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.