11-06236 Redmond, Brooke Trustee v. CJD & Associates a/k/a Davidson-Babcock (Doc. # 70) - Document Text
- Category: Judge Somers
- Published: 11 March 2014
- Written by Judge Somers
SIGNED this 10th day of March, 2014.
Designated for publication
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
BROOKE CORPORATION, et al.,
CHRISTOPHER J. REDMOND,
Chapter 7 Trustee of Brooke
Corporation, Brooke Capital
Corporation, and Brooke Investments,
CJD & ASSOCIATES, LLC, a/k/a
CASE NO. 08-22786
ADV. NO. 11-6236
MEMORANDUM OPINION AND ORDER DENYING
DEFENDANT’S MOTION FOR LEAVE TO FILE AMENDED ANSWER
Case 11-06236 Doc# 70 Filed 03/10/14 Page 1 of 22
Defendant CJD & Associates, LLC (CJD), moves under Bankruptcy Rule 7015
and Civil Rule 15(a)(2)1 to file an amended answer denying the Plaintiff’s allegation that
CJD is an insider of Debtors, which CJD admitted in its previously filed answer.2
Plaintiff opposes the motion primarily on the ground that the amendment would be futile
since CJD satisfies the statutory definition of a per se insider.3 For the reasons examined
below, the Court denies the motion.
The background facts are undisputed and not complex. Brooke Corporation
(Brooke Corp) and Brooke Capital Corporation (Brooke Capital) filed voluntary Chapter
11 petitions on October 28, 2008. Prior to that date, CJD (a Kansas limited liability
company) was a wholly-owned subsidiary of Brooke Brokerage Corporation, which, in
turn, was wholly owned by Brooke Corp. Brooke Capital was a majority-owned
subsidiary of Brooke Corp.
On February 2, 2012, the Trustee filed his Amended Complaint against CJD. It
seeks to avoid preferential or fraudulent transfers made by Brooke Capital to CJD, and to
1 Fed. R. Bankr. P. 7015 adopts Fed. R. Civ. P. 15 for adversary proceedings.
2 This Court has jurisdiction over the parties and the subject matter pursuant to 28 U.S.C.
§§ 157(a) and 1334(a) and (b), and the Standing Order of the United States District Court for the District
of Kansas that exercised authority conferred by § 157(a) to refer to the District’s bankruptcy judges all
matters under the Bankruptcy Code and all proceedings arising under the Code or arising in or related to a
case under the Code, effective July 10, 1984. Furthermore, this Court may hear and finally adjudicate this
matter because it is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(F) and (H). There is no
objection to venue or jurisdiction over the parties.
3 Plaintiff appears by John J. Cruciani and Michael D. Fielding of Husch Blackwell LLP. CJD
appears by Paul D. Sinclair, Jason L. Bush, and Brendan L. McPherson of Posinelli PC.
Case 11-06236 Doc# 70 Filed 03/10/14 Page 2 of 22
recover the value thereof. Paragraph 8 of the Amended Complaint alleged:
CJD & Associates, LLC d/b/a Davidson-Babcock (“CJD”) is
a Kansas limited liability company. Prior to Debtors’
bankruptcy filing on October 28, 2008, CJD was a wholly-
owned subsidiary of Brooke Brokerage Corporation who, in
turn, was wholly-owned by Debtor Brooke Corporation.
Thus, for all times relevant to this lawsuit, CJD was an
“insider” (as that term is defined by 11 U.S.C. § 101(31)) of
one of [sic] more of the Debtors because CJD constituted an
“affiliate” (as that term is defined by 11 U.S.C. § 101(2)).4
CJD’s answer to the Amended Complaint, filed on April 2, 2012, in response to
paragraph 8 stated,
Defendant admits that prior to the Debtors’ bankruptcy filing
on October 28, 2008, CJD was a wholly-owned subsidiary of
Brooke Brokerage Corporation who, in turn, was wholly-
owned by Debtor Brooke Corporation. As stated, Defendant
denies that it is a Kansas limited liability company as it was
administratively dissolved. The remainder of the allegations
in paragraph 8 consist of legal conclusions to which no
response should be required. To the extent a response is
required, the remaining allegations are denied.5
Paragraph 120 of the Trustee's Amended Complaint, included in Count I, which
seeks to recover preferential transfers, alleged, “At all times relevant to this matter,
Defendant was an insider of the Debtors.”6 CJD’s answer stated, “Defendants [sic]
admits paragraph 120 of the Complaint.”7 None of the affirmative defenses raised by
4 Doc. 5, 2, ¶ 8.
5 Doc. 10, 2, ¶ 8.
6 Doc. 5, 21, ¶ 120.
7 Doc. 10, 7, ¶ 120.
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CJD alleged that it was not an insider of any of Debtors.
