CHICAGO (CN) – A board member with voting power is still an insider for the purpose of corporate bankruptcy recovery proceedings, even if other members blocked his access to company records, the 7th Circuit ruled.
Before Longview Aluminum filed for Chapter 11 bankruptcy, Dominic Forte was one of the company’s five board members and held a 12 percent interest in the company.
From 2001 to June 2002, Forte was repeatedly denied requests to view the company’s business records. The executive filed suit against the board member with the highest percentage interest in Longview, Michael Lynch, alleging that Lynch had used his controlling interest to bar access to the records and was excluding Forte from management decisions.
On Aug. 20, 2002, the board members executed a majority written consent suspending Forte’s right to access Longview’s information and records, and investigating whether the requests were made for an improper purpose.
Forte was eventually offered $400,000, plus attorneys’ fees and costs, in exchange for his agreement to leave the board. He agreed and received a $200,000 cashier’s check the same day. A $15,000 check for attorneys’ fees followed.
But when Longview filed for Chapter 11 in March 2003, the bankruptcy trustee brought an adversary action to recover the payments made to Forte.
Forte surrendered $15,000, conceding that payments made within three months of the date of a Chapter 11 filing can be recovered. But he refused to refund the $200,000, claiming that he was not an “insider” and was thus not subject to a one-year recovery period.
Though once a board member, Forte argued that he had been stripped of his decision-making authority and insider status by the board’s majority written consent and subsequent settlement.
A bankruptcy judge, U.S. District Court judge and three-judge panel of the 7th Circuit rejected this logic.
“The District Court did not find the effect of the majority written consent to be enough to remove Forte’s status as an insider, and neither do we,” Judge William Bauer wrote for the court.
Longview had temporarily suspended Forte’s access to books and records, but it did not remove him from the board, the court ruled.
“Forte’s surviving member status caused him to retain meaningful rights and control given to members under Longview’s LLC Agreement; significantly, Forte still retained voting rights in the company,” the 10-page decision states. “At the time of the $200,000 transfer in November, Forte still held a formal position on the board and did not resign until after he received the transferred funds.”