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So many operating companies are part of a much larger corporate structure, and those structures typically involve the flow of cash back and forth among its parts. Many of these companies implement centralized cash-management systems. Increasingly, bankruptcy opinions have been addressing what happens when debtors or trustees later sue creditors for payments received by one part of the corporate structure for the contract or benefit of a separate part.
Brooke Corp. was a conglomeration of hundreds of insurance agencies that wrote general property, casualty and auto coverage policies for individuals and businesses. It included a franchisor corporation, a credit subsidiary and numerous other entities, including a general insurance agency. After Brooke's bankruptcy, that agency, CJD & Associates LLC, was sued by Brooke's chapter 7 trustee, alleging that the transfers back and forth between the parent and subsidiary were preferences.1 Since CJD sold policies and received premiums from insureds and would then wait days or weeks before remitting the premiums to the carriers, they became a major source of cash for the parent, Brooke.2 For several years prior to the October 2008 bankruptcy, cash was borrowed daily from CJD.3 In the year before the bankruptcy, Brooke, without consulting CJD, transferred an aggregate of $423.6 million to itself, then returned $421.8 million, a gain of $1.8 million for the parent company, Brooke.4
Ownership of CJD had been pledged as collateral to a lender a few months prior to bankruptcy, and in the bankruptcy, ownership had been transferred from the debtor to the lender.5 Then, the preference suit related to the transfers back and forth between Brooke and CJD followed. Because CJD was an "affiliate," it was an insider, subject to the one-year reachback period.6 Since Brooke had to transfer money first from CJD and return it later, the subsequent new-value defense only provided a credit for "subsequent" payments. Because money was returned later, the "subsequent" calculation benefited the trustee, even though $1.8 million evaporated from CJD's accounts. The question then became: Did CJD have an ordinary-course-of-business defense under 11 U.S.C. § 547(c)(2)?
Typically and historically, practitioners focus on and litigate whether a transaction or transactions were subjectively or objectively ordinary under the § 547(c)(2)(A) and (B) prongs of the affirmative defense. However, many practitioners give little...