The U.S. Supreme Court has already dismissed one bankruptcy appeal this term as “improvidently granted.” This is an oddity.
And it should have also dismissed U.S. Bank National Association v. Village at Lakeridge, Case No. 15-1509, for the same reason. Instead, the Court held oral arguments in the Lakeridge case on Halloween Day, 2017.
The Court made a mistake: it granted certiorari for the Lakeridge case on only one of the three questions presented. The mistake becomes obvious during oral arguments (Here’s a transcript of those arguments). This is also an oddity.
I’ll try to explain.
Facts
The simplified facts of the case are that an insider of the bankruptcy debtor assigned her claim to her boyfriend, who then voted to accept the debtor’s plan of reorganization.
The vote of an “insider” on a plan of reorganization cannot be counted under the requirements of § 1129(a)(10). So, the debtor’s plan of reorganization could not be confirmed if the insider’s boyfriend is also an insider.
Court Rulings
The Bankruptcy Court ruled that the boyfriend is an insider. Therefore, the plan could not be confirmed.
Debtor appealed. The Ninth Circuit Bankruptcy Appellate Panel (“BAP”) reversed, allowing the boyfriend’s vote to be counted.
Creditor appealed. The Ninth Circuit Court of appeals affirmed the BAP decision.
Ninth Circuit Rationale
Here are some essential declarations in the Ninth Circuit’s Lakeridge opinion:
–Definition of Insider:
“To be a ‘statutory insider,’ a creditor must fall within one of the categories listed in 11 U.S.C. § 101(31).”
“To be a non-statutory insider, the creditor must have a close relationship with the debtor and negotiate the relevant transaction at less than arm’s length.”
–Standards of Review on Appeal
“Whether an insider’s status transfers when he sells or assigns the claim to a third party presents a question of law.”
“Establishing the definition of non-statutory insider status is likewise a purely legal inquiry.”
“We review questions of law de novo.”
“Whether a specific person qualifies as a non-statutory insider is a question of fact.”
“We review factual findings for clear error.”
–Ninth Circuit Conclusions
The boyfriend “does not qualify as a statutory or non-statutory insider.”
“A creditor does not become an insider simply by receiving a claim from a statutory insider.”
Appeal to U.S. Supreme Court and Questions Presented
The Lakeridge creditor petitions the U.S. Supreme Court for a writ of certiorari to answer these three questions:
1. “Whether an assignee of an insider claim acquires the original claimant’s insider status” for voting on a Chapter 11 plan;
2. “Whether the appropriate standard of review for determining non-statutory insider status is the de novo standard of review . . . or the clearly erroneous standard of review”; and
3. “Whether the proper test for . . . nonstatutory insider status requires . . . an “arm’s length” analysis or . . . a “functional equivalent” test.
The Supreme Court grants certiorari – but only as to Question 2 on “the appropriate standard of review.” This decision to limit certiorari to Question 2 was a mistake. Here’s why: because Questions 1 and 3 involve unresolved issues. It’s difficult to establish a standard of review when the legal tests under review are disputed and unresolved.
–It would be like a review of a referee’s call in a football game, trying to decide if adequate visual evidence exists to overturn the call, when the rule the referee applied is in dispute and unresolved.
Justice Gorsuch Explains the Mistake
Justice Gorsuch had yet to become a Supreme Court Justice when the Supreme Court granted certiorari in the Lakeridge case.
Here’s how he describes, during oral arguments, the Court’s mistake in limiting its grant of certiorari to Question 2:
“Insider” test is unsettled.
“The Ninth Circuit has developed this two-part test . . . [requiring] both closeness and lack of arm’s length.”
“Other circuits have different verbal formulations and some haven’t even weighed in.”
“Some haven’t even weighed in on the question whether there is such thing as a non-statutory insider.”
Can’t evaluate standards of review when the underlying test is unsettled.
“And yet here we’re being asked to decide what the right standard of review is. Can we do that with any degree of assurance when we don’t know what the right legal test is?”
“and don’t we run the risk, perhaps, of sending the wrong signal to lower courts that we’re adopting . . . or endorsing the Ninth Circuit’s formulation of what the test is?”
