U. S. Bank N. A. v. Village at Lakeridge, LLC, 583 U.S. ___ (2018)
Lakeridge. a corporation with a single owner (MBP), filed for Chapter 11 bankruptcy, owing U.S. Bank $10 million and MBP $2.76 million. Lakeridge submitted a reorganization plan, proposing to impair the interests of both. U.S. Bank refused, blocking Lakeridge’s reorganization through a consensual plan, 11 U.S.C. 1129(a)(8). Lakeridge then turned to a “cramdown” plan, which would require consent by an impaired class of creditors that is not an “insider” of the debtor. An insider “includes” any director, officer, or “person in control” of the entity. MBP, unable to provide the needed consent, sought to transfer its claim to a non-insider. Bartlett, an MBP board member and Lakeridge officer, offered MBP’s claim to Rabkin for $5,000. Rabkin purchased the claim and consented to Lakeridge’s proposed reorganization. U.S. Bank objected, arguing that Rabkin was a nonstatutory insider because he had a “romantic” relationship with Bartlett. The Bankruptcy Court, Ninth Circuit, and Supreme Court rejected that argument. The Ninth Circuit correctly reviewed the Bankruptcy Court’s determination for clear error (rather than de novo), as “mixed question” of law and fact: whether the findings of fact satisfy the legal test for conferring non-statutory insider status. The standard of review for a mixed question depends on whether answering it entails primarily legal or factual work. Using the Ninth Circuit’s legal test for identifying such insiders (whether the transaction was conducted at arm’s length, i.e., as though the parties were strangers) the mixed question became: Given all the basic facts, was Rabkin’s purchase of MBP’s claim conducted as if the two were strangers? Such an inquiry primarily belongs in the court that has presided over the presentation of evidence, i.e., the bankruptcy court.
The Ninth Circuit properly applied the clear error standard rather than de novo review to a determination that a purchaser was not a nonstatutory insider for purposes of approving a cramdown plan of reorganization.
NOTE: Where it is feasible, a syllabus (headnote) will be released, as is being done in connection with this case, at the time the opinion is issued. The syllabus constitutes no part of the opinion of the Court but has been prepared by the Reporter of Decisions for the convenience of the reader. See United States v. Detroit Timber & Lumber Co., 200 U. S. 321 .
SUPREME COURT OF THE UNITED STATES
U. S. Bank N. A., Trustee, by and through CWCapital Asset Management LLC v. Village at Lakeridge, LLC
certiorari to the united states court of appeals for the ninth circuit
No. 15–1509. Argued October 31, 2017—Decided March 5, 2018
Respondent Lakeridge is a corporate entity with a single owner, MBP Equity Partners. When Lakeridge filed for Chapter 11 bankruptcy, it had a pair of substantial debts: It owed petitioner U. S. Bank over $10 million and MBP another $2.76 million. Lakeridge submitted a reorganization plan, proposing to impair the interests of both U. S. Bank and MBP. U. S. Bank refused the offer, thus blocking Lake- ridge’s option for reorganization through a fully consensual plan. See 11 U. S. C. §1129(a)(8). Lakeridge then turned to the so-called “cramdown” plan option for imposing a plan impairing the interests of a non-consenting class of creditors. See §1129(b). Among the prerequisites for judicial approval of such a plan is that another impaired class of creditors has consented to it. See §1129(a)(10). But crucially here, the consent of a creditor who is also an “insider” of the debtor does not count for that purpose. Ibid. The Bankruptcy Code’s definition of an insider “includes” any director, officer, or “person in control” of the entity. §101(31)(B)(i)–(iii). Courts have devised tests for identifying other, so-called “non-statutory” insiders, focusing, in whole or in part, on whether a person’s transactions with the debtor were at arm’s length.
Here, MBP (an insider of Lakeridge) could not provide the partial agreement needed for a cramdown plan, and Lakeridge’s reorganization was thus impeded. MBP sought to transfer its claim against Lakeridge to a non-insider who could agree to the cramdown plan. Kathleen Bartlett, an MBP board member and Lakeridge officer, offered MBP’s claim to Robert Rabkin, a retired surgeon, for $5,000. Rabkin purchased the claim and consented to Lakeridge’s proposed reorganization. U. S. Bank objected, arguing that Rabkin was a non-statutory insider because he had a “romantic” relationship with Bartlett and the purchase was not an arm’s-length transaction. The Bankruptcy Court rejected U. S. Bank’s argument. The Ninth Circuit affirmed. Viewing the Bankruptcy Court’s decision as one based on a finding that the relevant transaction was conducted at arm’s length, the Ninth Circuit held that that finding was entitled to clear-error review, and could not be reversed under that deferential standard.
Held: The Ninth Circuit was right to review the Bankruptcy Court’s determination for clear error (rather than de novo). At the heart of this case is a so-called “mixed question” of law and fact—whether the Bankruptcy Court’s findings of fact satisfy the legal test chosen for conferring non-statutory insider status. U. S. Bank contends that the Bankruptcy Court’s resolution of this mixed question must be reviewed de novo, while Lakeridge (joined by the Federal Government) argues for a clear-error standard.
For all their differences, both parties rightly point to the same query: What is the nature of the mixed question here and which kind of court (bankruptcy or appellate) is better suited to resolve it? Mixed questions are not all alike. Some require courts to expound on the law, and should typically be reviewed de novo. Others immerse courts in case-specific factual issues, and should usually be reviewed with deference. In short, the standard of review for a mixed question depends on whether answering it entails primarily legal or factual work.
