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U.S. Bank National Association v. Village at Lakeridge

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Supreme Court of the United States
U.S. Bank National Association v. Village at Lakeridge
Term: 2017
Important Dates
Argument: October 31, 2017
Decided: March 5, 2018
Outcome
9th Circuit reversed and remanded
Vote
9 - 0 to affirm
Majority
Elena Kagan • Chief Justice John G. Roberts • Anthony Kennedy • Clarence Thomas • Ruth Bader Ginsburg • Stephen Breyer • Samuel Alito • Sonia Sotomayor • Neil Gorsuch
Concurring
Anthony Kennedy • Sonia Sotomayor • Clarence Thomas • Neil Gorsuch


U.S. Bank National Association v. Village at Lakeridge is a case argued during the October 2017 term of the U.S. Supreme Court. Argument in the case was held on October 31, 2017. The case came on a writ of certiorari to the United States Court of Appeals for the Ninth Circuit.

The case addressed a split among federal circuit courts on how a court should review the determination that someone qualifies as an insider for the purpose of voting on a Chapter 11 bankruptcy reorganization plan. Eric Brunstad, a research scholar at Yale Law School, said of the case in March of 2017, "This will be an important procedural case. ... The question of the correct standard of review is one of broad relevance both within and outside the bankruptcy context."[1]

HIGHLIGHTS
  • The case: Under federal law, insiders, both statutory and non-statutory, are prevented from voting on a company's Chapter 11 bankruptcy reorganization plan. In upholding a bankruptcy appellate panel's determination that Robert Rabkin did not qualify as a non-statuory insider, a three-judge panel of the Ninth Circuit Court of Appeals divided on the standard used to make that determination. The majority held that the bankruptcy panel's determination must be reviewed for clear error, but the minority shared the view of the Third, Seventh, and Tenth Circuits that the determination must be reviewed 'de novo.
  • The issue: What standard, clear error or 'de novo, must be used to assess whether a person qualifies as a non-statutory insider for the purpose of voting on a Chapter 11 bankruptcy reorganization plan?
  • The outcome: The U.S. Supreme Court affirmed the ruling of the Ninth Circuit.


    • In brief: The Village at Lakeridge filed for Chapter 11 bankruptcy protection in 2011. There were only two creditors with legitimate claims to residual assets from Lakeridge's bankruptcy, U.S. Bank and MBP Equity Partners, and these were the only entities with voting rights on Lakeridge's proposed bankruptcy reorganization plan. U.S. Bank had a secured claim whereas MBP Partners had an unsecured claim. Dr. Robert Rabkin acquired MBP Equity Partners' unsecured claim through a personal friend who was also an MBP board member. U.S. Bank tried to purchase Rabkin's claim and, when the offer lapsed, sought to disallow Rabkin's claim by alleging that he was an insider. Under federal law, insiders, both statutory and non-statutory, are prevented from voting on a company's Chapter 11 bankruptcy reorganization plan. A bankruptcy court held that Rabkin was an insider, but a bankruptcy appellate panel reversed that holding. A divided three-judge panel of the Ninth Circuit upheld that decision, with a majority finding no clear error in the bankruptcy panel's decision. The Ninth Circuit panel's minority, however, argued that the determination of whether or not Rabkin was an insider was subject to 'de novo' review by the court, not a review for clear error. The Third, Seventh, and Tenth Circuits had used the de novo standard. Argument in the case was held on October 31, 2017. The United States Supreme Court affirmed the ruling of the Ninth Circuit on March 5, 2018.[2]

    You can review the lower court's opinion here.[3]

    Background

    Legal background

    When a company files for Chapter 11 bankruptcy protection, a bankruptcy court must confirm the company's Chapter 11 plan. In order to confirm, one of the conditions a bankruptcy court must determine is if any of the individuals voting to accept the bankruptcy plan is an insider. An insider is "one who has a sufficiently close relationship with the debtor that his conduct is made subject to closer scrutiny than those dealing at arms [sic] length with the debtor."[3] The law recognizes two different types of insiders, statutory and non-statutory. Statutory insiders are defined under federal law as a "person[s] in control of the debtor." A non-statutory insider is a person who does not fall under the explicit list of statutory insiders outlined under federal law, but is a person[s] "who has a sufficiently close relationship with the debtor to fall within the definition."[3]

    This case addressed a question of how courts must determine if someone qualifies as an insider.