CJD filed its motion for leave to file an amended answer on December 19, 2013.
It proposes to amend its response to paragraph 8 by deleting the sentence, “The remainder
of the allegations in paragraph 8 consist of legal conclusions to which no response should
be required,” and adding the following sentence: “Defendant denies that it is an ‘insider’
(as that term is defined by 11 U.S.C. § 101(31)) of one or more of the Debtors because
CJD constituted an ‘affiliate’ as that term is defined by 11 U.S.C. §101(2).”8 CJD also
proposes to amend its response to the allegations of paragraph 120 of the Amended
Complaint to read, “Defendant denies paragraph 120 of the Complaint.”9 The proposed
amended answer also includes as an affirmative defense that CJD was not a insider of
A. The Applicable Standard.
Civil Rule 15(a)(2), applicable to amendments other than those permitted as a
matter of course, provides that “a party may amend its pleading only with the opposing
party’s written consent or the court’s leave. The court should freely give leave when
justice so requires.” But “[t]he liberal amendment policy prescribed by Rule 15(a) does
not mean that leave will be granted in all cases.”10 In the Tenth Circuit, leave to amend
8 Doc. 66-2, 2, ¶ 8.
9 Id., 7, ¶ 120.
10 6 Charles AlanWright, et al., Federal Practice and Procedure, § 1487 at 699 (3d ed. 2010).
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may be refused when there is “‘a showing of undue delay, undue prejudice to the
opposing party, bad faith or dilatory motive, failure to cure deficiencies by amendments
previously allowed, or futility of amendment.’”11 The futility analysis determines
whether the proposed “claim or defense . . . is legally insufficient on its face.”12 “[I]f a
complaint as amended could not withstand a motion to dismiss or summary judgment,
then the amendment should be denied as futile.”13
B. The Parties’ Positions.
CJD argues that the Trustee is unable to show undue delay, prejudice, bad faith, or
dilatory motive. The case is in the early stages of litigation, with written discovery in
progress and no depositions having been taken. Further, according to CJD, the
amendments are not futile since the Trustee’s allegation that CJD is a statutory or per se
insider fails because insider status, on which the Trustee relies, applies to corporations,
but not to limited liability companies, such as CJD.
The Trustee first responds that leave should be refused because CJD delayed for
over 21 months before requesting leave to amend to its answer and the Trustee would be
unduly prejudiced by such amendment. In addition, and as his primary objection, the
Trustee argues that the amendment would be futile as a matter of law because CJD is a
11 Duncan v. Manager, Dep’t of Safety, 397 F.3d 1300, 1315 (10th Cir. 2005) (quoting Frank v.
U.S. West, Inc., 3 F.3d 1357, 1365 (10th Cir. 1993)).
12 6 Wright, et al., Federal Practice and Procedure, § 1487 at 733.
13 Id. at 743 (citing Bauchman ex rel. Bauchman v. West High School, 132 F.3d 542 (10th Cir.
1997) and other cases).
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statutory insider of Brooke Corp and Brooke Capital.14
C. The Court Rejects the Trustee’s Contention that Leave Should Be Denied
Because of Undue Delay or Undue Prejudice.
Although over 21 months passed since CJD filed the answer which it now seeks to
amend, undue delay is not measured by time alone. The circumstances of the case must
be considered. This litigation has not progressed significantly. If the defense to the
insider allegation is allowed at this time, the course of the litigation will not be
significantly different from what it would have been if CJD had denied insider status in
its original answer. For the same reason, the Trustee’s contention that he would be
unduly prejudiced by the amendment is unpersuasive. It is true that allowing the defense
would cause the Trustee to spend additional time and incur additional expense. But CJD
should not be bound by an admission because the other party relied upon it when the
litigation was in its early stages.
