U.S. Bank N.A. v. Vill. at Lakeridge, LLC (In re Vill. at Lakeridge, LLC)

• Decision Date: 08 February 2016
• Docket Number: Nos. 13–60038,13–60039.,s. 13–60038
• Citation: 814 F.3d 993
• Parties: In re THE VILLAGE AT LAKERIDGE, LLC, fka Magnolia Village, LLC, Debtor, U.S. Bank N.A., Trustee, et al., by and through CWCapital Asset Management LLC, solely in its capacity as Special Servicer, Appellant, v. The Village at Lakeridge, LLC, Appellee, Robert Alan Rabkin, Real Party in Interest. In re the Village at Lakeridge, LLC, fka Magnolia Village, LLC, Debtor, U.S. Bank N.A., Trustee, et al., by and through CWCapital Asset Management LLC, solely in its capacity as Special Servicer, Appellant, v. The Village at Lakeridge, LLC, Appellee, Robert Alan Rabkin, Real Party in Interest.
• Court: U.S. Court of Appeals — Ninth Circuit

814 F.3d 993

In re THE VILLAGE AT LAKERIDGE, LLC, fka Magnolia Village, LLC, Debtor,

U.S. Bank N.A., Trustee, et al., by and through CWCapital Asset Management LLC, solely in its capacity as Special Servicer, Appellant,

v.The Village at Lakeridge, LLC, Appellee,Robert Alan Rabkin, Real Party in Interest.

In re the Village at Lakeridge, LLC, fka Magnolia Village, LLC, Debtor,

U.S. Bank N.A., Trustee, et al., by and through CWCapital Asset Management LLC, solely in its capacity as Special Servicer, Appellant,

v.The Village at Lakeridge, LLC, Appellee,Robert Alan Rabkin, Real Party in Interest.

Nos. 13–60038

13–60039.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Oct. 22, 2015.

Filed Feb. 8, 2016.

Gregory A. Cross, Keith C. Owens (argued), Jennifer L. Nassiri (argued), Venable LLP, Los Angeles, CA, for Appellant.

Alan R. Smith (argued), Holly E. Estes, Law Offices of Alan R. Smith, Reno, NV, for Debtor/Appellee.

Before: RICHARD R. CLIFTON and N. RANDY SMITH, Circuit Judges, and ROBERT S. LASNIK,^* Senior District Judge.

Opinion by Judge N.R. SMITH

; Partial Concurrence and Partial Dissent by Judge CLIFTON.

OPINION

N.R. SMITH, Circuit Judge:

Before a bankruptcy court may confirm a reorganization plan in a Chapter 11 bankruptcy, it must determine if any of the persons voting to accept the plan are insiders.¹ Insiders are either statutory or non-statutory. To be a "statutory insider," a creditor must fall within one of the categories listed in 11 U.S.C. § 101(31). A creditor does not become an insider simply by receiving a claim from a statutory insider. To be a non-statutory insider, the creditor must have a close relationship with the debtor and negotiate the relevant transaction at less than arm's length. Thus, Dr. Robert Rabkin does not qualify as a statutory or non-statutory insider.²

I. Factual Proceedings

A. The Parties

The debtor, Village at Lakeridge, LLC ("Lakeridge"), has only one member:

MBP Equity Partners 1, LLC ("MBP"). MBP is managed by a board of five members, one of whom is Kathie Bartlett.³ Bartlett shares a close business and personal relationship with Rabkin, which is unrelated to Bartlett's position with MBP.

U.S. Bank National Association ("U.S. Bank") is successor trustee to Greenwich Financial Products, Inc., the company through which Lakeridge financed a property purchase. At the time Lakeridge filed for bankruptcy, U.S. Bank was one of two creditors holding a claim on Lakeridge's assets. U.S. Bank held a fully secured claim worth about $10 million, and MBP held an unsecured claim worth $2.76 million.

B. Bankruptcy Court Proceedings

Lakeridge filed for Chapter 11 relief on June 16, 2011. On September 14, Lakeridge filed a Disclosure Statement and an initial Plan of Reorganization. Shortly thereafter, MBP's board decided to sell MBP's unsecured claim.⁴ Bartlett, on behalf of MBP's board, approached Rabkin with an offer to sell the claim. On October 27, Rabkin purchased the claim for $5,000. In its Disclosure Statement, Lakeridge classified Rabkin's claim as a "Class 3 general unsecured claim."

On June 7, 2012, U.S. Bank deposed Rabkin, questioning him about his relationship with Lakeridge, MBP, and Bartlett. In his testimony, Rabkin indicated he had little knowledge of, and no relationship with, Lakeridge or MBP before he acquired MBP's claim. However, Rabkin testified that he had a close relationship with Bartlett, that he saw her regularly, including the day of the deposition, and that he had attended a meeting with his counsel and Lakeridge's counsel one hour before the deposition. Rabkin testified that he purchased MBP's unsecured claim as a business investment, that he had not known how much his claim was worth before the deposition, and that he knew the claim was a risky investment. Rabkin further testified that, prior to the deposition, he had not known his distribution under the proposed reorganization plan was $30,000. Rabkin claimed to have no interest in Lakeridge other than receiving a return on his investment.

