Thank You For Submiting Feedback!
Along with adopting a legal standard, a bankruptcy court evaluating insider status must make findings of “basic” or “historical” fact—addressing questions of who did what, when or where, how or why. The set of relevant historical facts will of course depend on the legal test used. By well-settled rule, such factual findings are reviewable only for clear error—in other words, with a serious thumb on the scale for the bankruptcy court. Fed. R. Civ. P. 52(a)(6) provides for a clear-error standard; Fed. R. Bankr. P. 7052 and 9014(c) apply Rule 52 to various bankruptcy proceedings.
At the time of its filing for Chapter 11 bankruptcy, respondent Lakeridge owed petitioner U. S. Bank over $10 million for the balance due on a loan, and also owed MBP Equity Partners another $2.76 million. When U.S. Bank refused respondent’s reorganization plan, which proposed to impair the interests of both U.S. Bank and MBP, respondent turned to the so-called “cramdown” plan option for imposing a plan impairing the interests of a non-consenting class of creditors. Among the prerequisites for judicial approval of such a plan was that another impaired class of creditors, who was not an “insider” of the debtor, has consented to the plan. In order to provide the partial agreement needed for the cramdown plan, Kathleen Bartlett, an MBP board member and Lakeridge officer, offered MBP's claim to Robert Rabkin, a retired surgeon, for $5,000. Rabkin purchased the claim and consented to Lakeridge's proposed reorganization. U.S. Bank objected, arguing that Rabkin was a non-statutory insider because he had a “romantic” relationship with Bartlett and the purchase was not an arm's-length transaction. The Bankruptcy Court rejected U.S. Bank's argument. The Ninth Circuit affirmed. Viewing the Bankruptcy Court's decision as one based on a finding that the relevant transaction was conducted at arm's length, the Ninth Circuit held that that finding was entitled to clear-error review, and could not be reversed under that deferential standard. On further appeal, U.S. Bank contended that the Bankruptcy Court's resolution must be reviewed de novo.
Did the Ninth Circuit properly apply the clear error review in determining whether Rabkin was a non-statutory insider for the purposes of the cramdown provision?
The Court held that the clear error review, rather than de novo review, was properly applied to a bankruptcy court's decision that a purchaser of an insider's bankruptcy claim was not a non-statutory insider for purposes of the cramdown provisions under 11 U.S.C.S. § 1129. The Court held that the inquiry necessary for the resolution of the case primarily belonged in the court that has presided over the presentation of evidence, that has heard all the witnesses, and that has both the closest and deepest understanding of the record--i.e., the bankruptcy court. According to the Court, appellate review of the arm's-length issue--even if conducted de novo--will not much clarify legal principles or provide guidance to other courts resolving other disputes. The issue was therefore one that primarily rested with a bankruptcy court, subject only to review for clear error.