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Bankruptcy Court Holds Strategic Partner/Vendor Liable as Insider in Preference Suit

January 31, 2006

The United States Bankruptcy Court for the District of Delaware held in Shubert v. Lucent Technologies Inc. (In re Winstar Communications, Inc.), on December 21, 2005, that Lucent, a Winstar vendor and secured lender, was liable on the bankruptcy trustee's preference claim for the return of a $188.1 million payment made by Winstar to Lucent eight months prior to Winstar's bankruptcy filing. The court explained in a detailed 88-page opinion that Lucent was an "insider" because of its "control over Winstar and lack of [an] arms' length relationship between them." Op., at 80. As the record showed, Lucent had caused Winstar to make "massive," unnecessary purchases to inflate Lucent's revenue and "treated Winstar as a captive buyer." Op., at 26, 74. Because Lucent was an insider, the debtor's payment for goods constituted a preference under the Bankruptcy Code ("Code") § 547(b), although it was made more than 90 days prior to the debtor's bankruptcy filing. (§ 547(b)(4)(B)).