Supreme Court Lakeridge Decision Clarifies The Standard Of Review Of Mixed Questions Of Law And Fact

In another decision affecting Chapter 11 cases, U.S. Bank National Association v. Village at Lakeridge, --- S. Ct. ---, 2018 WL 1143822 (2018), on March 5, 2018, the United States Supreme Court issued a unanimous decision, authored by Justice Kagan, affirming the Ninth Circuit's decision to review the Bankruptcy Court's determination of a mixed question of fact and law for clear error, rather than de novo. The decision concerned whether a particular creditor was a non-statutory “insider” of the Chapter 11 debtor following a transfer of a claim by an insider to a third party that (favorably) impacted the ability of the debtor to confirm a cram-down plan.

Bankruptcy Code Section 101(31) describes various relationships that parties may have with a debtor that would qualify those parties as “insiders” of a debtor. Courts have also found that other parties not covered by Section 101(31), such as parties who did not transact with a debtor at arms' length, fall into the category of “non-statutory insiders.” Determination of whether transactions were conducted at arm's length is a mixed question of fact and law that may require extensive factual analysis.

The designation of a creditor as an “insider” takes on particular importance in the context of Section 1129(a)(10) cramdown plans, where an impaired accepting class must accept the debtor's plan. Insiders do not count for the purposes of determining whether an impaired accepting class exists.

In the Lakeridge decision, the Supreme Court affirmed the Ninth Circuit's ruling that a Bankruptcy Court's determination of whether a party is a non-statutory insider is reviewed only for clear error, and not de novo, thereby deferring to the trial court.

The Facts

Village at Lakeridge, LLC ("Lakeridge"), the appellee, is wholly owned by MBP Equity Partners ("MBP"). When it filed for bankruptcy in 2011, Lakeridge owed MBP $2.76 million, and U.S. Bank more than $10 million. Lakeridge, at 3. Lakeridge's proposed Chapter 11 plan separately classified MBP and U.S. Bank and impaired both classes. U.S. Bank (in its own class) rejected the proposed plan, and as MBP was Lakeridge's owner, and thus an insider, the Bankruptcy Court found that there was no qualifying impaired accepting class and thus the plan could not be confirmed. Id.

To circumvent this issue, MBP transferred its claim against Lakeridge to a non-insider, Mr. Rabkin, for $5,000. The Chapter 11 plan provided for a $30,000 distribution on account of this unsecured claim. Mr. Rabkin voted in favor of the proposed plan. U.S. Bank objected, arguing that he was a non-statutory insider, as Mr. Rabkin was engaged in a romantic relationship with the MBP board member from whom he bought the claim. Id. at 3-4.

While the parties testified that they were, indeed, romantically involved, the Bankruptcy Court held that Mr. Rabkin...

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