U.S. Bank National Association v. Village at Lakeridge, LLC

Under Chapter 11 of the Bankruptcy Code, a reorganization plan could typically be approved only if all classes of impaired creditors consented. In certain circumstances, the court could cram down the plan over a class’s objection if at least one other impaired class consented; however, consent from an “insider” did not qualify. The code defined insiders as including directors, officers, or persons controlling the debtor, and courts also recognized additional nonstatutory insiders. The Village at Lakeridge, LLC (Lakeridge) (debtor) filed for Chapter 11 bankruptcy. Lakeridge was wholly owned by MBP Equity Partners (MBP) (creditor). Lakeridge owed MBP $2.76 million and U.S. Bank (creditor) $10 million. U.S. Bank objected to Lakeridge’s proposed plan. MBP consented, but as Lakeridge’s owner, MBP was a statutory insider whose consent was insufficient for a cramdown. MBP board member and Lakeridge officer Kathleen Bartlett approached Robert Rabkin, a retired surgeon with whom she was in a romantic relationship, and offered to sell him MBP’s $2.76 million claim for $5,000. Rabkin accepted, purchased the claim, and consented to Lakeridge’s plan. U.S. Bank objected, arguing that Rabkin was a nonstatutory insider due to his romantic relationship with Bartlett and the non-arm’s-length nature of the transaction. After an evidentiary hearing, the bankruptcy court found that Rabkin purchased MBP’s claim as a speculative investment after performing adequate due diligence. The court concluded that the transaction was made at arm’s length and that Rabkin was not an insider. On appeal, the Ninth Circuit held that a creditor is a nonstatutory insider if the creditor’s relationship with the debtor is comparable to that of a statutory insider and the relevant transaction was negotiated at less than arm’s length. The Ninth Circuit reviewed the bankruptcy court’s application of this test to the facts for clear error and affirmed. The United States Supreme Court granted certiorari on the question of what standard of review applied to the bankruptcy court’s determination that the transaction was conducted at arm’s length.