U. S. Bank N. A. v. Village at Lakeridge, LLC

Lakeridge. a corporation with a single owner (MBP), filed for Chapter 11 bankruptcy, owing U.S. Bank $10 million and MBP $2.76 million. Lakeridge submitted a reorganization plan, proposing to impair the interests of both. U.S. Bank refused, blocking Lakeridge’s reorganization through a consensual plan, 11 U.S.C. 1129(a)(8). Lakeridge then turned to a “cramdown” plan, which would require consent by an impaired class of creditors that is not an “insider” of the debtor. An insider “includes” any director, officer, or “person in control” of the entity. MBP, unable to provide the needed consent, sought to transfer its claim to a non-insider. Bartlett, an MBP board member and Lakeridge officer, offered MBP’s claim to Rabkin for $5,000. Rabkin purchased the claim and consented to Lakeridge’s proposed reorganization. U.S. Bank objected, arguing that Rabkin was a nonstatutory insider because he had a “romantic” relationship with Bartlett. The Bankruptcy Court, Ninth Circuit, and Supreme Court rejected that argument. The Ninth Circuit correctly reviewed the Bankruptcy Court’s determination for clear error (rather than de novo), as “mixed question” of law and fact: whether the findings of fact satisfy the legal test for conferring non-statutory insider status. The standard of review for a mixed question depends on whether answering it entails primarily legal or factual work. Using the Ninth Circuit’s legal test for identifying such insiders (whether the transaction was conducted at arm’s length, i.e., as though the parties were strangers) the mixed question became: Given all the basic facts, was Rabkin’s purchase of MBP’s claim conducted as if the two were strangers? Such an inquiry primarily belongs in the court that has presided over the presentation of evidence, i.e., the bankruptcy court.