In U.S. Bank NA v. The Village of Lakeridge LLC (“U.S. Bank”), the Ninth Circuit Court of Appeals held that for a bankruptcy debtor to confirm a plan using the Bankruptcy Code’s cram-down provisions, unsecured claims held by insiders are not counted for plan voting purposes. However, in the U.S. Bank case, the issue arose in the context of another party acquiring an interest from an insider, presenting the question: When a person acquires a claim from an insider, does this person become an insider?
Under bankruptcy law, an “insider” is defined as someone or the relative of someone who exercises control over the company. Examples of an insider are the director, officer or partner of a corporation or partnership respectively.
In U.S. Bank, the debtor’s general partner, attempt to solve the insider cram-down problem, sold its $2.8 million unsecured claim for $5,000 to a close friend of one of the owners of the general partner. The bankruptcy court held that this close friend who bought the claim, while not a statutory insider, became one upon purchase. The Ninth Circuit stated that, on appeal, this issue regarding insider status is subject to a clearly erroneous standard of review.
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 the evidence did not show that the alleged insider had a close enough relationship with the member of the board to be considered an insider.
The Supreme Court on March 27, 2017, agreed to consider the issue of whether determining statutory insider status for plan voting purposes is subject on appeal to review under the Third, Seventh and Tenth Circuits’ de novo standard, which, of course, places insignificant or no deference to the decision of the trial court, or the Ninth Circuit’s clearly erroneous standard of review, which places significant deference to the trial court’s decision. The Supreme Court’s will only be considering the standard of review issue rather than the integral issue of insider status.
U.S. Bank’s position is that the Ninth Circuit erred by failing to adopt a de novo standard of review when examining the insider status of an individual creditor. Petitioner’s brief was filed with SCOTUS on June 12, 2017. Further, the appeals court deviated from the appropriate standard of review applied by several other circuits in determining whether a creditor is too close to a “statutory insider” of a debtor to be considered a noninsider.
The bank stated in its brief: “Had the panel majority applied a de novo standard of review, it would have reversed.” At issue in the case is whether the alleged insider has the authority to vote on a Chapter 11 reorganization plan proposed by Village at Lakeridge.
In an amicus curiae brief, the U.S. solicitor general’s office urged SCOTUS to refuse the case, saying that the Ninth Circuit “correctly stated the legal standards for determining whether a creditor is a statutory or nonstatutory insider, and it correctly articulated the applicable standard of appellate review.”
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