In Part I of our entry on Weinman v. Walker (In re Adam Aircraft Indus. Inc.), a recent decision by the Bankruptcy Appellate Panel for the Tenth Circuit, we chronicled the ouster of Adam Aircraft’s president Joseph Walker and discussed several factors the BAP considered in finding that Walker made a clean break from Adam Aircraft and, thus, was not a statutory insider after his resignation on February 1, 2007. In Part II, below, we discuss the BAP’s holding regarding Walker’s non-statutory insider status.
Part I Refresher (Skip this refresher if you have eidetic memory or remember the main points. Read this refresher if you—GASP!—did not read yesterday’s post.)
On February 1, 2007, Adam Aircraft’s board informed George Adam, the CEO and chairman of Adam Aircraft’s board, that they were terminating Walker, a decision that Walker learned in a meeting with Adam later that evening. Meanwhile, Adam Aircraft was negotiating critical debt financing with Morgan Stanley, the success of which could be jeopardized by Walker’s termination. Thus, the board gave Walker the opportunity to resign rather than be terminated. Walker resigned via email a few minutes after midnight and proposed certain severance terms in exchange for agreeing to, among other things, not work for a competitor and tell all parties that he resigned for personal reasons. Walker did not return to Adam Aircraft’s premises thereafter.
Walker’s resignation and Koerbel’s election were effective as of February 2, 2007. On February 13, 2007, 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.
On 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, which was refunded the following day. 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.
Around May, 2007 Walker and Adam Aircraft executed another separation agreement, which 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” (but, Walker never performed any services as “field sales liaison” and none of the parties intended that he do so).
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
In Part I, we discussed the BAP’s holding with respect to whether Walker was a statutory insider after February 1, 2007. The BAP, after carefully parsing through the detailed factual background outlined above, affirmed the bankruptcy court’s decision and held that Walker was not a statutory insider after such date. But, was he a non-statutory insider? Read on to find out.
Non-Statutory Insider Status
According to the BAP, non-statutory insider status is a creature of caselaw and is “based on a professional or business relationship with the debtor . . . where such relationship compels the conclusion that the individual or entity has a relationship with the debtor, close enough to gain an advantage attributable simply to affinity rather than to the course of dealings between the parties.” In determining non-statutory insider status, the BAP explained that courts focus on two fact-intensive factors: (i) the closeness of the relationship between the parties, such as whether the transferee had access to inside information about the debtor or the transferees ability to control the debtor and (ii) whether the parties conducted the transactions at issue at arm’s length.
The BAP found that after the night of February 1, 2007, Walker stopped being a non-statutory insider because, following his “unceremonious ouster by the Board,” Walker was never close to American Aircraft’s management: He did not return to American Aircraft and did not have access to company information. That Walker was able to receive a refund of his airplane deposit within days of emailing his follow-up request was not sufficient evidence of any “particular closeness” between American Aircraft and Walker as American Aircraft already had agreed to make this payment at the time Walker sent the follow-up email.
As to the trustee’s arguments that the severance agreements could not have been negotiated at arm’s length because Walker had the power to “wreak havoc” on American Aircraft’s relationship with its customers, had intimate knowledge of American Aircraft’s financial situation and operations, and received better severance benefits than any other American Aircraft executive, the BAP held that, even if true, such facts alone were not sufficient to find that the bankruptcy court erred in finding that Walker was not a non-statutory insider. Not only did Walker negotiate the severance agreements with the board — a board that had just fired him — but Koerbel, Walker’s replacement, partially drafted the agreements. Such awkward and uncomfortable circumstances showed the court that all parties were motivated by their own interests in reaching the final deal. On the one hand, American Aircraft sought a clean break from Walker that would not jeopardize its negotiations with Morgan Stanley. On the other hand, Walker sought a continued means of support and medical coverage for himself and his wife. Thus, Walker was appropriately excluded from the non-statutory insider category.
As all of the transfers were made to Walker after February 1, 2007, the court did not have to reach the issue of whether Walker was an insider at the time the payments were made or at the time they were arranged. Accordingly, the court affirmed the bankruptcy court’s denial of the trustee’s claims under sections 547 and 548 —denying the trustee the opportunity to extend the look-back period for preferences to one year and avoid the payments made to Walker under section 548.
Although the court’s decision must have made Walker one happy ex-president, Adam Aircraft also reminds practitioners that the devil is in the details when it comes to preference and fraudulent transfer actions. In answering the question of when an insider is no longer an insider, the Tenth Circuit BAP shed light on several additional important factors parties should consider in weighing the likelihood of success of their arguments before launching (or defending against) a preference or fraudulent transfer action.
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