    Case background

    The Village at Lakeridge LLC (hereafter, Lakeridge) filed for Chapter 11 bankruptcy protection on June 16, 2011. A limited liability corporation, Lakeridge had only one managing member, MBP Equity Partners (hereafter, MBP). MBP was managed by a board of five members, including Kathie Bartlett. Separate and distinct from MBP, Bartlett had a close business and personal relationship with Dr. Robert Rabkin.

    At the time of Lakeridge's Chapter 11 filing, Lakeridge had two creditors with a legitimate claim, U.S. Bank National Association (hereafter, U.S. Bank) and MBP. U.S. Bank had a fully secured claim for $10 million dollars. MBP had an unsecured claim worth $2.76 million dollars. MBP's board decided to sell their unsecured claim. Acting on MBP's behalf, Bartlett approached Rabkin about purchasing MBP's claim. On October 27, 2011, Rabkin purchased MBP's claim for $5,000. In June of 2012, U.S. Bank deposed Rabkin about his relationship with Lakeridge, with MBP, and with Bartlett. Rabkin testified that he had a close relationship with Bartlett, but that he had little to no relationship with either Lakeridge or MBP prior to acquiring their claim. Rabkin further testified he was unaware that, under Lakeridge's proposed bankruptcy reorganization plan, his distribution would be $30,000. During the deposition, U.S. Bank offered to pay Rabkin $50,000 for the claim, which they later raised to $60,000 during the deposition. Rabkin refused to accept U.S. Bank's offer at that time and the offer lapsed.

    In July of 2012, U.S. Bank filed a motion in federal bankruptcy court to disallow Rabkin's claim, alleging that Rabkin was both a statutory and a non-statutory insider and that Rabkin's assignment under Lakeridge's reorganization plan was made in bad faith. The bankruptcy court held that Rabkin failed to meet the standard for a non-statutory insider and that Rabkin did not purchase MBP's claim in bad faith. The court, however, determined that Rabkin became a statutory insider upon acquiring the claim from MBP. "In other words, the bankruptcy court determined that, 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."[3]

    Both Lakeridge and Rabkin appealed the bankruptcy court's determination that Rabkin qualified as a statutory insider for the purposes of voting on Lakeridge's bankruptcy reorganization plan solely through acquiring MBP's claim. U.S. Bank cross-appealed, arguing that Rabkin was also a non-statutory insider and that he had purchase MBP's claim in bad faith. A Ninth Circuit bankruptcy appellate panel reversed the bankruptcy court's finding that Rabkin was a statutory insider and affirmed the court's holding that Rabkin failed to qualify as a non-statutory insider and that Rabkin did not acquire MBP's claim in bad faith. U.S. Bank appealed to the Ninth Circuit Court of Appeals.

    A three-judge panel of the Ninth Circuit composed of Circuit Judges Richard Clifton and N. Randy Smith and District Judge Robert Lasnik of the United States District Court for the Western District of Washington, sitting by designation, heard the appeal. Judge Smith delivered the opinion of the panel, which affirmed the bankruptcy appellate panel's findings on all counts. Judge Clifton agreed with the court's conclusion that a person did not become a statutory insider solely by acquiring a statutory insider's claim, but Clifton would have held that Rabkin qualified as a non-statutory insider and he dissented from that portion of the panel's opinion.

    Circuit split

    The issue presented to the U.S. Supreme Court stemmed from Judge Smith's decision to employ a clear error standard to review the bankruptcy panel's claim that Rabkin failed to qualify as a non-statutory insider. Smith noted, "We review a bankruptcy court's factual finding for clear error. ... We apply this highly deferential standard to findings of fact because '[f]indings of fact are made on the basis of evidentiary hearings and usually involve credibility determinations.' ... Therefore, so long as the bankruptcy court's findings are 'plausible in light of the record viewed in its entirety,' we cannot reverse even if we 'would have weighed the evidence differently.'"[3] Based on this standard of review, Judge Smith determined that the bankruptcy panel did not commit clear error in its determination that Rabkin failed to qualify as a non-statutory insider.

