01/04/2010 04:27:43 PM EST
Schubert v. Lucent Techs. (In re Winstar Communications, Inc.), 554 F.3d 382 (3rd Cir. 2009)
Common sense dictates that a transaction is not at arms length when one of the transacting parties is coerced into purchasing inventory it does not need, does not have the cash to finance the purchase, and is forced out compliance with financial covenants by the purchase. So the Third Circuit held in the recent Winstar decision. This commentary discusses the import of this important decision.
Excerpt:
The United States Court of Appeals for the Third Circuit has ruled that a corporate creditor is a non-statutory insider for purposes of a preference determination because the creditor engaged in coercive practices and forced one-sided transactions that were not in the best interests of the debtor. The decision, Schubert v. Lucent Techs. (In re Winstar Communications, Inc.), 554 F.3d 382 (3rd Cir. 2009), confirms that a corporate entity need not have actual managerial control over a debtor in order to be considered an insider subject to the longer reach back period under 11 U.S.C.§ 547(b). Instead, a non-statutory insider exerts control over a debtor by forcing transactions with the debtor that are not at arm's length.
Background
Section 547 of the Bankruptcy Code provides that a trustee can avoid a preferential transfer made to a creditor between ninety days and one year before a petition was filed if the creditor was, at the time of the transfer, an insider. See 11 U.S.C. § 547(b). The Code further provides that "the term insider' includes . . . [a] (i) director of the debtor; (ii) officer of the debtor; (iii) person in control of the debtor; (iv) partnership in which the debtor is a general partner; (v) general partner of the debtor; or (vi) relative of a general partner, director, officer or person in control of the debtor." 11 U.S.C. § 101(31)(B). Because section 101 contains a non-exhaustive list of insiders, courts have identified an additional category called "non-statutory insiders." Non-statutory insiders include individuals and entities whose close relationships with the debtor require closer scrutiny than those who deal with the debtor at arm's length. Alan M. Resnick & Henry J. Sommer, 2-101 Collier on Bankruptcy P 101.31 (2009).
Winstar, a provider of local and long-distance telecommunications services, and Lucent, a designer of telecommunications services and products, entered into a strategic partnership in October 1998. As a result of the partnership, Lucent funded construction of Winstar's network and Winstar became a major customer for Lucent's products and services. In May 2000, Winstar obtained a $1.15 billion revolving credit and term loan from a consortium of banks (the "Bank Facility"). Winstar used the Bank Facility proceeds to pay off its existing obligations to Lucent. At the same time, Winstar executed a new agreement with Lucent through which it received a $2 billion line of credit (the "Second Credit Agreement"). In November 2000, Siemens joined the Bank Facility and loaned Winstar $200 million (the "Siemens Loan"). Winstar used the Siemens Loan proceeds to pay $188.2 million that it owed to Lucent under the terms of the Second Credit Agreement. Winstar and its subsidiary filed chapter 11 reorganization cases on April 18, 2001.