U.S. Bank N.A. v The Village at Lakeridge, LLC (In re The Village at Lakeridge, LLC), 814 F.3d 993 (9th Cir. 2016) –

A secured creditor filed a motion to designate an unsecured creditor’s claim and disallow the creditor’s vote in favor of a plan of reorganization. The bankruptcy court granted the motion in part and denied in part. The parties cross appealed and the Bankruptcy Appellate Panel affirmed in part, reversed in part, and vacated in part. The secured creditor then appealed to the 9^th Circuit.

In this opinion the 9^th Circuit addressed questions relating to whether the unsecured creditor was an “insider.” The significance is that in order for a plan of reorganization to be confirmed “at least one class of claims that is impaired under the plan [must have] accepted the plan, determined without including any acceptance of the plan by any insider” pursuant to section 1129(a)(10) of the Bankruptcy Code (emphasis added).

At the time the debtor filed for bankruptcy there were 2 creditors: (1) a lender that financed the debtor’s purchase of property with a fully secured claim worth ~$10 million, and (2) an unsecured claim held by the debtor’s member (MBP) worth $2.76 million. Under section 101 the “term ‘insider’ includes” a long list of categories such as director, officer, person in control, relative, and affiliates or insiders of affiliates. MBP was clearly a statutory insider of the debtor.

MBP was the debtor’s only member. MBP itself was managed by a board of 5 members. Shortly after the debtor filed an initial plan of reorganization and disclosure statement, MBP’s board decided to sell its unsecured claim. Under the plan the claim was classified as a “Class 3 general unsecured claim.” One of the 5 board members approached an individual (Rabkin) on behalf of the MBP board with an offer to sell, and he purchased the claim for $5000.

At a deposition by the secured lender Rabkin testified that he bought the claim as an investment, he did not know how much it was worth prior to the deposition, and he knew it was a risky investment. At the deposition he learned that the distribution under the proposed plan was $30,000. The secured lender’s counsel offered to purchase the claim for $50,000 at the deposition. When Rabkin did not immediately accept, the offer was raised to $60,000. Although Rabkin agreed to consider the offer, he refused to provide an answer on the spot and the offer lapsed. (The offer was not given much weight because it was apparently made in a “crude manner” such that the reviewing judges found that it was not at all surprising that Rabkin was not interested in dealing with the lender.)

The secured lender moved to designate Rabkin’s claim and to disallow it for plan voting purposes, arguing among other things that Rabkin was both a statutory and non-statutory insider.

It claimed Rabkin was a statutory insider (meaning a person listed in section 101) because he acquired the claim from a statutory insider. The 9^th Circuit disagreed because it found that insider status relates to the claimant as opposed to the claim. The concept under general assignment law that an assignee takes a claim subject to any benefits and defects does not apply here. (In an interesting footnote the majority opinion acknowledged that the 9th Circuit previously issued an unpublished opinion that determined insider status does transfer with a claim under the general law of assignment – going on to chide the secured lender because court rules prohibited citing that unpublished opinion.)

As the court put it, the term insider is used as a noun referring to a person, and not an adjective describing a property of a claim. The court also noted that this was consistent with the reverse circumstance of an insider acquiring a claim from a non-insider. If a claim is held by an insider, it doesn’t count for voting purposes even if the claim originally was held by a non-insider.

That left the question of whether Rabkin was a non-statutory insider – meaning the functional equivalent of a statutory insider. (Since the definition “includes” the enumerated classifications of people, the list is not exhaustive.) For a creditor to be a non-statutory insider, (1) there must be a close relationship with the debtor comparable to one of the listed classifications and
(2) the relevant transaction is not negotiated at arm’s length. This is a factual determination. So the court looked to the bankruptcy court’s findings.

In this case Rabkin had no relationship with the debtor or MBP, but had a close business and personal relationship with the MBP board member that transmitted the offer. In addition to finding that there was no control relationship between the debtor or MBP and Rabkin, the bankruptcy court found that the board member with a relationship to Rabkin did not control MBP or the debtor, she did not control Rabkin, and Rabkin did not control her. Further Rabkin and the board member had separate finances, lived separately, and conducted business separately. (In particular, the bankruptcy court included findings that the two did not cohabitate, neither paid the bills or living expenses of the other, and neither purchased expensive gifts for the other.)

Since the majority found the bankruptcy court’s findings “entirely plausible” so that it could not reverse even if it might have weighed the evidence differently, the court affirmed the finding that Rabkin was not a non-statutory insider. Since Rabkin was neither a statutory nor a non-statutory insider, his vote was allowed for plan confirmation purposes.

There was a dissenting opinion that agreed that Rabkin did not become a statutory insider merely by acquiring the claim from an insider, but argued that he should be viewed as a non-statutory insider under the facts of the case. Rabkin paid $5000 for a claim that was nominally worth $2.76 million and which was to receive a distribution of $30,000 under the version of the plan that was pending at the time he bought the claim. The dissenter concluded that Rabkin was doing a favor for a friend, as opposed to the majority which concluded that the explanation that Rabkin “made a speculative investment at a relatively low cost and with the potential for a big payoff is equally logical.”

In real estate cases a debtor often has a particularly difficult time scrounging up an accepting class in the face of opposition by a mortgagee holding a large claim. The result in this case is clearly not a foregone conclusion, as suggested by the fact that the 9^th Circuit came out the other way on the statutory insider issue in its prior unpublished opinion. And certainly one could interpret the facts of this case as a successful attempt by a debtor to circumvent the requirement for acceptance by a non-insider class – which is likely to trigger a judicial effort to block this result (as the dissenter would have done).

Vicki R Harding, Esq.