The Supreme Court granted certiorari today in U.S. Bank NA v. The Village at Lakeridge LLC, but the high court will not review the more important question for chapter 11 practice.
The justices will not decide whether the purchaser of a claim automatically takes on the seller’s insider status, perhaps because the justices perceive no conflict among the circuits. Rather, the court will decide whether the standard of review for non-statutory insider status is de novo or clearly erroneous, or a combination of both.
Curiously, the Acting Solicitor General recommended denial of certiorari, believing that in reality there are no circuit splits and that the Ninth Circuit made the correct holdings. To the contrary, the petitioner contends that the Third, Seventh and Tenth Circuits employ the de novo standard while the Ninth Circuit “for the first time” employed the clearly erroneous standard.
The Ninth Circuit Opinion
In the chapter 11 case that came to the Ninth Circuit, there were only two creditors. One was a bank with a $10 million secured claim. The other was the debtor’s general partner, with a $2.8 million unsecured claim. As an insider, the general partner’s vote in favor of the plan could not be counted under Section 1129(a)(10). For lack of an accepting class, the plan could not have been confirmed and crammed down, because the bank opposed the plan.
Hoping to confirm using cramdown, the general partner sold his claim for $5,000 to a close friend of one of the owners of the general partner. The plan called for a $30,000 distribution on the unsecured claim.
The bankruptcy judge ruled that the buyer automatically became an insider upon purchasing the claim and thus could not be the accepting class. The Bankruptcy Appellate Panel reversed and was upheld in a 2-1 opinion in February 2016, with Circuit Judge N. Randy Smith writing for the majority.
The case turned on the definition of “insider” contained in Section 101(31), which names several types of people, known as statutory insiders, who are automatically insiders. By the definition’s use of the word “including,” Judge Smith said that others become “non-statutory insiders” if they have “a sufficiently close relationship with the debtor to fall within the definition.”
In the principal holding of the case, all three judges, including the dissenter, agreed that a “person does not become a statutory insider solely by acquiring a claim from a statutory insider.” Judge Smith said that the Code distinguishes between the status of a claim and the status of a creditor. Insider status, he said, pertains only to the claimant.
Consequently, Judge Smith said that status as an insider entails a “factual inquiry that must be conducted on a case-by-case basis.” To become an insider, a claim buyer “must have a close relationship with the debtor and negotiate the relevant transaction at less than arm’s length,” he said.
The bankruptcy judge had determined that the buyer was not an insider based on his conduct and relationship with the debtor and its owners. Since the buyer as a matter of law did not become an insider by purchasing the insider’s claim, the majority on the circuit court upheld the appellate panel because the bankruptcy judge’s findings of fact on insider status were not clearly erroneous.
Circuit Judge Richard R. Clifton dissented in part. It was “clear” to him that the buyer should have been deemed an insider. In his view of the facts, the sale was not negotiated at arm’s length.
The Certiorari Petition
The lender filed a petition for certiorari in June 2016, raising three issues: (1) whether the purchaser of an insider’s claim automatically acquires the seller’s insider status under Sections 1129(a)(10) and 101(31); (2) whether the standard of review on non-statutory insider status is de novo or clear error; and (3) whether the test for non-statutory insider status is an “arms’ length” analysis or a “functional equivalent” test.
In October, the justices invited the Acting Solicitor General to file a brief “expressing the views of the United States.”
In a brief filed in February, the Acting Solicitor General recommended that the Court deny the certiorari petition, saying that the circuit court properly articulated and applied the standards for appellate review. The government also could not discern any conflict among the circuits on the issues presented in the petition.
According to the government, the Ninth Circuit correctly applied the appellate standards: The bankruptcy court’s conclusions of law are reviewed de novo, and its findings of fact are reviewed for clear error. Concluding that “[f]urther review is not warranted,” the government said that the Ninth Circuit’s “application of the governing legal standard in conducting clear error review of the bankruptcy court’s factual findings raises no issue of general importance.”
The Supreme Court Cogitates
The justices were originally scheduled to pass on the certiorari petition at a conference on March 17. On March 20, the Court rescheduled the conference for March 24. Rescheduling consideration of a petition is sometimes an indication that the justices may be inclined to review the case.
In an order on March 27, the Court granted the petition, but “limited [review] to Question 2 presented in the petition,” regarding the standard of review. Not granting review of the first issue may be an indication that the justices see no conflict of circuits on the holding that the purchaser of a claim does not automatically assume the seller’s insider status.
The petition was granted too late for the Court to hold argument in time for a decision to be made before the current term ends in late June. Argument likely will be scheduled not long after the new term begins in October, assuming there are no delays in the parties’ submissions of briefs on the merits.
To read ABI’s discussion of the Ninth Circuit opinion, click here. For discussion of the Acting Solicitor General’s views, click here.
To read the Ninth Circuit opinion, click here. The opinion is officially reported at U.S. Bank NA v. The Village at Lakeridge LLC (In re The Village at Lakeridge LLC), 814 F.3d 993 (9th Cir. 2016).
The case in the Supreme Court is U.S. Bank NA v. The Village at Lakeridge LLC, 15-1509 (Sup. Ct.).