D. The Court Finds that the Proposed Amendment Would Be Futile.
The parties agree that the motion for leave should be denied if the defense to be
added by the amended answer could not survive a motion for summary judgment. In
support of his futility contention, the Trustee argues that CJD is a per se insider of Brooke
Corp under § 101(31)(E) because it constitutes an “affiliate” under § 101(2)(B) and (C).
CJD responds that because it is a limited liability company (LLC) rather than a
14 The Trustee also objected that CJD’s addition of an affirmative defense denying insider status
would be futile, since the assertion that a defendant is not an “insider” is not an affirmative defense but
rather simply an attack on a prima facie element of the Trustee’s case. Doc. 67, 11-12. In its rely brief,
CJD agreed with this position and no longer seeks leave for this particular amendment. Doc. 68, 9.
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corporation, it is not an “affiliate” and therefore not an “insider.” The legal issue
presented by the Trustee’s opposition to the motion is therefore whether CJD is a
corporation for purposes of the definition of “affiliate,” and therefore an “insider” of
Brooke Corp and Brooke Capital.
1. CJD is an “affiliate” of Brooke Corp under § 101(2)(B), and therefore an
“insider” of Debtors Brooke Corp and Brooke Capital under § 101(31)(E).
a. Arguments and authorities supporting the Trustee’s position.
Section 101(31) states the term “insider” “includes” those categories of persons
enumerated in the definition, such as a director, officer, or other person in control of a
corporate debtor, and a relative or general partner of an individual debtor. Courts agree
that the use of the word “includes” in the definition indicates that Congress did not intend
for the statutory list to be exclusive, and that there are two types of insiders: (1) those
entities specifically mentioned in the definition, and (2) those not listed but who have a
sufficiently close relationship with the debtor that their conduct is made subject to close
scrutiny.15 The first category constitutes statutory or per se insiders, those “‘whose
affinity or consanguinity gives rise to a conclusive presumption that the individual or
entity commands preferential treatment by the debtor.’”16 The second category is present
when it is shown “that the person or entity in fact had a relationship with the debtor that
15 Rupp v. United Security Bank (In re Kunz), 489 F.3d 1072, 1078-79 (10th Cir. 2007) (quoting
Miller Avenue Prof'l & Promotional Servs. v. Brady (In re Enterprise Acquisition Partners), 319 B.R.
626, 631 (9th Cir. BAP 2004)).
16 Id., 489 F.3d at 1079 (quoting Enterprise Acquisition Partners, 319 B.R. at 631).
Case 11-06236 Doc# 70 Filed 03/10/14 Page 7 of 22
was sufficiently close that the two were not dealing at arm’s length.”17
Even though an LLC controlled by a corporate debtor is not included in the list of
persons in § 101(31)(B), the Trustee contends that CJD is a per se insider of Brooke Corp
and Brooke Capital under § 101(31)(E), which defines “insider” to include an “affiliate,
or insider of an affiliate as if such affiliate were the debtor.” “Affiliate” is defined by
§ 101(2)(B) to mean a “corporation 20 percent or more of whose outstanding voting
securities are directly or indirectly owned, controlled, or held with power to vote, by the
debtor.” The Trustee contends, and CJD does not dispute, that if CJD were a corporation,
under these definitions, it would be an insider of Debtors Brooke Corp and Brooke
Capital. This is because before Debtors’ bankruptcies, CJD was a wholly-owned
subsidiary of Brooke Brokerage Corporation (Brooke Brokerage) and Brooke Brokerage
was majority owned by Brooke Corp. Thus, if it were a corporation, CJD would have
been an “affiliate” of Brooke Corp, since 100% of its securities would have been
indirectly owned or controlled by Brooke Corp because of Brooke Corp’s majority
ownership of Brooke Brokerage. Moreover, since Brooke Capital was a majority-owned
subsidiary of Brooke Corp, Brooke Capital was an “affiliate” of Brooke Corp under
§ 101(2)(B), and CJD (as a corporate “insider” of Brooke Corp) would also have been an
“affiliate” and therefore a per se insider of Brooke Capital under § 101(31)(E).
The Trustee further contends, but CJD disputes, that although CJD was in fact a
17 Id., 489 F.3d at 1079.
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limited liability company, it was nevertheless a “corporation” as defined by § 101(9) for
purposes of the definition of “affiliate.” Section 101(9) provides:
The term “corporation” —
(A) includes —
(i) association having a power or privilege that a
private corporation, but not an individual or a
(ii) partnership association organized under a
law that makes only the capital subscribed
responsible for the debts of such association;
(iii) joint-stock company;
(iv) unincorporated company or association; or
(v) business trust; but
(B) does not include limited partnership.
