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How to Avoid Insider Preference Liability

By Michael L. Cook

The Tenth Circuit held on July 15, 2008, that a major creditor with a seat on the debtor's board of directors and a 10.6% equity interest was not an insider in a bankruptcy preference suit. In re U.S. Medical, Inc., 2008 WL2736658 (10th Cir. 7/15/08). Affirming the Bankruptcy Appellate Panel's reversal of the bankruptcy court, the Court of Appeals explained that Congress never intended to “subject [to insider status] an entity with 'complex business relationships existing over a period of time, attended by some personal involvement but without control ' over the debtor's business'” ' Id. at *4. As shown below, the decision contains a road map for corporate insiders on how to avoid preference liability.

Relevance of Insider Status

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