U. S. Bank N. A. v. Village at Lakeridge, LLC
2018 U.S. LEXIS 1520, 200 L. Ed. 2d 218, 138 S.Ct. 960 (2018)
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Rule of Law:
An appellate court should review a bankruptcy court's determination of whether a transaction was conducted at 'arm's length' for the purpose of establishing non-statutory insider status under the deferential clear-error standard, as this is a primarily factual mixed question of law and fact.
Facts:
- The Village at Lakeridge, LLC (Lakeridge), owned by MBP Equity Partners, filed for Chapter 11 bankruptcy.
- Lakeridge owed over $10 million to U.S. Bank and $2.76 million to its owner, MBP.
- U.S. Bank rejected Lakeridge's proposed reorganization plan.
- Because MBP was a statutory 'insider' of Lakeridge, its vote could not be used to confirm a 'cramdown' plan over U.S. Bank's objection.
- To obtain a consenting non-insider vote, MBP sold its $2.76 million claim to Robert Rabkin for $5,000.
- The sale was facilitated by Kathleen Bartlett, an officer of Lakeridge and board member of MBP, who was in a romantic relationship with Rabkin.
- After purchasing the claim, Rabkin consented to Lakeridge's reorganization plan.
Procedural Posture:
- Lakeridge filed for Chapter 11 bankruptcy in the U.S. Bankruptcy Court for the District of Nevada.
- U.S. Bank filed a motion in the Bankruptcy Court to designate Robert Rabkin's claim as an insider claim.
- The Bankruptcy Court denied U.S. Bank's motion, finding that Rabkin was not a non-statutory insider because the transaction was at arm's length.
- U.S. Bank, as appellant, appealed the decision to the U.S. Court of Appeals for the Ninth Circuit.
- A divided panel of the Ninth Circuit affirmed the Bankruptcy Court, holding that the 'arm's-length' determination was a finding of fact reviewable for clear error.
- The U.S. Supreme Court granted certiorari to resolve the question of the appropriate standard of review.
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Issue:
Is a bankruptcy court's determination that a creditor does not qualify as a non-statutory insider because they purchased a claim in an arm's-length transaction subject to clear-error review by an appellate court, rather than de novo review?
Opinions:
Majority - Justice Kagan
Yes. A bankruptcy court's determination that a transaction was at arm's length is subject to clear-error review. The standard of review for a mixed question of law and fact depends on whether answering it entails primarily legal or factual work. The question of whether a transaction was at 'arm's length'—i.e., conducted as though the parties were strangers—is an intensely fact-specific inquiry that requires a court to consider a raft of case-specific historical facts and make factual inferences. This type of determination belongs primarily to the court that presided over the presentation of evidence and has the deepest understanding of the record. Because applying the 'arm's-length' standard requires 'precious little' legal elaboration and appellate review would not clarify legal principles for future cases, the bankruptcy court's conclusion is subject to deferential review for clear error.
Concurring - Justice Kennedy
Yes. The majority is correct that clear-error review is the proper standard. However, courts of appeals should continue to elaborate on the legal standards that govern non-statutory insider status to ensure uniformity. There is some room for doubt that the Bankruptcy Judge was correct in this specific case, especially given MBP’s failure to offer its claim to other potential buyers, but that question is not before this Court. The Court's opinion should not be read as endorsing the Ninth Circuit's substantive test as the complete standard for determining insider status.
Concurring - Justice Sotomayor
Yes. Within the context of the Ninth Circuit's legal test, the Court’s analysis on the standard of review is correct. However, the underlying two-prong test used by the Ninth Circuit, which makes an arm's-length transaction dispositive, may be incorrect. The statutory concept of an 'insider' seems to presume that transactions with such a person cannot be at arm's length. Had a different, and potentially more appropriate, legal test for non-statutory insider status been applied, the balance of legal and factual work might have been different, which in turn could have required a different standard of review, such as de novo.
Analysis:
This decision solidifies the authority of bankruptcy courts by shielding their fact-intensive determinations from de novo appellate review. It clarifies that for mixed questions of law and fact, the key determinant for the standard of review is whether the question is more 'fact-like' or 'law-like.' While settling the procedural standard, the concurring opinions signal that the substantive legal test for 'non-statutory insider' status is far from settled, inviting future litigation and circuit splits over what criteria—beyond just the arm's-length nature of a single transaction—should define an insider relationship.
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