An Oddity: Supreme Court Decides Nothing in its U.S. Bank v. Village at Lakeridge Bankruptcy Opinion

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An Oddity

By Donald L. Swanson

On March 5, 2018, the U.S. Supreme Court issues its latest bankruptcy opinion in the case of U.S. Bank v. Village at Lakeridge, LLC., Case no. 15-1509.

The Facts

Village at Lakeridge has a single owner: MBP Equity Partners.  And it has two creditors: it owes “over $10 million” to U.S. Bank and “$2.76 million” to its owner, MBP.

In 2011, Lakeridge files Chapter 11 and submits a plan of reorganization that impairs both creditors. U. S. Bank votes against the plan.

A requirement for plan confirmation is the affirmative vote of one class of impaired creditors, for which the votes of insider creditors cannot be counted (see § 1129(a)(10)). Since MBP is an insider, its vote doesn’t count, and since U.S. Bank’s vote is, “No,” Lakeridge’s plan cannot be confirmed.  And Lakeridge is “faced with liquidation.”

–Assignment to a Friend

To skirt this problem, Lakeridge’s owner (MBP) assigns its insider claim to Robert Rabkin. This assignment is where Lakeridge gets interesting. The Supreme Court explains the assignment facts and their significance like this:

“Kathleen Bartlett, a member of MBP’s board and an officer of Lakeridge, approached Robert Rabkin, a retired surgeon, and offered to sell him MBP’s $2.76 million claim for $5,000.”

Bartlett and Rabkin have a romantic relationship.

“Rabkin took the deal,” without doing any due diligence. And as the new holder of MBP’s old loan, “he consented to Lakeridge’s proposed reorganization.”

“As long as he was not himself an insider,” Rabkin could vote in favor of the plan and, thereby, “satisfy” the requirement of an affirmative vote from an impaired class.  This “would bring Lakeridge a large step closer to reorganizing its business over U. S. Bank’s objection.”

–Legal Issue and Rulings Below

U. S. Bank argues that Rabkin “qualified as a non-statutory insider” because of his “romantic” relationship with Bartlett and because his acquisition of the MBP loan “was not an arms-length transaction.”

[Note: The “insider” definition in 11 U.S.C. § 101(31) begins: “The term ‘insider’ includes–.”  Then it lists specific relationships as illustrative: e.g., relative, partner, director, officer, affiliate and managing agent.  These specified relationships are known as “statutory insiders,” while all other relationships covered by the word “includes” are known as “non-statutory insiders.”]

The Bankruptcy Court rejects U.S. Bank’s argument, despite Rabkin’s “romantic” relationship with an insider and despite his lack of due diligence for the “speculative investment.”

The Ninth Circuit affirms.  In doing so,  it establishes this two-conditions test for determining whether someone is a non-statutory insider.

“(1) the closeness of its relationship with the debtor is comparable to that of the enumerated insider classifications” in § 101(31), and

“(2) the relevant transaction is negotiated at less than arm’s length.”

Both of these conditions must be satisfied to establish a non-statutory insider status.

In Lakeridge, the Ninth Circuit found: (i) Rabkin’s acquisition of MBP’s claim “was conducted at arm’s length” and, therefore, he could not be a non-statutory insider, and (ii) the Bankruptcy Court’s decision to that effect could not be overturned because it “was entitled to clear-error review.”

Supreme Court’s Opinion

The Supreme Court granted certiorari on a narrow issue—“to decide a single question,” namely:

“Whether the Ninth Circuit was right to review for clear error (rather than de novo) the Bankruptcy Court’s determination that Rabkin does not qualify as a non-statutory insider because he purchased MBP’s claim in an arm’s length transaction.”

–A Primer

The Supreme Court’s Lakeridge opinion is helpful because it provides a primer on standards of review for mixed law and fact questions. For example:

To decide the non-statutory insider question, “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.”

The Supreme Court describes the “final, mixed question” in Lakeridge like this: “was Rabkin’s purchase of MBP’s claim conducted as if the two were strangers to each other?” The Supreme Court then declares these two conclusions and affirms the Ninth Circuit result:

“That is about as factual sounding as any mixed question gets”; and

Ergo, “a clear-error standard should apply.”

–On Ninth Circuit’s Two-Conditions Test

Before getting to its primer on standards of review, however, the Supreme Court makes this declaration in Lakeridge on the Ninth Circuit’s two-conditions test:

“We do not address the correctness of the Ninth Circuit’s legal test; indeed, we specifically rejected U. S. Bank’s request to include that question in our grant of certiorari. . . . We simply take that test as a given in deciding the standard-of-review issue we chose to resolve.”

