U. S. Bank N. A. v. Village at Lakeridge, LLC

Background

A small company called Lakeridge owed over $10 million to one bank and $2.76 million to its sole owner, MBP. When Lakeridge filed Chapter 11 bankruptcy, it sought to reorganize. MBP, as the owner, could not count as a consenting creditor for a court‑approved “cramdown” plan, so MBP sold its claim to a retired surgeon, Robert Rabkin, for $5,000. Rabkin dated Kathleen Bartlett, an MBP board member and Lakeridge officer. U.S. Bank argued the sale was not an arm’s‑length deal and that Rabkin should be treated as an insider; the bankruptcy court disagreed and the Ninth Circuit affirmed.

Reasoning

The Court focused on what standard of review applies when a bankruptcy judge decides whether a transaction was arm’s‑length and thus whether a buyer is a non‑statutory insider. The Justices explained this is a “mixed” question of law and fact. Because the arm’s‑length inquiry asks whether, given the specific facts, the parties acted like strangers, it is mainly factual. The Court held appellate courts should therefore review such factual determinations only for clear error, while retaining de novo review over pure legal questions. The Court affirmed the Ninth Circuit’s use of the clear‑error standard here.

Real world impact

Bankruptcy judges’ factfinding about whether a creditor’s purchase was arm’s‑length now gets substantial deference on appeal. That makes it harder for creditors to overturn trial‑court findings about insider status. The decision is limited to the standard of review and does not resolve all ways a person might qualify as an insider.

Dissents or concurrances

Several Justices concurred to note concerns: some urged that the Ninth Circuit’s two‑part test may need further development and that narrowly offered sales to friends could signal non‑arm’s‑length conduct.