On April 9, 2013, the US District Court for the Southern District of New York issued an opinion in Capmark Financial Group Inc. v. Goldman Sachs Credit Partners L.P. dismissing plaintiffs' insider preference complaint.

In connection with a leveraged buyout in 2006, Capmark Financial Group Inc. and its affiliates (Capmark or Debtors) incurred $10.75 billion in unsecured debt from various lenders, including Goldman Sachs (Defendants). The lenders formed a limited liability company (LLC) holding 74% of the equity in Capmark. Affiliates of the Defendants owned 19.8% of the equity in the LLC and had a representative on Capmark's board of directors. Another affiliate of the Defendants provided Capmark with management monitoring and advisory services.

In May 2009, Capmark entered into a $1.5 billion secured credit facility with new lenders that also included the Defendants. It used part of the new credit facility to repay $145 million of the 2006 unsecured debt to the Defendants. In October 2009, Capmark filed for bankruptcy. After emerging from bankruptcy in 2011, reorganized Capmark (Plaintiffs) sued the Defendants to avoid and recover the $145 million payment as an insider preference. The Plaintiffs alleged that, because the Defendants were originally unsecured lenders with a member on the board of directors, they stood on both sides of the 2009 secured credit facility. By replacing unsecured debt with secured debt, the Defendants were better positioned to receive payment in full when Capmark declared bankruptcy five months later. The Defendants moved to dismiss, claiming, among other things, that they were not insiders.

The key litigated issue was whether the Defendants were either:

If the Defendants were insiders, this would extend the normal 90-day preference period to one year. Because the alleged preferential transfer was made more than five months before bankruptcy, it could only be avoided if the Defendants were subject to the one-year preference period applicable to insiders.

The Court granted the Defendants' motion to dismiss, rejecting the Plaintiffs' claim that the Defendants were insiders. The Plaintiffs argued that:

Citing Second Circuit precedent, the Court ruled that for a party to be considered an insider, that party must exercise "substantial" and "extensive" control over the debtor. Even if the Defendants' affiliates had extensive control over the LLC, this would not be enough to show extensive control over the Debtor. Therefore, the Defendants were not statutory insiders.

The Court also rejected the argument that the Defendants' affiliates were statutory insiders. The Plaintiffs argued that Defendants' affiliates were part of a "group" under Rule 13d of the Exchange Act, resulting in all members of the group being deemed beneficial owners of the group's collective 74% equity interest in the LLC. The Court held that Rule 13d does not supplant the Bankruptcy Code's definition of insider and, therefore, the Defendants' affiliates were not statutory insiders.

However, even if the Defendants' affiliates were statutory insiders, the Plaintiffs' argument would still fail because the Court declined to pierce the corporate veil separating the Defendants from their affiliates. The Court stated that veil piercing should occur only in extraordinary circumstances. Domination and control, without more, are insufficient to hold a parent company liable for the acts of its subsidiary. The Court held that the complaint did not show that the Defendants and their affiliates disrespected the corporate formalities that separated them, nor that the corporate form was used to perpetrate fraud or injustice.

The Court also ruled that the Defendants were not non-statutory insiders, after examining the closeness of the Debtor to the Defendants and whether their transactions were conducted at arm's length. The Court found that the Plaintiffs alleged only that the Defendants acted as ordinary commercial lenders that participated in a lending syndicate. It held that the Plaintiffs did not allege a sufficiently close relationship between the Defendants and the Debtors or a sufficiently high level of control. Further, the Court refused to impute the closeness of the Defendants' affiliates to the Defendants themselves, consistent with its rejection of the Plaintiffs' veil piercing argument.

Finally, the Court held that the Plaintiffs were judicially estopped from arguing that the 2009 secured credit facility transaction was not at arm's-length, because they previously took the position that it was.

This decision is favorable for lenders because it illustrates the challenges that plaintiffs face in proving insider status for a preference claim. Plaintiffs must show exactly how a lender controlled the debtor. Control of an entity that holds a majority of the debtor's equity is not sufficient. This opinion also rejects the idea that a lender should be deemed an insider merely because of its affiliates' aggregate equity holdings in a debtor, unless a very demanding standard for piercing the corporate veil can be satisfied.