Say What?! How can an appellate court possibly provide a meaningful decision on standards of review, when it is applying a hypothetical legal test it does not endorse?

Concurring Opinions

Keep in mind that this opinion is, ostensibly, “unanimous.” Yet it comes with two separate concurring opinions by four justices.

–The First One

The first concurring opinion (in order of publishing) is by Justice Kennedy. Here are his primary points:

Legal standards for “a non-statutory insider” are in the process of “evolution” and “ongoing elaboration,” and courts should pay particular attention to “the relevance and meaning of the phrase ‘arms-length transaction’” as they “more specifically” develop the legal tests.

Certiorari was not granted on the validity of the Ninth Circuit’s two-conditions test, and the Supreme Court’s opinion “should not be read as indicating” that the Ninth Circuit’s test “is the proper or complete standard” for “determining insider status.”

Nor was certiorari granted on whether the Bankruptcy Court properly applied the Ninth Circuit’s test; and “there is some room for doubt” on such question.

–The Second One

The second concurring opinion is by Justice Sotomayor, which is joined by Justice Kennedy (who wrote the first concurring opinion), Justice Thomas and Justice Gorsuch. Here are its primary points:

Certiorari is granted on whether the standard of review for “non-statutory insider status” is “de novo or clear error.”

“To answer that question, the Court ‘takes . . . as a given’” the Ninth Circuit’s “two-prong test,” and “within that context, I agree” that the “arm’s length” issue is “a mixed question of law and fact that should be reviewed for clear error.”

“I write separately” because of a concern that the Court’s 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” because the “standard of review is deeply intertwined with the test being applied”;

–“Here, the Court” affirms “that the relevant transaction” was “conducted at arm’s length,” and since “that analysis is primarily factual in nature,” the Court “rightly concludes that appellate review . . . is for clear error”;

–But “if the proper inquiry” involves “a different balance of legal and factual work, the Court may have come to a different conclusion on the standard of review”; and “I do not seek to answer that question,” since the Court “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.”

–“I can conceive of at least two possible legal standards” that “inherently presume” transactions between insiders “are not conducted at arm’s length,” neither of which “reflects the Ninth Circuit’s test.”

“This is all to say that I hope that courts will continue to grapple with the role that an arms-length inquiry should play in a determination of insider status.”

If “the appropriate test” for non-statutory insider status “is different from the one that the Ninth Circuit applied” and “involves a different balance of legal and factual work than the Court addresses here,” I might “view the applicable standard of review differently.”

Summary: No Decision At All

So . . . the Supreme Court provides a primer on standards of review on mixed law and fact questions under a hypothetical legal test it does not endorse.  And it affirms the winner and loser in the case.

However, the only concrete decision on a legal question the Supreme Court makes in Lakeridge is that the following question “is about as factual sounding as any mixed question gets” so that “a clear-error standard” applies: Did the parties act as if they were strangers when Rabkin acquired MBP’s claim?

–And that’s not a “decision” resolving anything.

Disappointment – and what might have been

All of this is disappointing because there are lots of important (and interesting) issues in the Lakeridge case that might have been addressed. Here are but a few:

–How should a romantic relationship be evaluated in the “insider” context: are we really going to ask people to describe, under oath, the intimate details of their romantic relationship?

–Is it permissible for an insider to assign his/her/its claim to a friend to solve the non-insider voting class requirement for confirmation?

–When an insider’s claim is assigned to someone for voting as a non-insider, is the intent or good faith of the debtor or of the assigning creditor relevant?

Conclusion

So, what’s the Lakeridge opinion good for? It’s primer on standards of review for mixed questions of law and fact will be good reading—and maybe even a good exam question—for law students. And the primer should be helpful for appellate courts everywhere to use as they wrestle with mixed questions of law and fact.

But as to substantive bankruptcy law, the Lakeridge opinion is a waste of the Supreme Court’s time, talent, attention and effort. It adds nothing of substance.

Note: Here are links to two prior articles on the Supreme Court’s Lakeridge case:

(1) written when the Supreme Court granted certiorari, see “Romance and ‘Insider’ Status, with Other Oddities, at U.S. Supreme Court (U.S. Bank v. Village at Lakeridge)“; and

(2) written shortly after oral arguments, see “Oddities at U.S. Supreme Court Continue in Oral Argument on U.S. Bank v. Lakeridge.”

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