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How to Identify a Non-Statutory Insider
There are distinct disadvantages to being an insider in bankruptcy litigation. A transfer of property of a debtor to a creditor who is an insider made within one year preceding the debtor's bankruptcy filing may be avoidable as a preference, whereas the preference window for transfers to non-insider creditors is limited to transfers made within 90 days preceding the bankruptcy filing. 11 U.S.C. ' 547(b)(4). Moreover, the conduct of insiders toward a debtor is subjected to rigorous scrutiny such that the claims of insiders are more susceptible to equitable subordination than those of non-insiders. See In re Fabricators, 926 F.2d at 1458, 1465 (5th Cir. 1991).
It is well-established that the definition of an “insider” contained in ' 101(31) of the Bankruptcy Code is not exhaustive and that there exists a category of insiders, commonly known as “non-statutory insiders,” whose description is not set forth in the Bankruptcy Code itself. In Schubert v. Lucent Techs., Inc. (In re Winstar Commc'ns, Inc.), 554 F.3d 382 (3d Cir. 2009), the Third Circuit Court of Appeals affirmed the lower courts' rulings that a public company was an insider of another non-affiliated public company and was therefore required to return a $188.2 million payment made over four months before the debtor's bankruptcy filing. This decision, in which the Third Circuit clarified the standards for identifying a non-statutory insider, deserves special attention because it illustrates how critical it is for lenders and vendors to conform their conduct toward troubled companies so as to reduce their risk of being deemed non-statutory insiders.
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