“Shouldn’t we wait to see what the courts of appeals sort out on all this before we decide what the standard of review is?”
–The transcribed answer of Respondent’s counsel to this last question is: “Your Honor, if the Court would like to dismiss the case as improvidently grantable, we’ll take a win any way we can get it. (Laughter.)”
Must decide the underlying test first.
“determining the standard of review thus requires precise identification of the particular question raised on appeal.”
–if it “depends upon status, that might be a legal-looking question”; but
–if it “depends on arm’s length, that might be a more factual-looking question.”
“And we haven’t resolved the relationship between those two or, in fact, whether both of them are appropriate considerations.”
Justice Ginsburg Highlights the Mistake
Justice Ginsburg disagrees with the Ninth Circuit on Question 1:
–She declares, “the [insider] taint travels with the claim.”
And she disputes the Ninth Circuit’s standard on Question 3:
–She declares that non-insiders “deal with each other as if they were strangers.”
–Then she asks, almost rhetorically, “Isn’t that the definition?” “What would you add?”
Justice Sotomayor Delves Into the Mistake
Justice Sotomayor raises a hypothetical concerning Question 3: “let’s assume,” she says,
–“the district court had found that this couple was an intimate couple that lived together, exchanged payments of their expenses, were like a married couple.”
–“But, in fact, they transacted this in an arm’s-length way. He did due diligence. He — he thought about it. He talked to investors. They all said this is a great deal; take it.”
–“So it has the indicia of arm’s length, but it is almost an insider relationship because he’s essentially married to this woman.”
Petitioners’ counsel responds: “Both elements are required, Your Honor.”
Justice Sotomayor replies: “That’s fascinating.” Both elements are “not required with traditional statutory insiders. With statutory insiders, we presume that the transaction is tinged.”
Then she adds: “Why don’t we make the same presumption if these — if these non-statutory insiders are just like insiders?
Petitioners’ counsel responds: “Well, the test that we have, which is settled, is the two-prong test.”
Justice Sotomayor questions the “settled” characterization.
A short time later, she says:
“You asked us to take this [insider standard] as a question presented, and we denied it.”
“Why did you ask us to take the question if you think the [insider] standard is okay?
Counsel responds with, “when we asked for cert on that question, we thought the standard lacked sufficient definition. But since the Court denied cert on that question, I’m –“
Justice Sotomayor interrupts with, “You’re living with it.”
–Counsel responds, “That’s exactly right.”
An Oddity from Justice Alito
Justice Alito puts the standard of review question for an “insider” determination like this: who is “better positioned” to determine whether “strangers would engage” in a particular transaction, the bankruptcy judge or a panel of appellate judges?
He concludes:
(i) “an appellate court is better positioned” than a bankruptcy judge “to say what relationship is comparable” to the statutory insiders identified in § 101(31)—requiring a de novo standard of review, but
(ii) the “arm’s length transaction” issue is best resolved by a bankruptcy judge, because it is “very close to a question of pure fact”—requiring an “clear error” standard of review.
Justice Alito then expands his “better positioned” idea with this odd inquiry:
–Do bankruptcy judges “have a tendency” toward confirming a plan of reorganization, rather than to “preside over a liquidation”?
Petitioners’ counsel takes the bait, without (presumably) any support from evidence in the record or from any other data, and says:
–“Some jurisdictions are very pro-debtor and would lean towards confirmation. Bankruptcy is an area where there — where forum shopping is prevalent.”
While any such bankruptcy judge “tendency” is interesting, it is also speculative and a bit odd for this particular case. After all:
–it is the Bankruptcy Judge in Lakeridge who found an insider status and, thereby, prevented plan confirmation; and
–It is both the Bankruptcy Appellate Panel and the Ninth Circuit Court of Appeals who invoked the de novo standard of review to overturn the Bankruptcy Judge’s “insider” finding and, thereby, authorize plan confirmation..
Conclusion
I wrote a prior article on the Lakeridge case, when the U.S. Supreme Court first granted certiorari, about oddities in the case at that time. Here’s a link to that article:
Oddities are still around and continue to persist in the Lakeridge case, as demonstrated by oral arguments discussed above.
It will be interesting to see how the U.S. Supreme Court resolves this case.
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