Koerbel’s election were effective as of February 2, 2007.
February 13, 2007
Ex-president Walker and Adam Aircraft executed a Memorandum of Understanding outlining the terms of Walker’s severance and executed a separate agreement and release outlining the terms of his severance: (i) severance pay of $250,000 for one year, beginning March 1, 2007; (ii) additional monthly payments of $20,833 for up to six months if certain conditions were met; and (iii) retention of vested stock options. Adam Aircraft also agreed to offer, at some future time, a return of a deposit Walker had made for the future purchase of an Adam Aircraft plane, the repurchase of Walker’s stock, and healthcare benefits.
March 19, 2007
Walker emailed Kim Madigan, Adam Aircraft’s vice president of human resources, requesting an update on the return of his plane deposit.
March 20, 2007
Adam Aircraft refunded Walker’s plane deposit with interest. The Morgan Stanley financing agreement was also revised to exclude the repurchase of Walker’s stock from a negative covenant prohibiting Adam Aircraft from repurchasing stock.
May, 2007 – Onward
Around May, 2007 Walker and Adam Aircraft executed another separation agreement substantially similar to the previous severance agreements. This agreement provided that Walker’s employment as president of Adam Aircraft terminated effective as of March 1, 2007 and that as of that date he was a “field sales liaison.” Walker, however, never performed any services as “field sales liaison,” and none of the parties intended that he do so. Moreover, none of the parties explained the apparent discrepancy between the board’s decision that Walker’s resignation be effective as of February 2, 2007 and the March 1 date reflected in the May separation agreement.
Several months later, Adam Aircraft repurchased Walker’s stock.
Summary of Payments to Walker during the One Year before the Petition Date
March, 2007: Refund of plane deposit ($100,000)
July, 2007: Repurchase of Adam Aircraft stock ($100,002)
March, 2007 – February, 2008: Severance payments ($250,000)
The trustee brought an adversary proceeding against Walker, seeking to recover all of the payments Adam Aircraft made to Walker after his termination pursuant to, among other things, sections 547(b)(4) and 548(a)(1)(B)(ii)(IV) of the Bankruptcy Code. The bankruptcy court allowed the trustee to avoid $62,500.02 paid to Walker within the 90 days before the petition date pursuant as a preferential transfer under section 547(b)(4)(A). The court, however, denied the trustee’s remaining claims under sections 547 and 548 because Walker was not an insider.
Bankruptcy Appellate Panel
On the trustee’s appeal from the bankruptcy court’s decision, the main issue before the Bankruptcy Appellate Panel was whether Walker was an insider from and after February 1, 2007. If he was, then the trustee could expand the 90-day lookback period to one year under section 547(b)(4) of the Bankruptcy Code and take advantage of section 548(a)(1)(B)(ii)(IV). Importantly, the meaning of “insider” is the same for purposes of sections 547 and 548, except that section 547 focuses on insider status at the time of the transfer, and section 548 focuses on insider status at both the time of the transaction and when the obligation was incurred.
Statutory Insider Status
Bankruptcy law recognizes two types of insiders: statutory or “per se” insiders and non-statutory insiders. Statutory or “per se” insiders are those that are included in the non-exclusive definition of “insider” in section 101(31) of the Bankruptcy Code and give rise to the conclusive presumption that the individual or entity commands preferential treatment by the debtor. For example, for debtor corporations, per se insiders include directors, officers, persons in control of the debtor, partnerships in which the debtor is a general partner, general partners of the debtor, and relatives of any of the aforementioned individuals. Pursuant to Black’s Law Dictionary, on which the BAP relied, a director means “a person who is a member of the governing board of the corporation and participates in corporate governance.” An officer is defined as “a person elected or appointed by the board of directors to manage the daily operations of a corporation, such as a CEO, president, secretary, or treasurer.”
Prior to his resignation as president and from the board, Walker was a statutory insider. The bankruptcy court found, though, that Walker ceased to be a statutory insider after February 1, 2007. The trustee argued that Walker was still an officer and director after such date because his “resignation” from both positions was conditioned on Adam Aircraft’s acceptance of the severance terms in his February 2, 2007 email. The BAP disagreed and found substantial support in the record for the bankruptcy court’s finding that Walker made a clean break from Adam Aircraft on February 1, 2007:
- his resignation email stated that if his severance terms were met he would abstain from competing with Adam Aircraft, support the company to others, and tell all parties that his resignation was due to personal reasons;
- he had already removed all of his personal belongings from the premises; and
- about eight or nine hours after Walker sent his resignation email, Koerbel took over as president, and the board held a meeting to announce these changes.
Moreover, not only did Koerbel help prepare the severance agreements and the Memorandum of Understanding, but Walker did not attend or participate in any of the board meetings or corporate governance or management after February 1, 2007 and did not return to Adam Aircraft’s premises. All of these facts were sufficient for the bankruptcy court to find that Walker made a clean break from Adam Aircraft on February 1, 2007 and ceased to be a statutory insider after such date. Accordingly, the BAP held that the bankruptcy court did not err in finding that Walker was not a statutory insider.
Tomorrow, we will discuss how the bankruptcy court and the BAP analyzed the issue of whether Walker was a non-statutory insider.