    Judge Clifton, in dissenting from this holding, argued that the clear error standard was wrong. He wrote, "The problem here is not with the facts as found by the bankruptcy court but with the legal test that the bankruptcy court applied. What standard did the bankruptcy court apply to determine whether this transaction was conducted at arm’s length, by parties acting like they were strangers? We don’t know, because the bankruptcy court order never discussed the concept. At a minimum, this makes Rabkin’s status a mixed question of law and fact, subject to 'de novo' review."[3]

    De novo review is used for mixed questions of law and fact because "they require consideration of legal concepts and the exercise of judgment about the values that animate legal principles."[3] Judge Clifton's position, that the de novo standard applied here, had been adopted by the Third, Seventh, and Tenth Circuits.

    The question for consideration before the U.S. Supreme Court was which Ninth Circuit judge was correct, Judge Smith or Judge Clifton?

    Petitioner's challenge

    U.S. Bank National Association, the petitioner, challenged the holding of the Ninth Circuit. U.S. Bank argued that the Ninth Circuit panel's determination that Rabkin failed to qualify as a non-statutory insider was reached using the wrong legal standard.

    Certiorari granted

    On June 13, 2016, U.S. Bank National Association, the petitioner, initiated proceedings in the Supreme Court of the United States in filing a petition for a writ of certiorari to the Ninth Circuit. The U.S. Supreme Court granted the request for certiorari on March 27, 2017, limiting argument to question 2 presented by the petition. Argument in the case was held on October 31, 2017.[4]

    Question presented

    Question presented:

    "Whether the appropriate standard of review for determining non-statutory insider status is the de novo standard of review applied by the Third, Seventh and Tenth Circuit Courts of Appeal, or the clearly erroneous standard of review adopted for the first time by the Ninth Circuit Court of Appeal in this action."[4]

    Audio

    • Audio of oral argument:[5]



    Transcript

    • Transcript of oral argument:[6]

    Outcome

    Decision

    The Supreme Court unanimously affirmed the ruling of the Ninth Circuit, holding that clear error was the proper standard of review to apply when an appellate court reviews a district court's findings on non-statutory insider status.[2]

    Opinion of the court

    Justice Elena Kagan delivered the opinion for the court. Kagan emphasized that the court's decision was limited to the standard of review. To determine the correct standard of review, she began by analyzing the types of findings a district court must make in this kind of case:

    “ To decide whether a particular creditor is a nonstatutory insider, a bankruptcy judge must tackle three kinds of issues—the first purely legal, the next purely factual, the last a combination of the other two. And to assess the judge’s decision, an appellate court must consider all its component parts, each under the appropriate standard of review. In this case, only the standard for the final, mixed question is contested. But to resolve that dispute, we begin by describing the unalloyed legal and factual questions that both kinds of courts have to address along the way, as well as the answers that the courts below provided.[2][7] ”


    First, she wrote, a court must apply a legal test. As a question of law, that legal finding is reviewed de novo--without any deference to the lower court's ruling--by an appellate court. Second, a court must "make findings of what we have called 'basic' or 'historical' fact—addressing questions of who did what, when or where, how or why."[2] "By well-settled rule," she continued, "such factual findings are reviewable only for clear error—in other words, with a serious thumb on the scale for the bankruptcy court." After that, the court must determine "whether the historical facts found satisfy the legal test chosen for conferring non-statutory insider status. We here arrive at the so-called 'mixed question' of law and fact at the heart of this case." To determine the standard of review for a mixed question, Kagan wrote, the court must look to whether "it entails primarily legal or factual work." She turned to the case at hand:

    “ At a high level of generality, the court needed to determine whether the basic facts it had discovered (concerning Rabkin’s relationships, motivations, and so on) were sufficient to make Rabkin a non-statutory insider. But the court’s use of the Ninth Circuit’s legal test for identifying such insiders reduced that question to a more particular one: whether the facts found showed an arm’s-length transaction between Rabkin and MBP. And still, we can further delineate that issue just by plugging in the widely (universally?) understood definition of an arm’s-length transaction: a transaction conducted as though the two parties were strangers. Thus the mixed question becomes: Given all the basic facts found, was Rabkin’s purchase of MBP’s claim conducted as if the two were strangers to each other?


