In March, a unanimous Supreme Court ruled that the Ninth Circuit correctly reviewed a bankruptcy court’s ruling for clear legal error rather than employing the de novo “arm’s length” standard used in the Third, Seventh, and Tenth Circuits. In U.S. Bank Nat’l Ass’n v. Village at Lakeridge, LLC, No. 15-509, 583 U.S. ___ (2018), the United States Supreme Court ruled on whether the bankruptcy court properly determined in confirming a plan that the sole impaired accepting creditor was not a “non-statutory” insider. Had this creditor been such an insider, the chapter 11 plan should not have been confirmed.
Whether a creditor qualifies as an “insider” may have significant implications on many issues including, but not limited to, plan confirmation and the analysis of fraudulent transfers and preferences. However, in granting certiorari to hear Lakeridge, the Supreme Court expressly declined the opportunity to address whether the Ninth Circuit articulated the correct legal test to determine if a person qualifies as a non-statutory insider. The Supreme Court only answered the narrow question of whether the Ninth Circuit applied the correct standard of review to the lower court’s determination.
Lakeridge involved a Chapter 11 bankruptcy filing by the Village at Lakeridge LLC in 2011. MBP Equity Partners 1 LLC (“MBP”) was Lakeridge’s only corporate member and managed by a five-member board, which included Kathie Bartlett, who had a close business and personal relationship with Robert Rabkin.
At the time of Lakeridge’s filing, two creditors held claims, one fully secured claim worth about $10 million held by U.S. Bank, and an unsecured claim worth about $2.76 million held by MBP. Soon after Lakeridge filed its initial chapter 11 plan, MBP sold its unsecured claim to Robert Rabkin for $5,000. U.S. Bank objected and moved for an order that Rabkin’s claim was an insider claim.
While the bankruptcy court ruled that Rabkin did not purchase MBP’s claim in bad faith, it still found that he became a statutory insider by purchasing the claim. The Court stated: “When a statutory insider sells or assigns a claim to a non-insider, the non-insider becomes a statutory insider as a matter of law.”
However, on appeal, the Ninth Circuit’s Bankruptcy Appellate Panel reversed the finding that Rabkin had become a statutory insider as a matter of law because of his acquisition of MBP’s claim. It affirmed the findings that he was not a non-statutory insider and that assignment of the claim was not made in bad faith.
Justice Kagan affirmed the Ninth Circuit’s decision to apply a clear error standard of review. The concurring opinions by Justices Kennedy and Sotomayor acknowledged problems in the legal test applied by the Ninth Circuit and each seemed to invite lower courts to consider alternative approaches to the resolution of the issue. The case really does not provide any significant, lasting guidance as the Court seemed to look to Congress for clarification, “… the issue is not of the kind that appellate courts should take over” wrote Justice Kagan.
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