Claims Trading From The Inside Out: Ninth Circuit BAP Holds That A Non-Insider Claimant's Vote On A Plan Is Not Discounted Merely Because The Claimant Purchased Its Claim From An Insider

In an unpublished decision in In re The Village at Lakeridge, LLC, BAP Nos. NV-12-1456 and NV-12-1474 (B.A.P. 9th Cir. Apr. 5, 2013), the United States Bankruptcy Appellate Panel of the Ninth Circuit held that a vote on a plan of reorganization submitted by a non-insider claimant is not to be disregarded under Bankruptcy Code section 1129(a)(10) merely because the claimant purchased the claim from an insider. In other words, the transferee of a claim does not step into the shoes of the transferor vis à vis the transferor's status as an insider.

Under Bankruptcy Code section 1129(a)(10), the acceptance of a proposed plan by an impaired class is determined by excluding “any acceptance of the plan by an insider.” In The Village at Lakeridge, a plan was proposed that impaired the only unsecured claim in the case - that of the debtor's sole member. This claim was scheduled in the amount of $2,761,000. It was undisputed that the debtor's sole member was a statutory insider under Bankruptcy Code section 101(31). After the plan was proposed, the debtor's sole member sold the claim to a Dr. Rabkin for $5,000. Dr. Rabkin voted to accept the debtor's proposed plan.

The secured creditor in the case filed a motion seeking to designate Rabkin's claim under Bankruptcy Code section 1126(e) and to disallow his claim for purposes of voting on the proposed plan. The bankruptcy court granted the motion in part, holding that because the debtor's sole member was a statutory insider, Rabkin acquired the same status when he purchased the claim. Thus, the bankruptcy court held that Rabkin's vote on the plan could not be considered for voting purposes, leaving the debtor without the assenting class of impaired claims it needed to confirm its plan.

The Bankruptcy Appellate Panel reversed, finding that the bankruptcy court applied an erroneous legal rule. Citing to the general rule thatinsider determination . . . is made on a case-by-case basis, after the consideration of various factors, the Panel noted that it was undisputed that Rabkin was not himself a statutory insider. The Panel analyzed and distinguished the case law cited by the bankruptcy court in support of its...