Update on Insider Litigation

The U.S. Bankruptcy Court for the Northern District of Illinois ordered the “equitable subordination” of insider secured claims against a Chapter 11 debtor on Nov. 30, 2015 because the insiders left “the company and its unsecured creditors unprotected against a sharp market decline” in the debtor’s business; failed to make an equity infusion “when a sharp market decline [in the debtor’s business operations] did in fact occur … immediately after [the insiders received a cash] distribution”; caused the debtor to lose its “equity cushion” with the distribution they received and “replaced” it with their secured loans, thereby “diminishing the funds available to support the trade creditors”; and kept the debtor’s finances “completely confidential from its trade creditors,” making it “impossible for any … trade creditors to know about its shareholder distributions … or its decision to substitute secured debt.” In re SGK Ventures, LLC, 2015 WL 7755525, at *22 (Bankr. N.D. Ill. Nov. 30, 2015). Because of the trustee’s broad attack on the debtor’s insiders here, the court’s decision provides a helpful update to the current state of insider litigation.