    That is about as factual sounding as any mixed question gets. Indeed, application of the Ninth Circuit’s arm’s-length legal standard really requires what we have previously described as a 'factual inference[ ] from undisputed basic facts.'...And we can arrive at the same point from the opposite direction—by asking how much legal work applying the arm’s-length test requires. Precious little, in our view...The stock judicial method is merely to state the requirement of such a transaction and then to do the fact-intensive job of exploring whether, in a particular case, it occurred.[2][8][7]

    		”

    Because the inquiry was primarily factual, she concluded, the appropriate standard of review was clear error.[2]

    Concurring opinions

    Justice Kennedy

    Justice Anthony Kennedy concurred in the judgment and in Justice Kagan's opinion but wrote separately. Kennedy expressed some doubts about the legal test for insider status, but clarified that the court did not reach the test itself:

    “ As the Court’s opinion makes clear, courts of appeals may continue to elaborate in more detail the legal standards that will govern whether a person or entity is a nonstatutory insider under the Bankruptcy Code...Under the test that the Court of Appeals applied here, there is some room for doubt that the Bankruptcy Judge was correct in concluding that Rabkin was not an insider...As the Court is careful and correct to note, however, certiorari was not granted on this question. As a result, whether the test for nonstatutory insider status as formulated and used by courts in the Ninth Circuit is sufficient is not before us; and whether on these facts it was clear error to find that Rabkin was not an insider is also not before us.[2][9][7] ”

    Justice Sotomayor

    Justice Sonia Sotomayor also concurred in the judgment and in Justice Kagan's opinion but wrote separately. Her concurring opinion was joined by Justices Kennedy, Clarence Thomas, and Neil Gorsuch. Like Kennedy, Sotomayor expressed concern over whether the lower courts applied the correct legal test:

    “ I am concerned that our holding eludes the more fundamental question whether the Ninth Circuit’s underlying test is correct. If that test is not the right one, our holding regarding the standard of review may be for naught...The Court’s discussion of the standard of review thus begs the question of what the appropriate test for determining non-statutory insider status is. I do not seek to answer that question, as the Court expressly declined to grant certiorari on it. I have some concerns with the Ninth Circuit’s test, however, that would benefit from additional consideration by the lower courts[2][7] ”

    The opinion

    See also

    Footnotes

    1. ↑ Bloomberg BNA, "High Court to Hear Bankruptcy Case on Insider Claims," March 30, 2017
    2. ↑ 2.0 2.1 2.2 2.3 2.4 2.5 2.6 2.7 United States Supreme Court, U.S. Bank National Association v. Village at Lakeridge Opinion, March 5, 2018
    3. ↑ 3.0 3.1 3.2 3.3 3.4 3.5 3.6 U.S. Court of Appeals for the Ninth Circuit, In re The Village at Lakeridge LLC, FKA Magnolia Village LLC; U.S. Bank N.A. et al. v. The Village at Lakeridge LLC, Robert Alan Rabkin (real party in interest), February 8, 2016
    4. ↑ 4.0 4.1 Supreme Court of the United States, U.S. Bank N.A. v. Village at Lakeridge, March 27, 2017
    5. ↑ Supreme Court of the United States, U.S. Bank National Association v. Village at Lakeridge, argued October 31, 2017
    6. ↑ Supreme Court of the United States, U.S. Bank National Association v. The Village at Lakeridge, argued October 31, 2017
    7. ↑ 7.0 7.1 7.2 7.3 Note: This text is quoted verbatim from the original source. Any inconsistencies are attributable to the original source.
    8. ↑ Internal citations and quotations omitted.
    9. ↑ Internal citations and quotations omitted.
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