In re The Village at Lakeridge

A bankruptcy court cannot confirm a Chapter 11 reorganization plan without first determining if any of the persons voting to accept the plan are either statutory or non-statutory insiders.

Village at Lakeridge, LLC (“Lakeridge”), had one member, MBP Equity Partners 1, LLC (“MBP”), run by Kathie Bartlett, who shared a close business relationship with Robert Rabkin. U.S. Bank National Association (“U.S. Bank”) and MBP were creditors holding claims on Lakeridge’s assets. Lakeridge filed for Chapter 11 bankruptcy, after which MBP decided to sell its unsecured claim on Lakeridge. Bartlett sold MBP’s claim to Rabkin for $5,000. U.S. Bank deposed Rabkin, questioning his relationship with Lakeridge, MBP, and Bartlett. Rabkin claimed that while he had a close relationship with Bartlett, he had little knowledge and no relationship with Lakeridge or MBP before acquiring MBP’s claim. U.S. Bank moved to designate Rabkin’s claim, arguing that Rabkin was both a statutory and non-statutory insider, and that the assignment to Rabkin had been made in bad faith. The bankruptcy court held that Rabkin was not a non-statutory insider, and held that Rabkin did not purchase MBP’s claim in bad faith. However, the bankruptcy court did find Rabkin to be a statutory insider, and disallowed Rabkin’s claim for plan voting. The Bankruptcy Appellate Panel for the Ninth Circuit reversed the lower court’s decision and claimed that Rabkin was neither a statutory nor non-statutory insider. On appeal, the Ninth Circuit explained that a creditor would not become an insider just by receiving a claim from a statutory insider, but instead must fall within one of the categories listed in 11 U.S.C. §101(31). A non-statutory insider is a creditor who has a close relationship with the debtor and must have negotiated the relevant transaction at less than harm’s length. Therefore, the panel concluded that Rabkin did not qualify as a statutory or non-statutory insider. AFFIRMED.