Understand the complexities and nuances of the Bankruptcy Code to better advise clients and prepare for court.
By Diane Davis
Feb. 11 — One of the two creditors of a Chapter 11 debtor in a single asset real estate case didn't become a statutory insider simply by receiving a claim from a statutory insider, the Ninth Circuit held Feb. 8 (U.S. Bank, N.A. v. The Vill. at Lakeridge, LLC.
The creditor also wasn't a non-statutory insider because he didn't have a close relationship with the debtor and negotiate the transaction at less than arm's length, the appeals court said.
Affirming the judgment of the Bankruptcy Appellate Panel's decision, Judge N. Randy Smith of the U.S. Court of Appeals for the Ninth Circuit concluded that insider status can't be assigned but must be determined for each individual on a “case-by-case basis after the consideration of various factors.”
“The fact that insider status relates to the claimant and not the claim is an important point,” Prof. Lawrence Ponoroff, Samuel M. Fegtly Chair in Commercial Law at University of Arizona College of Law, told Bloomberg BNA Feb. 10. “A contrary conclusion would impede reorganization in single asset real estate cases like this one,” he said.
By finding that the unsecured creditor was an impaired creditor who was not an insider, he was allowed to vote for the debtor's reorganization plan over the objection of the secured creditor.
The question of insider status matters because “in order to cram down its plan over the objection of the secured creditor, [secured creditor] U.S. Bank N.A., at least one impaired class must vote in favor of the plan without taking into account the vote of any insiders,” Ponoroff told Bloomberg BNA.
“In this case, there were only two creditors and two classes. Thus, if [Robert A.] Rabkin was found to be an insider there would be no approval by an impaired class,” Ponoroff said.
Judge Richard R. Clifton concurred in part and dissented in part with the court's judgment.
Before a bankruptcy court may confirm a Chapter 11 debtor's reorganization plan, it must determine if any of the persons voting to accept the plan are insiders. Chapter 11 bankruptcy is for businesses or individuals whose debts exceed the statutory thresholds for Chapter 13.
“As the court noted in footnote 8, ‘[i]f [appellant] U.S. Bank's argument were true, we would expect to find references to “the holder of an insider claim” rather than “an insider” in the bankruptcy code,'” Ponoroff said.
Under Bankruptcy Code Section 1129(a)(10), a bankruptcy court will confirm a plan “only if all of the following requirements are met: … If a class of claims is impaired under the plan, at least one class of claims that is impaired under the plan has accepted the plan, determined without including any acceptance of the plan by an insider.” To be a “statutory insider,” a creditor must fall within one of the categories listed in Section 101(31), the court said.
Ponoroff found the majority’s conclusion about the standard of review correct and its conclusion to affirm “because the determination of non-insider status does require an intensive factual inquiry.” He noted, however, that the “dissent identifies some facts that make the transaction look a bit suspicious.”
Judge Clifton agreed with the legal conclusion that a person doesn't necessarily become a statutory insider solely by acquiring a claim from a statutory insider.
Clifton dissented, however, with the majority's conclusion that Dr. Robert Rabkin should be viewed as a non-statutory insider. The facts in the case clearly indicate that the transaction was negotiated at less than arm's length, he said. Rabkin paid $5,000 to MBP, the sole member of the debtor The Village at Lakeridge, LLC for an unsecured claim against Lakeridge worth $2.76 million, Clifton said. The bankruptcy court never said what standard it applied to determine whether the transaction was conducted at arm's length, he said.
According to Clifton, the majority opinion renders Bankruptcy Code Section 1129 meaningless. “[I]nsiders are free to evade the requirement simply by transferring their interest for a nominal amount … to a friendly third party, who can then cast the vote the insider could not have cast itself.”
The debtor only has one member, MBP EquityPartners 1 LLC (MBP), which is managed by a board of five members. One of its members, Kathie Bartlett, shares a close business and personal relationship with Dr. Robert Rabkin.
U.S. Bank is the successor trustee to Greenwich Financial Products, Inc., the company through which the debtor financed a property purchase. U.S. Bank held a secured claim worth $10 million and MBP held an unsecured claim worth $2.76 million in the debtor's property.
At the time Lakeridge filed for Chapter 11 relief, MBP's board decided to sell its unsecured claim. Bartlett, on behalf of the board, approached Rabkin with an offer to buy the claim for $5,000, which he accepted. Rabkin testified that although he had a close personal relationship with Bartlett, he purchased the unsecured claim as a business investment.
U.S. Bank later offered to purchase Rabkin's claim for $50,000, but he felt pressure, and declined it.
U.S. Bank asked the bankruptcy court to designate Rabkin's claim and disallow it for plan voting purposes because he was both a statutory and non-statutory insider, and the assignment was made in bad faith.
The bankruptcy court held that Rabkin wasn't a non-statutory insider and the claim wasn't purchased in bad faith. The court, however, disallowed it for plan voting because it determined that Rabkin had become a statutory insider by acquiring a claim from MBP.
Both the debtor and Rabkin appealed the bankruptcy court's decision to the Bankruptcy Appellate Panel.
The BAP reversed the finding that Rabkin had become a statutory insider as a matter of law by acquiring MBP and affirmed the findings that Rabkin wasn't a non-statutory insider and that the claim assignment wasn't made in bad faith.
According to the BAP, insider status can't be assigned and must be determined for each individual on a “case-by-case basis, after the consideration of various factors.” Finally, the BAP said that Rabkin could vote to accept the debtor's reorganization plan because he was an impaired creditor who was not an insider.
U.S. Bank appealed to the Ninth Circuit, arguing that Rabkin became a statutory insider when he acquired a claim from MBP.
The Ninth Circuit rejected this argument, concluding that insider status relates only to the claimant, not the property of a claim. The appeals court also said that a person's insider status is a question of fact that must be determined after the claim transfer occurs.
According to the court, “if a third party could become an insider as a matter of law by acquiring a claim from an insider, bankruptcy law would contain a procedural inconsistency wherein a claim would retain its insider status when assigned from an insider to a non-insider, but would drop its non-insider status when assigned from a non-insider to an insider.”
The Ninth Circuit said the bankruptcy court must conduct a fact-intensive analysis to determine if a creditor and debtor share a close relationship and negotiated at less than arm's length. Based on the evidence, the court found that Rabkin had little knowledge of Lakeridge or its sole member MBP prior to acquiring the unsecured claim.
Although Rabkin and Bartlett did have a close, personal and business relationship, Bartlett didn't control MBP or Rabkin, the court said. Thus, U.S. Bank failed to show that Rabkin's relationship with Bartlett was sufficiently close to compare with any category listed in Section 101(31), the court said.
Senior Judge Robert S. Lasnik for the U.S. District Court for the Western District of Washington, sitting by designation, joined the opinion.
Gregory A. Cross, Keith C. Owens, and Jennifer L. Nassiri, Venable LLP, Los Angeles, represented the appellant/trustee U.S. Bank N.A.; Alan R. Smith, Holly E. Estes, Law Offices of Alan R. Smith, Reno, Nevada, represented debtor/appellee The Village at Lakeridge, LLC.
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