U.S. Bank Nat'l Ass'n v. Vill. at Lakeridge, LLC.

• Decision Date: 05 March 2018
• Docket Number: No. 15–1509.,15–1509.
• Parties: U.S. BANK NATIONAL ASSOCIATION, Trustee, by and through CWCAPITAL ASSET MANAGEMENT LLC, Petitioner v. The VILLAGE AT LAKERIDGE, LLC.
• Court: U.S. Supreme Court

138 S.Ct. 960

200 L.Ed.2d 218

U.S. BANK NATIONAL ASSOCIATION, Trustee, by and through CWCAPITAL ASSET MANAGEMENT LLC, Petitioner

v.The VILLAGE AT LAKERIDGE, LLC.

No. 15–1509.

Supreme Court of the United States

Argued Oct. 31, 2017.

Decided March 5, 2018.

Gregory A. Cross, Mitchell Y. Mirviss, Venable LLP, Baltimore, MD, Keith C. Owens, Jennifer L. Nassiri, Venable LLP, Los Angeles, CA, for Petitioner.

Alan R. Smith, Holly E. Estes, Law Offices of Alan R. Smith, Reno, NV, Daniel L. Geyser, Stris & Maher LLP, Dallas, TX, Peter K. Stris, Brendan S. Maher, Douglas D. Geyser, Stris & Maher LLP, Los Angeles, CA, for Respondent.

JUSTICE KAGAN delivered the opinion of the Court.

The Bankruptcy Code places various restrictions on anyone who qualifies as an "insider" of a debtor. The statutory definition of that term lists a set of persons related to the debtor in particular ways. See 11 U.S.C. § 101(31). Courts have additionally recognized as insiders some persons not on that list—commonly known as "non-statutory insiders." The conferral of that status often turns on whether the person's transactions with the debtor (or another of its insiders) were at arm's length. In this case, we address how an appellate court should review that kind of determination: de novo or for clear error? We hold that a clear-error standard should apply.

I

Chapter 11 of the Bankruptcy Code enables a debtor company to reorganize its business under a court-approved plan governing the distribution of assets to creditors. See 11 U.S.C. § 1101 et seq. The plan divides claims against the debtor into discrete "classes" and specifies the "treatment" each class will receive. § 1123; see § 1122. Usually, a bankruptcy court may approve such a plan only if every affected class of creditors agrees to its terms. See § 1129(a)(8). But in certain circumstances, the court may confirm what is known as a "cramdown" plan—that is, a plan impairing the interests of some non-consenting class. See § 1129(b). Among the prerequisites for judicial approval of a cramdown plan is that another impaired class of creditors has consented to it. See § 1129(a)(10). But crucially for this case, the consent of a creditor who is also an "insider" of the debtor does not count for that purpose. See ibid. (requiring "at least one" impaired class to have "accepted the plan, determined without including any acceptance of the plan by any insider").

The Code enumerates certain insiders, but courts have added to that number. According to the Code's definitional section, an insider of a corporate debtor "includes" any director, officer, or "person in control" of the entity. §§ 101(31)(B)(i)-(iii). Because of the word "includes" in that section, courts have long viewed its list of insiders as non-exhaustive. See § 102(3) (stating as one of the Code's "[r]ules of construction" that " ‘includes' and ‘including’ are not limiting"); 2 A. Resnick & H. Sommer, Collier on Bankruptcy ¶ 101.31, p. 101–142 (16th ed. 2016) (discussing cases). Accordingly, courts have devised tests for identifying other, so-called "non-statutory" insiders. The decisions are not entirely uniform, but many focus, in whole or in part, on whether a person's "transaction of business with the debtor is not at arm's length." Ibid. (quoting In re U.S. Medical, Inc., 531 F.3d 1272, 1280 (C.A.10 2008) ).

This case came about because the Code's list of insiders placed an obstacle in the way of respondent Lakeridge's attempt to reorganize under Chapter 11. Lakeridge is a corporate entity which, at all relevant times, had a single owner, MBP Equity Partners, and a pair of substantial debts. The company owed petitioner U.S. Bank over $10 million for the balance due on a loan. And it owed MBP another $2.76 million. In 2011, Lakeridge filed for Chapter 11 bankruptcy. The reorganization plan it submitted placed its two creditors in separate classes and proposed to impair both of their interests. U.S. Bank refused that offer, thus taking a fully consensual plan off the table. But likewise, a cramdown plan based only on MBP's consent could not go forward. Recall that an insider cannot provide the partial agreement needed for a cramdown plan. See supra, at 963; § 1129(a)(10). And MBP was the consummate insider: It owned Lakeridge and so was—according to the Code's definition—"in control" of the debtor. § 101(31)(B)(iii). The path to a successful reorganization was thus impeded, and Lakeridge was faced with liquidation. Unless ...

Unless MBP could transfer its claim against Lakeridge to a non-insider who would then agree to the reorganization plan. So that was what MBP attempted. Kathleen Bartlett, a member of MBP's board and an officer of Lakeridge, approached Robert Rabkin, a retired surgeon, and offered to sell him MBP's $2.76 million claim for $5,000. Rabkin took the deal. And as the new holder of MBP's old loan, he consented to Lakeridge's proposed reorganization. As long as he was not himself an insider, Rabkin's agreement would satisfy one of the prerequisites for a cramdown plan. See § 1129(a)(10) ; supra, at 963. That would bring Lakeridge a large step closer to reorganizing its business over U.S. Bank's objection.

Hence commenced this litigation about whether Rabkin, too, was an insider. U.S. Bank argued that he 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." Motion to Designate Claim of Robert Rabkin as an Insider Claim in No. 11–51994 (Bkrtcy. Ct. Nev.), Doc. 194, p. 11 (Motion).¹ At an evidentiary hearing, both Rabkin and Bartlett testified that their relationship was indeed "romantic." App. 128, 142–143.² But the Bankruptcy Court still rejected U.S. Bank's view that Rabkin was a non-statutory insider. See App. to Pet. for Cert. 66a. The court found that Rabkin purchased the MBP claim as a "speculative investment" for which he did adequate due diligence. Id., at 67a. And it noted that Rabkin and Bartlett, for all their dating, lived in separate homes and managed their finances independently. See id., at 66a.

The Court of Appeals for the Ninth Circuit affirmed by a divided vote. According to the court, a creditor qualifies as a non-statutory insider if two conditions are met: "(1) the closeness of its relationship with the debtor is comparable to that of the enumerated insider classifications in [the Code], and (2) the relevant transaction is negotiated at less than arm's length." In re Village at Lakeridge, LLC, 814 F.3d 993, 1001 (2016). The majority viewed the Bankruptcy Court's decision as based on a finding that the relevant transaction here (Rabkin's purchase of MBP's claim) "was conducted at arm's length." Id., at 1003, n. 15. That finding, the majority held, was entitled to clear-error review, and could not be reversed under that deferential standard. See id., at 1001–1003. Rabkin's consent could therefore support the cramdown plan. See id., at 1003. Judge Clifton dissented. He would have applied de novo review, but in any event thought the Bankruptcy Court committed clear error in declining to classify Rabkin as an insider. See id., at 1006.

This Court granted certiorari to decide a single question: Whether 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. 580 U.S. ––––, 137 S.Ct. 1372, 197 L.Ed.2d 553 (2017).

II

To decide whether a particular creditor is a non-statutory insider, a bankruptcy judge must tackle three kinds of issues—the first purely legal, the next purely factual, the last a combination of the other two. And to assess the judge's decision, an appellate court must consider all its component parts, each under the appropriate standard of review. In this case, only the standard for the final, mixed question is contested. But to resolve that dispute, we begin by describing the unalloyed legal and factual questions that both kinds of courts have to address along the way, as well as the answers that the courts below provided.

Initially, a bankruptcy court must settle on a legal test to determine whether someone is a non-statutory insider (again, a person who should be treated as an insider even though he is not listed in the Bankruptcy Code). But that choice of standard really resides with the next court: As all parties agree, an appellate panel reviews such a legal conclusion without the slightest deference. See Highmark, Inc. v. Allcare Health Management System, Inc., 572 U.S. ––––, ––––, 134 S.Ct. 1744, 1748, 188 L.Ed.2d 829 (2014) ( "Traditionally, decisions on questions of law are reviewable de novo " (internal quotation marks omitted)); Tr. of Oral Arg. 29–30, 33. The Ninth Circuit here, as noted earlier, endorsed a two-part test for non-statutory insider status, asking whether the person's relationship with the debtor was similar to those of listed insiders and whether the relevant prior transaction was at "less than arm's length." 814 F.3d, at 1001 ; see supra, at 964 – 965. And the Ninth Circuit held that the Bankruptcy Court had used just that standard—more specifically, that it had denied insider status under the test's second, transactional prong. See 814 F.3d, at 1002–1003, and n. 15 ; supra, at 964 – 965. We do not address the correctness of the Ninth Circuit's legal test; indeed, we specifically rejected U.S. Bank's request to include that question in our grant of certiorari. See 580 U.S. ––––, 137 S.Ct. 1372, 197 L.Ed.2d 553 ; Pet. for Cert. i. We simply take that test as a given in deciding the standard-of-review issue we chose to resolve.

Along with adopting a legal standard, a bankruptcy court evaluating insider status must make findings of what we have called "basic" or "historical" fact—addressing questions of who did what, when or where, how or why. Thompson v. Keohane, 516 U.S. 99, 111, 116 S.Ct. 457, 133...