Although LLCs are not included in the enumerated entities, this omission does not
preclude finding that LLCs are “corporations” for purposes of the Code. The term
“corporation” only “includes” the entities enumerated in the statute. Under the Code’s
rules of construction as stated in § 102(3), the terms “‘include’ and ‘including’ are not
limiting.” The clear meaning of the definition of “corporation” is that entities not
enumerated in the statute may also be considered “corporations.”
Although the construction of the definition of “corporation” is a matter of federal
law, applicable state law defines the powers and privileges of the entity. Under Kansas
law, an LLC is a business organization “which offers the possibility of combining the
limitation on individual liability normally associated with the corporate form with the
conduit tax treatment of items of income, gain, loss, deduction and credit normally
Case 11-06236 Doc# 70 Filed 03/10/14 Page 9 of 22
associated with the partnership form.”18 Like a corporation, a “limited-liability company
may own property in its own name, and members have no ownership interest in specific
limited-liability company property.”19 Like a corporation, an LLC’s “liabilities in tort are
solely those of the LLC and . . . no member or manager may be liable solely based on
their status as a member or manager.”20 Members of LLCs, like stockholders of
corporations, are authorized to bring derivative suits.21 The Court concludes that a
Kansas LLC has powers and privileges that a corporation, but not an individual or
In the bankruptcy context, an LLC has been found to fit within the definition of a
“corporation” for purposes other than the definition of an “affiliate.” There is no question
that an LLC may file a petition under Title 11.22 As one court has stated, this is because
“an LLC, by virtue of its structure and limited liability features, fits comfortably within
the Bankruptcy Code’s definition of ‘corporation’ and, hence, is a ‘person’ eligible to be a
18 Edwin W. Hecker Jr., Limited Liability Companies in Kansas, 63 J. Kan. B. Ass’n 40, 40
19 In re App. for Tax Exemption of Kouri Place, L.L.C., 44 Kan. App. 2d 467, 470, 239 P.3d 96,
99 (2010) (citing K.S.A. 17-76,111).
20 University of Kansas v. Sinks, 565 F. Supp. 2d 1216, 1239 (D. Kan. 2008).
21 Halley v. Barnabe, 271 Kan. 652, 661-62, 24 P.3d 140, 146-47 (2001).
22 See In re Midpoint Development, L.L.C., 466 F.3d 1201, 1203-07 (10th Cir. 2006) (upholding
dismissal of Oklahoma LLC’s Chapter 11 petition because under Oklahoma law, debtor ceased to exist
when it filed articles of dissolution several months prior to filing bankruptcy); In re Lovell’s Amer. Car
Care, LLC, 438 B.R. 355 (table), unpub. op. available at 2010 WL 2769056, *3-6 (10th Cir. BAP 2010)
(Wyoming LLC eligible to file bankruptcy when certificate of dissolution had not been filed before date
of filing of bankruptcy petition).
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debtor.”23 An LLC is considered a “corporation” under Bankruptcy Rule 7007.1, which
requires a corporation that is a party to an adversary proceeding to file an ownership
Several courts considering per se insider status have held that LLCs fit within the
definition of a “corporation.” These include Longview Aluminum, L.L.C., 25 a decision by
the Seventh Circuit Court of Appeals. In that case, the Chapter 11 trustee brought an
adversary proceeding to set aside, as preferential transfers, prepetition payments that the
debtor LLC had made to one of its managing members, who was alleged to be an insider.
The court noted that “[t]he Bankruptcy Code’s definition of a corporation includes
unincorporated limited liability companies.”26 The court then analogized the position of a
member of an LLC to the director of a corporation and concluded that “a member of an
LLC can be a statutory insider within the meaning of 11 U.S.C. § 101(31)(B).”27
In Barman, 28 the court sustained the Trustee’s objection to discharge of the
debtors, Harold and Evelyn Barman, on the ground that they had refused to obey a court
23 Gilliam v. Speier (In re KRSM Props., LLC), 318 B.R. 712, 717 (9th Cir. BAP 2004). Section
109 provides that only certain “persons” may be debtors under Chapters 7 and 11. “The term ‘person’
includes individual, partnership and corporation.” 11 U.S.C. § 101(41).
