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California Bankruptcy Court: For an Insider Status – An Entity Should Fall Within the Categories Specifically Listed in the Definitional Statute

October 12, 2017, CaliforniaDebtor SunCal Marble Head, LLC developed residential real estate projects in the Western United States. Defendant SunCal Management (SCM) provided development management services to the SunCal Debtors. SCM was also the Debtor’s managing agent. The Trustee brought a motion for partial summary judgment for preferential transfers against SCM, alleging that the Debtor paid over $931,000 to SCM, allegedly an insider, towards management fees in the year before the Debtor’s petition date and hence the contested transfers were avoidable under Sec. 547 of the bankruptcy code. The court ruled in favor of the trustee. SCM did not fall within the definition of affiliate in Section §101(2)(D) because it did not operate the Debtor under a lease or operating agreement. The court determined that subsection § 101(2)(D) explicitly requires that the entity operating the debtor do so under “a lease or operating agreement.” Further, terming the development management agreement (the agreement between the Debtor and the Defendant) to be an “operating agreement” would be expanding the definition of affiliate (and thus insider) beyond what is plainly contained in the statute. The court further found that SCM was also a statutory insider of the Debtor under §101(31). Under §101(31)(F) “insiders” includes a “managing agent of the debtor” and in the case at bar, SCM exercised operational control over the Debtor and thus a managing agent.

(Palmdale Hills Prop. v Argent Mgmt., LLC (In re Palmdale Hills Prop.), 2017 Bankr. LEXIS 3534 [Bankr CD Cal Oct. 12, 2017, Nos. 8:08-bk-17206-ES, 1:16-ap-01120-GM].)


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