Case No. 15-1509 | 9th Cir. Decision
When the Court decides U.S. Bank National Association v. Village at Lakeridge, it will be answering a civil procedure question disguised as a bankruptcy case. To be sure, the facts of the case, and lower court proceedings, involved details of a Chapter 11 bankruptcy proceeding that began in federal bankruptcy court. The Court, however, limited its grant of certiorari to only one of the three questions presented in the petition. The Court chose not to address two questions that looked toward bankruptcy law, and instead granted certiorari on a circuit split: Whether de novo review is the appropriate standard for determining non-statutory insider status, as the Third, Seventh, and Tenth Circuits have held, or whether it is the clearly erroneous standard, adopted for the first time by the Ninth Circuit in this action.
In June of 2011, The Village at Lakeridge, LLC, filed for bankruptcy. At the time of the bankruptcy, only two creditors had claims to any of Lakeridge’s assets. The two entities were U.S. Bank, which held a fully secured claim worth about $10 million, and MBP Equity Partners 1, LLC, the sole member of Village of Lakeridge, who held an unsecured claim worth $2.76 million. Shortly after bankruptcy proceedings began, MBP decided to sell its unsecured claim. One of MBP’s board members, Kathie Bartlett, approached Dr. Robert Rabkin, with whom she had a close business and personal relationship, to purchase the claim. He agreed and purchased the claim for $5,000. While being deposed by U.S. Bank’s counsel, Dr. Rabkin stated that he knew he possessed a risky investment and simply wanted a return on that investment. He did not know how much his claim was worth, nor did he know anything about the company. All he knew was that Bartlett offered him the claim and he took the investment. He then turned down a $60,000 offer from U.S. Bank to purchase the claim.
U.S. Bank moved to have Dr. Rabkin designated as both a statutory and non-statutory insider (statuses denoting a creditor as “suspicious”), either of which would have made him ineligible to vote on the confirmation plan. This was especially important because U.S. Bank was the only other creditor with a vote on the confirmation plan, and they were planning to vote no. A single yes vote would have approved the confirmation plan in this proceeding, and thus U.S. Bank claimed the transfer to Dr. Rabkin was made in bad faith as MBP would not have been able to vote on the plan had they held on to the claim.
The bankruptcy court held both that Dr. Rabkin was not a non-statutory insider and that he did not purchase the claim in bad faith. The court did, however, determine that Dr. Rabkin became a statutory insider by purchasing the claim from a statutory insider and thus he could not vote on the confirmation plan. Lakeridge and Dr. Rabkin both appealed. The United States Bankruptcy Appellate Panel for the Ninth Circuit did not see things the same way and held that one does not simply become a statutory insider by purchasing a claim from a statutory insider. It also affirmed that Dr. Rabkin was not a non-statutory insider and that the assignment was not made in bad faith. U.S. Bank appealed, and the Ninth Circuit affirmed the ruling by finding no clear error in the Bankruptcy Appellate Panel’s decision, with the lone dissenter arguing that the case should have been reviewed de novo as is done in the Third, Seventh, and Tenth Circuits.
If the Supreme Court agrees with the Ninth Circuit that the clearly erroneous standard is proper in this instance, it will change the way in which the other circuits review these cases. If the Supreme Court agrees with the majority of Circuits and states that de novo review is the proper standard, the Ninth Circuit may have to do a further fact-based inquiry into whether MBP’s transfer to Dr. Rabkin was made to circumvent voting rules, and whether Dr. Rabkin should be designated as an insider.