24 See Fed. R. Bankr. P. 7007.1, Advisory Committee Note (2003).
25 In re Longview Aluminum, L.L.C., 657 F.3d 507 (7th Cir. 2011).
26 Id. at 509, n.1.
27 Id. at 510.
28 Solomon v. Barman (In re Barman), 237 B.R. 342 (Bankr. E.D. Mich. 1999).
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order in another bankruptcy case concerning an insider, BHB Enterprises, LLC (BHB),
organized under South Carolina law. Harold Barman was a member of BHB. The
debtors admitted that they were insiders of BHB, but denied that BHB was an insider of
theirs. The court examined § 101(31), which provides that an “insider includes [,] . . . if
the debtor is an individual[,] . . . [a] corporation of which the debtor is a director, officer,
or person in control . . . [and an] affiliate, or insider of an affiliate as if such affiliate were
the debtor.”29 It also examined § 101(2)(B), which defines “affiliate” to mean a
“corporation 20 percent or more of whose outstanding voting securities are directly or
indirectly owned, controlled, or held with power to vote, by the debtor.” It then
concluded, based upon an examination of the characteristics of limited liability companies
under South Carolina law, “that a limited liability company, such as BHB, is sufficiently
analogous to a corporation” for purposes of determining insider status.30 The court held
that “BHB is an ‘affiliate’ (and thus an insider) of Harold Barman because he owned, or
directly or indirectly controlled, one third of the voting rights in BHB [and that] BHB is
also within the statutory definition of an ‘insider’ of Harold Barman because he is one of
its three members and thus holds a position that is analogous to that of a ‘director, officer
or person in control’ of BHB.”31
29 Id. at 348 (quoting 11 U.S.C. § 101(31)(A)(iv) and (E)) (emphasis added by the court).
30 Id. at 348.
31 Id. at 349.
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In Lull, 32 a 2009 decision, the court relied on KRSM Properties and Barman to
hold that a member-managed Hawaii LLC should be treated as a corporation for purposes
of the definition of “insider.” In that case, the debtor and Zapara were each 50% owners
of interests in JWL, LLC. More than 90 days prepetition, the debtor made transfers to
Zapara which the trustee sought to recover as preferential transfers. The court held:
Under the Barman reasoning, and because an LLC is within
the Code’s definition of “corporation” under § 101(9)(A),
JWL may be treated like a corporation for the purposes of
insider analysis, and under 11 U.S.C. § 101(31)(A)(iv) its
insiders include “director(s), officer(s) or person(s) in
. . . As the only members of an LLC, Debtor and
Zapara had co-equal rights in the management and conduct of
the company’s business as a matter of law. . . . JWL is an
“affiliate” of Debtor because Debtor controlled or held fifty
percent of the “voting securities” of JWL (and because an
LLC fits within the Code’s definition of “corporation” under
§ 101(9)(A)). Zapara is also an “insider” of JWL and thus an
insider [of] the debtor under § 101(31)(E) because she also
controlled or held 50% of the “voting securities” of JWL.33
Very recently, the Parks34 court thoroughly examined the question of whether an
LLC, organized under Washington law, was a “corporation” for purposes of the definition
of “insider.” The court began its analysis with the principles of statutory construction. It
noted that the definition of “corporation” uses the expansive word “includes,” and was
32 Kotoshirodo v. Zapara (In re Lull), 2009 WL 3853210 (Bankr. D. Haw. Nov. 17, 2009).
33 Id. at *4.
34 Sherron Assocs. Loan Fund XXI (Lacey) L.L.C. v. Thomas (In re Parks), 503 B.R. 820 (Bank.
W.D. Wash. 2013).
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“persuaded that ‘corporation’ as used in § 101(9)(A) is not limited to those entities
specifically itemized in statute.”35 It found this approach to be consistent with that taken
by the Seventh Circuit in Longview Aluminum, discussed above, when it held that “a
member of an L.L.C. was equivalent in relationship to a director of a corporation, thereby
expanding the definition of ‘director’ in § 101(31) [defining insider] to include other
L.L.C. members.”36 Next, the court applied the “presumption that equivalent words have
equivalent meaning when repeated in same statute,”37 and observed that in the non-insider
context it has been “found that an L.L.C. ‘fits comfortably within the Bankruptcy Code’s
definition of “corporation.”’”38 The state law treatment of LLCs further supported the
court’s conclusion that an LLC was included in the broad definition of “corporation” for
purposes of the definition of “insider.”39
b. Authorities supporting CJD’s position.
