Pictured:  Reno Nevada’s The Villages at Lakeridge, a great investment for non-statutory insiders, or for anyone else!!


Last April, we updated you that the Supreme Court had granted review of In re The Village at Lakeridge, LLC, 814 F.3d 993 (9th Cir. 2016). Our most recent post is here.

On March 5, 2018, the Supreme Court held a clear-error standard of review should apply to a review of a determination of non-statutory insider status. U.S. Bank Nat. Ass’n v. Vill. at Lakeridge, LLC, No. 15-1509, ___ S. Ct. ___2018 WL 1143822, at *2 (U.S. Mar. 5, 2018).

As a refresher, in Village at Lakeridge, in exchange for $5,000, an insider (Bartlett) transferred a $2.76 million claim against the debtor to an individual (Rabkin) who was not a statutory insider.  814 F.3d at 997.  The debtor argued that the assignee of the insider claim (who voted in favor of the debtor’s plan) provided the debtor an impaired, consenting class for purposes of cramdown under 11 U.S.C. § 1129(b).  U.S. Bank moved to designate the assignee’s claim on the basis that he was both a statutory and non-statutory insider (including because Rabkin and Bartlett were, or had been, romantically involved), and that the assignment was made in bad faith. Id. at 997-98.  The bankruptcy court designated the claim and ruled that the assignee was not entitled to vote because, when the claim was assigned, the assignee acquired the insider status of the assignor as a matter of law. Id. at 998.  However, the bankruptcy court ruled that the assignee was not himself an insider and the assignment was not made in bad faith. Id.

The United States Bankruptcy Appellate Panel for the Ninth Circuit reversed the bankruptcy court’s ruling that the assignee acquired insider status by way of assignment and affirmed the bankruptcy court’s determinations that the assignee was not himself an insider and the assignment was not made in bad faith. Id.

In the Ninth Circuit, a creditor qualifies as a non-statutory insider if two conditions are met: “(1) the closeness of its relationship with the debtor is comparable to that of the enumerated insider classifications in [Section 101(31) of the Bankruptcy Code], and (2) the relevant transaction is negotiated at less than arm’s length.” In re Village at Lakeridge, LLC, 814 F. 3d 993, 1001 (9th Cir. 2016).  The Bankruptcy Court, as affirmed by the Ninth Circuit, determined that because the transaction was found to be at arm’s length, the creditor was not an insider under the Ninth Circuit test. Id. at 1002-1003.

As we advised you last year, the Supreme Court granted review on only one issue, framed by U.S. Bank as follows: “Whether the appropriate standard of review for determining non-statutory insider status is the de novo standard of review applied by the Third, Seventh and Tenth Circuit Courts of Appeal, or the clearly erroneous standard of review adopted for the first time by the Ninth Circuit Court of Appeal in this action.”  U.S. Bank’s Petition for a Writ of Certiorari, at i.

Writing for a unanimous Supreme Court, Justice Kagan was careful to note that they were not reviewing the Ninth Circuit’s test for determining non-statutory insider status. Village at Lakeridge, Slip Op. at 6 (“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.).”

Justice Kagan then stated the all parties – and the Supreme Court – were in agreement that the “historical facts” were reviewed deferentially. Id.  These facts included the Bankruptcy Court’s findings about Rabkin’s relationship with Bartlett (e.g., that they did not “cohabitate” or pay each other’s “bills or living expenses”) and his motives for purchasing the insider’s claim (e.g., to make a “speculative investment”). Id. at 6-7.

When a legal standard is applied to historical facts, a “mixed question” of law and fact arises. “[W]hen applying the law involves developing auxiliary legal principles of use in other cases—appellate courts should typically review a decision de novo.” Id. at 8 (citing Salve Regina College v. Russell, 499 U. S. 225, 231–233 (1991)).

However, a deferential, clear error standard is appropriate where case-specific factual issues prevail—“compelling them [appellate courts] to marshal and weigh evidence, make credibility judgments, and otherwise address what we have (emphatically if a tad redundantly) called ‘multifarious, fleeting, special, narrow facts that utterly resist generalization.’” Id. (citing Pierce v. Underwood, 487 U. S. 552, 561–562 (1988) (internal quotation marks omitted)).

Justice Kagan boiled down the issue before the court to a single question: “Given all the basic facts found, was Rabkin’s purchase of MBP’s claim conducted as if the two were strangers to each other?” Id. at 10.  The Supreme Court concluded:  “That is about as factual sounding as any mixed question gets[,]” and held the clear-error standard of review applied. Id. at 10-11.

But the fun doesn’t end with Justice Kagan’s opinion. Justice Kennedy wrote a short, concurring opinion that stressed the court was only ruling on the standard of review, and should not be read to approve of the test used by the Ninth Circuit. Id. (Kennedy, J., concurring).

Justice Sotomayor wrote a lengthier concurrence in which Justices Kennedy, Thomas, and Gorsuch joined. Justice Sotomayor affirmatively questioned whether the Ninth Circuit applied the correct test, but acknowledged that the Supreme Court declined to grant certiorari on that issue. Id. at 2 (Sotomayor, J. concurring).

Because the Ninth Circuit’s test is phrased in the conjunctive, a creditor would not be an insider under such test if the transaction was at arm’s length even if the closeness of the creditor’s relationship with the debtor is comparable to that of the statutory insiders. Id. This troubled Justice Sotomayor, who noted that the Code presumes lack of arm’s length to statutory insiders.  A creditor who is substantially similar to a statutory insider (e.g., a romantic partner of an insider who in all respects acts like a spouse) can nevertheless conclusively foreclose a finding of insider status (at least in the Ninth Circuit) by showing the transaction was at arm’s length. Id. at 3-4 (Sotomayor, J. concurring).

Justice Sotomayor then states she can conceive of “at least two possible legal standards that are consistent with the understanding that insider status inherently presumes that transactions are not conducted at arm’s length.” They are:

First, it could be that the inquiry should focus solely on a comparison between the characteristics of the alleged non-statutory insider and the enumerated insiders, and if they share sufficient commonalities, the alleged person or entity should be deemed an insider regardless of the apparent arm’s-length nature of any transaction.” Cf. In re Longview Aluminum, LLC, 657 F. 3d 507, 510–511 (7th Cir. 2011) (considering only whether a manager of a debtor corporation was comparable to the enumerated insiders, regardless of whether any transaction was conducted at less-than-arm’s length).

Second, it could be that the test should focus on a broader comparison that includes consideration of the circumstances surrounding any relevant transaction. If a transaction is determined to have been conducted at less-than arm’s length, it may provide strong evidence in the context of the relationship as a whole that the alleged non-statutory insider should indeed be considered an insider.  Relatedly, if the transaction does appear to have been undertaken at arm’s length, that may be evidence, considered together with other aspects of the parties’ relationship, that the alleged non-statutory insider should not, in fact, be deemed an insider.

Id. at 4-5 (Sotomayor, J. concurring). Justice Sotomayor then noted that if the appropriate test for determining non-statutory insider status were different from the one articulated by the Ninth Circuit, then “the applicable standard of review would be different as well.” Id. at 5 (Sotomayor, J. concurring).


For now, the clear error standard applies to a review of a determination of non-statutory insider status. But practitioners should be mindful that several Supreme Court justices openly question the Ninth Circuit test, and appear willing to changing the standard of review should a different test arise.