Last December, we updated you that the Supreme Court was considering whether to grant review of In re The Village at Lakeridge, LLC, 814 F.3d 993 (9th Cir. 2016). Our original post is here. On March 27, 2017, the Supreme Court granted review of Village at Lakeridge, but only as to one question presented, the most boring one in our view. (Seems like after giving us bankruptcy professionals a thrill with a deep, insightful, and important ruling like Jevic, the Supreme Court is going back to bankruptcy matters that range from the esoteric to the downright irrelevant; oh well.)

In The Village at Lakeridge, a non-statutory insider acquired a $2.76 million claim against the debtor from an insider for $5,000. Id. at 997. The debtor attempted to confirm its plan (which included a cramdown of U.S. Bank’s claim) by arguing that the assignee of the insider claim provided the debtor an impaired consenting class. U.S. Bank moved to designate the assignee’s claim on the basis that he was both a statutory and non-statutory insider, and that the assignment was made in bad faith. Id. at 997-98. The bankruptcy court designated the claim and ruled that the assignee was not entitled to vote because, when the claim was assigned, he acquired the insider status of the assignor as a matter of law. Id. at 998. However, the bankruptcy court ruled that the assignee was not himself an insider and the assignment was not made in bad faith. Id.

The United States Bankruptcy Appellate Panel for the Ninth Circuit reversed the bankruptcy court’s ruling that the assignee acquired insider status by way of assignment and affirmed the bankruptcy court’s determinations that the assignee was not himself an insider and the assignment was not made in bad faith. Id. Three years later (!!), the Ninth Circuit affirmed.

As we advised you in December, U.S. Bank presented three questions that it urged merited review. Its second question was: “Whether the appropriate standard of review for determining non-statutory insider status is the de novo standard of review applied by the Third, Seventh, and Tenth Circuit Courts of Appeal, or the clearly erroneous standard of review adopted for the first time by the Ninth Circuit Court of Appeal in this action.” U.S. Bank’s Petition for a Writ of Certiorari, at i.

U.S. Bank argued a circuit split exists on the standard of review that should be applied to a determination of insider status. Id. at 19. U.S. Bank alleged that the Ninth Circuit’s review of the bankruptcy court’s determination of non-statutory insider status for clear error directly conflicts with the standard of review employed by the majority of circuit courts in the Third, Seventh, Tenth, and Eleventh Circuits, which hold that questions of insider status are mixed questions of law and fact to be reviewed de novo. Id. at 19-20 (citing Schubert v. Lucent Tech. Inc. (In re Winstar Comm’ns., Inc.), 554 F.3d 382, 395 (3d Cir. 2009); In re Longview Aluminum, L.L.C., 657 F.3d 507, 509 (7th Cir. 2011); In re Krehl, 86 F.3d 737, 742 (7th Cir. 1996); Anstine v. Carl Zeiss Meditec AG (In re U.S. Med., Inc.), 531 F.3d 1272, 1275 (10th Cir. 2008); Miami Police Relief & Pension Fund v. Tabas (In re The Florida Fund of Coral Gables, Ltd.), 144 Fed. Appx. 72, 74 (11th Cir. 2005).

On March 27, 2017, the United States Supreme Court granted U.S. Bank’s petition for writ of certiorari, but only as to the question of the proper standard of review. Case updates for In re The Village at Lakeridge, LLC are available here.

Potential Ramifications

Affirming the appellate rulings in Village at Lakeridge could increase efforts by debtors to confirm plans by assigning insider claims to friendly non-insiders who will vote for the plan.

On the other hand, a ruling in this case could add some clarity to the other little circuit split on whether an assignee of a claim (such as a claims buyer) takes a claim subject to impediments such as potential disallowance due to the claim seller’s receipt of a preference, or whether the assignment frees the claim of such impediments (which is a huge windfall to the claimant, we think). A great summary of this split – which is far more interesting, in the view of the Bankruptcy Cave – can be found here in an very good article by Simon Fraser of Cozen O’Connor and Benjamin Klehr of Cohen Pollock.

Stay tuned for more developments on this case.