In support of it motion to amend, CJD anticipates the Trustee’s argument that the
amendment would be futile and asserts that the “problem with the Trustee’s allegations as
to the insider status of CJD is that CJD was not a corporation, but a limited liability
35 Id. at 827-28.
36 Id. at 828.
37 Id. (citing Cohen v. de la Cruz, 523 U.S. 213, 220 (1998)).
38 Id. (quoting Gilliam v. Speier (In re KRSM Props., L.L.C.), 318 B.R. 712, 717 (9th Cir. BAP
2004) (considering whether LLC was a “person” for purposes of the Code and therefore eligible to file a
petition) and also citing Fed. R. Bankr. P. 7007.1, Advisory Committee Note (2003)).
39 Id. at 828-29.
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company.”40 It then discusses several cases to support its argument.
The first case is Enterprise Acquisition Partners, a decision of the Ninth Circuit
BAP, which did not concern the status of an LLC, but observed that “[p]articularly in
light of the conclusive presumption of preferential treatment that arises from a
determination that an entity is a per se insider, there is no justification for expanding the
definition of per se insider beyond what is plainly contained in the statute.”41 CJD then
relies upon several cases which apply the Enterprise caution.
The first cited case relying on Enterprise is Weddle, 42 in which the Chapter 7
trustee brought an adversary action to avoid the recording of a judgment against the
individual debtors that was done more than 90 days prepetition by a limited liability
company controlled by the father of one of the debtors. The debtors were members of the
LLC and each held a 5% ownership interest in 100 common units. Because neither
membership in, nor management or control of an LLC is specifically addressed in the
definition of “insider” in § 101(31), the plaintiff, relying on Barman, argued that
“insider” status should be found because the debtors were persons in control of the LLC,
and the “insider” definition concerning “corporations” found in § 101(31)(A)(iv)
applied.43 The court cited the Enterprise instruction not to enlarge the list of per se
40 Doc. 66, 4.
41 Enterprise Acquisition Partners, 319 B.R. at 632.
42 Elsaesser v. Cougar Crest Lodge, L.L.C. (In re Weddle), 353 B.R. 892 (Bankr. D. Idaho 2006).
43 Id. at 897.
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insiders beyond those in the statute, and held that “[s]ince a[n] LLC of which debtor is a
member, director, officer or person in control is not among the list of per se, statutory
insiders, Plaintiff’s argument fails.”44
Next, CJD relies upon Lull, 45 a 2008 bankruptcy decision from the District of
Hawaii. In this preference action, the bankruptcy trustee contended that Tipaldi had
received an avoidable transfer from debtor Lull more than 90 days prepetition. Both Lull
and Tipaldi were members and managers of Tower Creek, LLC. The trustee (like the
Plaintiff-Trustee in this case) contended that Tipaldi was a per se insider of the debtor
because § 101(31)(E) defines “insider” to include an “affiliate, or insider of an affiliate as
if such affiliate were the debtor,” and the LLC was an “affiliate” of the debtor under the
corporate portion of § 101(2)(B). Although acknowledging that some courts have found
that an LLC is “sufficiently analogous to a corporation to permit a court to apply the
corporate provisions of § 101(31) to a LLC,”46 the court noted that the Ninth Circuit had
not decided the question, but the Ninth Circuit BAP had instructed that the definitions
should not be expanded. The court therefore concluded that the “Weddle court’s holding
that a limited liability company is not a per se insider of a debtor who is a member of the
