Bankruptcy Judge Kaufman recently dusted off some very old law books to explore both the deep legislative history of the Bankruptcy Code and also ancient English common law to figure out who a “relative” is under the Code.
The facts in Ehrenberg v. Halajyan (published) are not crystal clear but it appears that a Chapter 7 sued the debtor and his first cousin for a using his avoidance powers. The question was whether a first cousin qualifies as an “insider.”
For non bankruptcy practitioners, you may be curious what “avoidance powers” are. It’s a relatively complex topic, but in essence, these powers make it possible for a trustee to recover money if the debtor transfers property to an insider to avoid creditors or the bankruptcy liquidation process. Relatives are considered insiders.
But is a first cousin a “relative?”
It appears this case is the first time the question has come up in the Ninth Circuit. The Bankruptcy Code does not define it. It says that a relative is an “individual related by affinity or consanguinity within the third degree as determined by common law.”
But what does the Code mean by “common law” in this context? Eherenberg analyzed it as follows. First, the courts seem to agree common law refers to state law. But even that is unclear because there are different types of common law within states.
To explore the question further, the court had to explore the legislative history of the old Bankruptcy Act of 1898 (you should see the footnote), which led the court to explore, and apply, very old English common law to conclude that yes, indeed, a first cousin is an insider.
Judge Kaufman listed the case for publication.