U.S. Bank, through counsel, offered to purchase Rabkin's claim for $50,000 at the deposition. Rabkin said he would consider the offer. U.S. Bank, in an attempt to compel an immediate answer, increased its offer to $60,000. Rabkin again agreed to consider the offer, refusing to provide an answer on the spot. After Rabkin consulted with counsel, he did not respond to the offer. The offer lapsed. At a hearing on August 29, 2012, Rabkin stated he had felt pressured to accept U.S. Bank's cash offer while he was under oath, without having time to review it first.⁵

On July 1, 2012, U.S. Bank moved to designate Rabkin's claim and disallow it for plan voting purposes ("Designation Motion"). U.S. Bank contended Rabkin was both a statutory and non-statutory insider, and that the assignment to Rabkin was made in bad faith. The bankruptcy court held an evidentiary hearing on the Designation Motion on August 1, 2012. In its subsequent order ("Designation Order"), the court held Rabkin was not a non-statutory insider, because:

(a) Dr. Rabkin does not exercise control over [Lakeridge;] (b) Dr. Rabkin does not cohabitate with Ms. Bartlett, and does not pay [her] bills or living expenses; (c) Dr. Rabkin has never purchased expensive gifts for Ms. Bartlett; (d) Ms. Bartlett does not exercise control over Dr. Rabkin[;] (e) Ms. Bartlett does not pay [Dr.] Rabkin's bills or living expenses; and (f) Ms. Bartlett has never purchased expensive gifts for Dr. Rabkin.

The court also held that Rabkin did not purchase MBP's claim in bad faith. However, the court designated Rabkin's claim and disallowed it for plan voting, because it determined Rabkin had become a statutory insider by acquiring a claim from MBP. In other words, the bankruptcy court determined that, when a statutory insider sells or assigns a claim to a non-insider, the non-insider becomes a statutory insider as a matter of law.

Lakeridge and Rabkin both timely appealed the Designation Order, challenging the court's finding that Rabkin was a statutory insider for purposes of plan voting. U.S. Bank cross-appealed, challenging the findings that Rabkin was not a non-statutory insider and had not purchased MBP's claim in bad faith.

C. Bankruptcy Appellate Panel

The United States Bankruptcy Appellate Panel for the Ninth Circuit ("BAP") affirmed in part, reversed in part, and vacated in part the Designation Order. The BAP reversed the finding that Rabkin had become a statutory insider as a matter of law by acquiring MBP's claim and affirmed the findings that Rabkin was not a non-statutory insider and that the claim assignment was not made in bad faith.⁶ The BAP held that insider status cannot be assigned and must be determined for each individual "on a case-by-case basis, after the consideration of various factors." Finally, the BAP held Rabkin could vote to accept the Lakeridge plan under 11 U.S.C. § 1129(a)(10), because he was an impaired creditor who was not an insider. U.S. Bank appealed. We have jurisdiction under 28 U.S.C. § 158(d),⁷ and we affirm.

II. Standard of Review

We review the bankruptcy court's decision independent of the BAP's decision. See Boyajian v. New Falls Corp. (In re Boyajian), 564 F.3d 1088, 1090 (9th Cir.2009). Whether an insider's status transfers when he sells or assigns the claim to a third party presents a question of law. Miller Ave. Prof'l & Promotional Servs., Inc. v. Brady (In re Enter. Acquisition Partners), 319 B.R. 626, 630 (9th Cir. BAP 2004). Establishing the definition of non-statutory insider status is likewise a purely legal inquiry. We review questions of law de novo. Stahl v. Simon (In re Adamson Apparel), 785 F.3d 1285, 1289 (9th Cir.2015).

Whether a specific person qualifies as a non-statutory insider is a question of fact. Friedman v. Sheila Plotsky Brokers, Inc. (In re Friedman), 126 B.R. 63, 70 (9th Cir. BAP 1991), overruled on other grounds by Zachary v. Cal. Bank & Tr., No. 13–16402, 811 F.3d 1191, 2016 WL 360519 (9th Cir. Jan. 28, 2016). We review factual findings for clear error. In re Adamson Apparel, 785 F.3d at 1289.

III. Discussion

"An insider is one who has a sufficiently close relationship with the debtor that his conduct is made subject to closer scrutiny than those dealing at arms [sic ] length with the debtor." S.Rep. No. 95–989, at 25 (1978), as reprinted in 1978 U.S.C.C.A.N. 5787, 5810; H.R.Rep. No. 95–595, at 312 (1977), as reprinted in 1978 U.S.C.C.A.N. 5963, 6269. We recognize two types of insiders: statutory insiders and non-statutory insiders. Statutory insiders, also known as "per se insiders," are persons explicitly described in 11 U.S.C. § 101(31), such as "person[s] in control of the debtor." § 101(31). As a matter of law, a statutory insider has a sufficiently close relationship with a debtor to warrant special treatment. In re Enter. Acquisition Partners, 319 B.R. at 631. No one suggests Rabkin qualifies as a statutory insider in his own right.

A non-statutory insider is a person who is not explicitly listed in § 101(31), but who has a sufficiently close relationship with the debtor to fall within the definition. See Schubert v. Lucent Techs. Inc. (In re Winstar Commc'ns, Inc.), 554 F.3d 382, 395 (3d Cir.2009) ("[I]n light of Congress's use of the term ‘includes' in § 101(31), courts have identified a category of creditors, sometimes called ‘non-statutory insiders,’ who fall within the definition but outside of any of the enumerated categories."); see also § 101(31) (stating that "[t]he term ‘insider’ includes " the listed categories (emphasis added)); § 102(3) (explaining that "includes" is "not limiting").

A. Statutory Insider Status

U.S. Bank asserts that Rabkin became a statutory insider when he acquired a claim from MBP. We disagree. A person does not become a statutory insider solely by acquiring a claim from a statutory insider for two reasons. First, bankruptcy law distinguishes between the status of a claim and that of a claimant.

Insider status pertains only to the...