company is the more sound result.”47
45 Kotoshirodo v. Dorland and Assocs., Inc. (In re Lull), 2008 WL 3895561 (Bankr. D. Haw.
46 Id. at *8.
47 Id. at *9.
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In its reply brief, CJD argues that the Tenth Circuit would adopt its argument over
that of the Trustee. The case relied on is Kunz, 48 where the court held that the debtor’s
title of “director emeritus” of a bank did not make him a “director” of the bank or a per se
insider of the debtor, for the purpose of avoidance of allegedly preferential transfers from
the debtor to the bank. The court determined that the meaning of “director” as used in the
definition of “insider” is “a person who is a member of the governing board of the
corporation and participates in corporate governance.”49 This meaning was found to
contrast with that of “emeritus,” which refers to a person “‘holding after retirement . . . an
honorary title corresponding to that held last during active service’” or “‘retired from an
office or profession.’”50 The court therefore held that the debtor was not an “insider” of
the bank, and that a director emeritus was not equivalent to a director for the purposes of
insider status. The court rejected the trustee’s argument that the term “director” must be
construed to included any kind of director, which would equate a managing director with
a former director. The court’s construction was found to be more consistent with the
“overall understanding of the function of the statutory definition of ‘insider’ — as well as
true to the actual language.”51 According to CJD, this analysis demonstrates that “the
Tenth Circuit understands, like the Enterprise line of cases, that an expansion of the
48 In re Kunz, 489 F.3d 1072.
49 Id. at 1077.
50 Id. at 1078 (quoting Webster's Third New Internat'l Dictionary 741).
51 Id. at 1079.
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definition of an insider beyond what is plainly stated in the statute is unnecessary.”52
c. The Court finds the Trustee’s arguments and authorities to be more
persuasive than CJD’s.
The Court finds that the Trustee’s position is fully supported by the plain meaning
of the applicable definitions. The cases cited by the Trustee holding that an LLC is
within the statutory definition of a “corporation” for purposes of the definition of
“affiliate” are persuasive. The Code defines a “corporation” to include an “association
having a power or privilege that a private corporation, but not an individual or a
partnership, possesses.”53 A Kansas LLC has such powers and privileges, and CJD does
not argue to the contrary.
Once it is determined that a Kansas LLC fits within the Code’s definition of
“corporation,” CJD’s status as an “insider” of both Debtors Brooke Corp and Brooke
Capital follows from the definitions of “affiliate” and “insider.” An “affiliate” is defined
to mean a corporation “20 percent or more of whose outstanding voting securities are
directly or indirectly owned [or] controlled . . . by the debtor.” Debtor Brooke Corp
owned Brooke Brokerage Corporation, which in turn owned CJD. Brooke Corp therefore
indirectly controlled CJD, making CJD an “affiliate” of Brooke Corp, and therefore an
“insider” of Brooke Corp since “insider” is defined by § 101(31)(e) to include an
“affiliate.” Further, Debtor Brooke Capital was a majority-owned subsidiary of Brooke
52 Doc. 68, at 7.
53 11 U.S.C. § 101(9).
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Corp and therefore an “affiliate” of Brooke Corp under § 101(2)(B). Since CJD is an
“insider” of Brooke Corp, which is an “affiliate” of Brooke Capital, CJD also is an
“insider” of Brooke Capital under § 101(31)(E).
Contrary to the Enterprise line of cases relied upon by CJD, the foregoing analysis
is not an expansion of the definition of per se insider by analogizing an LLC to a
corporation; it is a straightforward application of the Code definitions. The Weddle
decision on which CJD relies characterized the plaintiff’s argument in support of insider
status as requesting the court to “apply by analogy the insider definition concerning
corporations found in § 101(31)(A)(iv).”54 Rather than examining whether the LLC
satisfied the Code’s definition of “corporation,” which is the linchpin of the Trustee’s
argument in this case, the Weddle court followed the Ninth Circuit BAP’s admonition not
to expand the definition of per se insider. Further, the 2008 Lull decision, also relied
upon by CJD and which followed Weddle, arose in the same bankruptcy proceeding and
was decided by the same judge as the 2009 Lull decision which supports the Trustee’s
argument, a development that casts doubt upon that judge’s earlier analysis.
The Court finds the Trustee’s analysis to be consistent with the Tenth Circuit’s
decision in Kunz, which, contrary to CJD’s implication, did not adopt the Enterprise
directive to limit per se insiders to those enumerated in § 101(31) without regard to the
Code’s statutory definition of “corporation.” Rather Kunz was decided, as is this case,
54 Weddle, 353 B.R. at 897.
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upon the plain meaning of the statutory definitions. As observed by the Kunz court, “it
was the legislative intent that a person with a relationship designated in the statute be
treated as an insider because of the high potential for control inherent in those
relationships.”55 For purposes of per se insider status in preferential transfer litigation,
this Court sees no relevant distinction between a corporate and an LLC subsidiary of a
debtor; there is an equally high potential for control inherent in both relationships. If the
presumption of preferential treatment applies to a corporation, it should also apply to a
2. CJD is not a per se insider of Brooke Corp under § 101(31)(E) because of
the operating agreement between CJD and Brooke Brokerage.
