U.S. National Bank Association v. Village at Lakeridge

Whether the appropriate standard of review for determining non-stuatory insider status in a Chapter 11 Bankruptcy is the de novo standard of review, as followed by the 3rd, 7th, and 10th Circuits, or the clearly erroneous standard of review, as followed by the 9th Circuit?

Debtor, Respondent had a single member: MBP Equity Partners (“MBP”), who is managed by a five-member board of directors, including Kathie Bartlett. Petitioner is successor trustee to a company through which Respondent financed a property purchase. When Respondent filed for bankruptcy Petitioner was one of two creditors, but was the only secured creditor. The non-secured creditor, MBP sold its unsecured claim to Dr. Rabkin who had a personal relationship with Bartlett. Bartlett approached Rabkin to offer to sell the claim for $5,000 on behalf of the board. Petitioner deposed Rabkin who testified that he did have a personal relationship with Bartlett but with no other parties in the transaction. Petitioner offered to purchase Rabkin’s claim but Rabkin declined the offer. Petitioner moved to designate Rabkin’s claim and disallow it for plan voting purposes on the proposition that Rabkin was a statutory and non-statutory insider. The bankruptcy court held that when a statutory insider sells or assigns a claim to a non-insider, that non-insider becomes a statutory insider as a matter of law. Both parties appealed and the United States Bankruptcy Appellate Panel for the Ninth Circuit (“BAP”) affirmed in part, reversed in part, and vacated in part. The United States Court of Appeals for the Ninth Circuit affirmed, holding that a creditor does not become an insider by simply receiving a claim from a statutory insider. The United States Court of Appeals for the Ninth Circuit reviewed the BAP’s finding of whether a specific person qualifies as a non-statutory insider for clear error. Petitioner appealed to the United States Supreme Court to resolve the issue of whether the appropriate standard of review for determining non-statutory insider status is the de novo standard of review or the clearly erroneous standard of review.