United States: Supreme Court Alert: The Court Provides Additional Guidance On The Appropriate Level Of Review Of Determinations Of Mixed Questions Of Law And Fact By The Bankruptcy Court

U.S. Bank National Ass'n ex rel. CWCapital Asset Management LLC v. Village at Lakeridge, LLC, holding that bankruptcy court determinations regarding whether transactions are at arms-length are predominantly factual in nature, and thus should be overturned only on the basis of clear error.1 In the opinion, authored by Justice Kagan, the Court affirmed the Ninth Circuit's decision to uphold, under a clear-error standard of review, the bankruptcy court's approval of a cramdown plan.2 That approval hinged on the bankruptcy court's finding that a creditor, where he had been transferred his interest by an insider of the debtor with whom he had a romantic relationship and where he had paid only a fraction of the interest's actual value, did not qualify as an insider of the debtor.3

At the time of the bankruptcy filing, the debtor, Lakeridge, was owned entirely by one entity, MBP Equity Partners, and had two major debts; one to U.S. Bank for more than $10 million, and one to MBP for $2.76 million.4 Lakeridge proposed a plan that would impair both creditors.5 U.S. Bank rejected the plan.6 Because MBP Equity was a statutory insider, it could not overcome U.S. Bank's objection, and it thus sought to transfer its claim against Lakeridge to an outsider.7 A member of MBP's board and an officer of Lakeridge, Kathleen Bartlett, made a deal with Robert Rabkin, a retired surgeon with whom she had a romantic relationship, to sell MBP's $2.76 million claim for $5,000.8

Rabkin consented to the plan, and the bankruptcy court affirmed the plan.9 U.S. Bank objected, arguing that Rabkin qualified as a non-statutory insider because he had a "romantic" relationship with Bartlett and his purchase of MBP's loan "was not an arm's-length transaction."10 At an evidentiary hearing, it was established that Rabkin and Bartlett did in fact have a romantic relationship.11 The bankruptcy court concluded that Rabkin was not an insider despite this relationship, however, because he purchased the MBP claim as a "speculative investment" after doing adequate due diligence, and Bartlett and Rabkin lived in separate homes and managed their finances independently.12 Indeed, the bankruptcy court determined that the transaction was made at "arms-length" and did not convey insider status.13

The Court of Appeals for the Ninth Circuit affirmed, holding that the bankruptcy court's determination that the transaction "was conducted at arm's length" "was entitled to clear-error review, and could not be reversed under that deferential standard."14

The Supreme Court granted certiorari to resolve "[w]hether the Ninth Circuit was right to review for clear error (rather than de novo) the Bankruptcy Court's determination that Rabkin does not qualify as a non-statutory insider because he purchased MBP's claim in an arm's-length transaction."15 The Court found that the question of whether the facts satisfied the legal standard applied in the Ninth Circuit was a question of mixed law and fact, but was predominately factual in nature.16 In support, the Court explained that "[w]hat remains for a bankruptcy court, after all that, is to determine whether the historical facts found satisfy the legal test chosen for conferring non-statutory insider status. We here arrive at the so-called 'mixed question' of law and fact at the heart of this case."17

The Supreme Court explained that this "mixed question" was actually whether, under the facts as found by the bankruptcy court, "Rabkin's purchase of MBP's claim [was] conducted as if the two were strangers to each other?"18 Such a question is, the Court noted, "about as factual sounding as any mixed question gets" and "really requires what we have previously described as a 'factual inference[] from undisputed basic facts.'"19 Because the question was so factually driven, it belonged, the Court concluded "in the court that has presided over the presentation of evidence, that has heard all the witnesses, and that has both the closest and the deepest understanding of the record—i.e., the bankruptcy court."20 The Court also, as an alternative basis for its holding, noted that "precious little" legal work is involved in applying the "arm's-length test."21 The Court found "no apparent need to further develop 'norms and criteria,' or to devise a supplemental multi-part test, in order to apply the familiar term."22 Thus, "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," meaning "the issue is not of the kind that appellate courts should take over."23

The Court held that because the bankruptcy court was in the best position to make the determination as to whether a transaction was arms-length, the bankruptcy court's decision should be overturned only for clear error.24

Justice Kennedy concurred in the outcome, but wrote to make clear that the Court was not adopting the test applied by the Ninth Circuit, nor was it affirming that the standard was correctly applied.25 He emphasized that the opinion "properly limits its decision to the question whether the Court of Appeals applied the correct standard of review, and its opinion should not be read as indicating that a transaction is arm's length if the transaction was negotiated simply with a close friend, without broader solicitation of other possible buyers."26

Justice Sotomayor issued a separate concurrence joined by Justices Kennedy, Thomas, and Gorsuch, expressing concerns regarding the test for insider status as applied by the Ninth Circuit, and doubt as to the bankruptcy court's conclusions.[27] She noted that if the nature of the test were to change, it is possible that the applicable standard of review would also change.28

* * *

This case supports the concept that bankruptcy court decisions involving mixed questions of law and fact will, if the inquiry is predominantly factual so that the court is in the best position to make those decisions, be reviewed only for "clear error."

Footnotes

1. U.S. Bank Nat'l Ass'n ex rel. CWCapital Asset Mgmt. LLC v. Vill. at Lakeridge, LLC, No. 15-1509, 2018 WL 1143822 (2018), aff'g U.S. Bank Nat'l Ass'n v. Vill. at Lakeridge, LLC, 137 S. Ct. 1372 (2017) (mem).

2. Under the Bankruptcy Code, a court may confirm a plan that impairs the interests of a class that does not consent—a "cramdown" plan—provided that, inter alia, another creditor that is also impaired by the plan and is not an "insider" of the debtor consents. See 11 U.S.C. § 1129(a)(10) (requiring "at least one" impaired class to have "accepted the plan, determined without including any acceptance of the plan by any insider"). The Bankruptcy Code defines "insider", 11 U.S.C. § 101(31), and sets forth a non-exhaustive list of persons who qualify, including those that are "in control" of the debtor. See id. The courts also recognize as insiders other persons not included on that list, referred to as "non-statutory insiders." Often, "the conferral of that status . . . turns on whether the person's transactions with the debtor (or another of its insiders) were at arm's length." U.S. Bank Nat'l Ass'n, 2018 WL 1143822, at *2.

3. Id. at * 3.

4. Id.

5. Id.

6. Id.

7. Id.

8. U.S. Bank Nat'l Ass'n, 2018 WL 1143822, at *3.

9. Id.

10. Id.

11. Id.

12. Id.

13. Id.

14. U.S. Bank Nat'l Ass'n, 2018 WL 1143822, at *3.

15. Id. at *4 (citing U.S. Bank Nat'l Ass'n, 137 S. Ct. 1372 (2017)).

16. Id. at *5.

17. Id.

18. Id. at *6.

19. Id. (citation omitted).

20. U.S. Bank Nat'l Ass'n, 2018 WL 1143822, at *6.

21. Id. at *7.

22. Id.

23. Id.

24. Id.

25. Id. at *8 ("[W]hether the test for non-statutory insider status as formulated and used by courts in the Ninth Circuit is sufficient is not before us; and whether on these facts it was clear error to find that Rabkin was not an insider is also not before us.").

26. U.S. Bank Nat'l Ass'n, 2018 WL 1143822, at *8.

27. Id. at *8.

28. Id. at *8-12.

This article is designed to give general information on the developments covered, not to serve as legal advice related to specific situations or as a legal opinion. Counsel should be consulted for legal advice.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions