Facts of the Case
The Village at Lakeridge, LLC, (Lakeridge) filed for bankruptcy on June 16, 2011. At that time, MBP Equity Partners 1, LLC (MBP), a member of Lakeridge, decided to sell its claim on Lakeridge’s assets to Robert Rabkin. In a deposition, Rabkin testified that he had a close relationship with a member of MBP’s board. U.S. Bank National Association, which also held a claim to Lakeridge’s assets, offered to purchase Rabkin’s claim, but Rabkin decided not to accept it. U.S. Bank subsequently filed a motion to designate Rabkin as both a statutory and non-statutory insider, either of which would prevent Rabkin from voting on bankruptcy plan proceedings. The bankruptcy court held that Rabkin had become a statutory insider by purchasing a claim from MBP, which the court considered an insider because it was an affiliate of Lakeridge. The U.S. Court of Appeals for the Ninth Circuit held that insider status is a question of fact that appellate courts review under the deferential standard of clear error. Under the clear error standard, an appellate court will only reverse a lower court’s finding if it is clear from the evidence that a mistake has been made. After reviewing the case under this standard, the appellate court reversed and held that a third party that is assigned a claim does not assume the insider status of the assigning party. The court also held that Rabkin was not a non-statutory insider because the evidence did not show that Rabkin had a close enough relationship with the member of MBP’s board to be considered an insider.
Question
Is a designation of non-statutory insider status reviewable under the standard of clear error?
Conclusion
The Ninth Circuit was correct to review the Bankruptcy Court's determination under a "clear error" standard because the "mixed question" whether a designation of non-statutory insider status is more factual than legal. Justice Elena Kagan delivered the opinion for a unanimous Court. In the Ninth Circuit, the determination of insider status turns on whether the facts support an "arm's length transaction" between the parties. Applied to the facts of this case, the issue was whether Rabkin’s purchase of MBP’s claim was conducted as if the two were strangers to each other? While this question involves issues of law and fact, the answer turns primarily on factual determinations, therefore the more deferential "clear error" standard was the appropriate standard of review.
Justice Anthony Kennedy filed concurring opinion to clarify that the Court does not necessarily find that the Ninth Circuit's standard is complete or proper, only that the application of that standard leads to the result the Court did in fact reach. Justice Sonia Sotomayor also filed a concurring opinion, in which Justices Kennedy, Thomas, and Gorsuch joined, disapproving the Court's decision not to address the question whether the Ninth Circuit's "arm's length transaction" standard is the correct one.