Here, the Bankruptcy Court confronted the question whether the basic facts it had discovered (concerning Rabkin’s relationships, motivations, etc.) were sufficient to make Rabkin a non-statutory insider. Using the transactional prong of the Ninth Circuit’s legal test for identifying such insiders (whether the transaction was conducted at arm’s length, i.e., as though the two parties were strangers) the mixed question became: 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. Such an inquiry primarily belongs in the court that has presided over the presentation of evidence, that has heard all the witnesses, and that has both the closest and deepest understanding of the record—i.e., the bankruptcy court. One can arrive at the same point by asking how much legal work applying the arm’s-length test requires. It is precious little—as shown by judicial opinions applying the familiar legal term without further elaboration. Appellate review of the arm’s-length issue—even if conducted de novo—will not much clarify legal principles or provide guidance to other courts resolving other disputes. The issue is therefore one that primarily rests with a bankruptcy court, subject only to review for clear error. Pp. 5–11.
814 F. 3d 993, affirmed.
Kagan, J., delivered the opinion for a unanimous Court. Kennedy, J., filed a concurring opinion. Sotomayor, J., filed a concurring opinion, in which Kennedy, Thomas, and Gorsuch, JJ., joined.
|Apr 6, 2018||JUDGMENT ISSUED.|
|Mar 5, 2018||Adjudged to be AFFIRMED. Kagan, J., delivered the opinion for a unanimous Court. Kennedy, J., filed a concurring opinion. Sotomayor, J., filed a concurring opinion, in which Kennedy, Thomas, and Gorsuch, JJ., joined.|
|Oct 31, 2017||Argued. For petitioners: Gregory A. Cross, Baltimore, Md. For respondents: Daniel L. Geyser, Dallas, Tex.; and Morgan Goodspeed, Assistant to the Solicitor General, Department of Justice, Washington, D. C. (for United States, as amicus curiae.)|
|Sep 25, 2017||Motion of the Solicitor General for leave to participate in oral argument as amicus curiae and for divided argument GRANTED.|
|Sep 12, 2017||Record requested from the U.S.C.A. 9th Circuit.|
|Sep 11, 2017||Reply of petitioners U.S. Bank National Association, Trustee, et al. filed. (Distributed)|
|Sep 7, 2017||CIRCULATED|
|Aug 31, 2017||SET FOR ARGUMENT on Tuesday, October 31, 2017.|
|Aug 18, 2017||Motion of the Acting Solicitor General for leave to participate in oral argument as amicus curiae and for divided argument filed.|
|Aug 18, 2017||Brief amicus curiae of the United States filed.|
|Aug 11, 2017||Brief of respondent The Village at Lakeridge, LLC filed.|
|Jun 12, 2017||Joint appendix filed.|
|Jun 12, 2017||Brief of petitioner U.S. Bank National Association, Trustee, et al. filed.|
|Apr 21, 2017||The time to file respondents' brief on the merits is extended to and including August 11, 2017.|
|Apr 21, 2017||The time to file the joint appendix and petitioners' brief on the merits is extended to and including June 12, 2017.|
|Mar 27, 2017||Petition GRANTED limited to Question 2 presented by the petition.|
|Mar 20, 2017||DISTRIBUTED for Conference of March 24, 2017.|
|Mar 1, 2017||DISTRIBUTED for Conference of March 17, 2017.|
|Feb 28, 2017||Reply of petitioner U.S. Bank National Association, Trustee, et al. filed.|
|Feb 13, 2017||Brief amicus curiae of United States filed.|
|Oct 3, 2016||The Acting Solicitor General is invited to file a brief in this case expressing the views of the United States.|
|Aug 31, 2016||DISTRIBUTED for Conference of September 26, 2016.|
|Aug 15, 2016||Brief of respondent The Village at Lakeridge, LLC in opposition filed.|
|Jul 12, 2016||Order extending time to file response to petition to and including August 15, 2016, for all respondents.|
|Jun 13, 2016||Petition for a writ of certiorari filed. (Response due July 15, 2016)|
- US Bank v. The Village at Lakeridge, LLC, No. 13-60038 (9th Cir. Feb. 08, 2016)
Lakeridge has one member, MBP. MBP is managed by a board of five members, one of whom is Kathie Bartlett. Bartlett shares a close business and personal relationship with Dr. Robert Rabkin. Lakeridge filed for bankruptcy and US Bank held a fully secured claim worth about $10 million and MBP held an unsecured claim worth $2.76 million. After MBP's board decided to sell its unsecured claim, Rabkin purchased the claim for $5000. US Bank subsequently moved to designate Rabkin's claim and disallow it for plan voting purposes. The bankruptcy court held Rabkin was not a non-statutory insider and that Rabkin did not purchase MBP's claim in bad faith. However, the bankruptcy court designated Rabkin’s claim and disallowed it for plan voting, because it determined Rabkin had become a statutory insider by acquiring a claim from MBP. Lakeridge and Rabkin both appealed, and US Bank cross-appealed. The BAP reversed the finding that Rabkin had become a statutory insider as a matter of law by acquiring MBP’s claim and affirmed the findings that Rabkin was not a non-statutory insider and that the claim assignment was not made in bad faith. The BAP held that insider status cannot be assigned and must be determined for each individual “on a case-by-case basis, after the consideration of various factors.” Finally, the BAP held Rabkin could vote to accept the Lakeridge plan under 11 U.S.C. 1129(a)(10), because he was an impaired creditor who was not an insider. The court affirmed the BAP's decision.