In addition to the foregoing argument, the Trustee argues that CJD is an insider of
Brooke Corp based upon the allegation that CJD was being operated under an operating
agreement with Brooke Brokerage.56 Section 101(2)(C) defines an “affiliate” an a
“person whose business is operated under a lease or operating agreement by a debtor.”
The Court agrees with the Trustee that an LLC is a “person” for purposes of this
55 Kunz, 489 F.3d at 1079.
56 A Certificate of Amendment and Restatement of the Operating Agreement of CJD &
Associates, L.L.C. dated December 31, 2004 (Doc. 67-1) is included in the record with a supporting
affidavit of the Trustee (Doc. 67-2). The Operating Agreement provides that the business and affairs of
the company shall be managed by its manager, which for purposes of the agreement is referred to as the
board of directors. Doc. 67-1, 1. The directors are elected by the members, (Doc. 67-1, 7), and Brooke
Brokerage Corporation is named as holding 100% of the membership interests (Doc. 67-1, 5). CJD’s
objection to the Trustee’s arguments premised upon the Operating Agreement relies in part upon the fact
that there is no evidence that the Operating Agreement was in effect when the transfers in issue were
made. Although the Court agrees there is no such evidence, it prefers to address the Trustee’s arguments
based upon the construction of the Bankruptcy Code, rather than the fact-question of the effective dates of
the Operating Agreement.
Case 11-06236 Doc# 70 Filed 03/10/14 Page 20 of 22
definition. The Code defines “person” to include an “individual, partnership, and
corporation.”57 Although an LLC is not included in the list, courts find an LLC is a
“person” for purposes of determining its eligibility under § 109 to file a petition.58
But the Court finds that the operating agreement relied upon by the Trustee does
not satisfy the “affiliate” definition. To qualify as the basis for “affiliate” status, the
operating agreement must be with a debtor; here the operating agreement was with
Brooke Brokerage, a non-debtor. To overcome this deficiency, the Trustee argues that
the “debtor” means Brooke Brokerage because “[i]n applying § 101(31)(E) [which
defines “insider” to mean “affiliate, or insider of an affiliate as if such affiliate were the
debtor]” to § 101(2)(C) [defining “affiliate” to mean a “person whose business is operated
under a lease or an operating agreement by a debtor”], the term ‘debtor’ means Brooke
Brokerage because it is ‘as if’ Brooke Brokerage (i.e., “such affiliate’) ‘were the
debtor.’”59 But this argument misconstrues § 101(31)(E), which provides for two routes
to “insider” status: (1) being an “affiliate” of the debtor; and (2) being an “insider” of an
“affiliate” of the debtor, as if such affiliate were the debtor. For purposes of the first
route, CJD is not an “affiliate” of a debtor based upon the operating agreement with non-
debtor Brooke Brokerage. For purposes of the second route, there is no Bankruptcy Code
definition providing that CJD is an “insider” of Brooke Brokerage, an affiliate of Brooke
57 11 U.S.C. § 101(41).
58 See note 22.
59 Doc. 67, at 10.
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Corp, because of the operating agreement. Under the Code definitions, an “insider” of an
“affiliate” of the debtor is treated the same as an “insider” of the debtor. This does not
mean that the “affiliate” is a debtor. The Trustee’s argument misconstrues the phrase “as
if such affiliate were the debtor” in the definition of “insider.” The Court therefore finds
that CJD cannot be an “affiliate” of Brooke Corp under § 101(2)(C) based upon an
operating agreement with Brooke Brokerage.
For the foregoing reasons, the Court denies CJD’s motion to file an amended
answer denying the Trustee’s allegations that CJD is a per se insider of Debtors Brooke
Corp and Brooke Capital. The proposed amendment would be futile because, under the
uncontroverted facts as to the relationship of CJD with the Brooke entities, CJD is a
statutory or pe se insider.
The foregoing constitutes Findings of Fact and Conclusions of Law under Rule
7052 of the Federal Rules of Bankruptcy Procedure, which makes Rule 52(a) of the
Federal Rules of Civil Procedure applicable to this proceeding.
IT IS SO ORDERED.
# # #
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