US Bank National Association v. Village at Lakeridge (Decision March 5, 2018)

Scales of Justice

The Justices all agree that the bankruptcy court mostly analyzed facts to determine Rabkin was not an insider.

The Supreme Court only answers questions that are directly before it. So when the Supreme Court was asked to determine whether the 9th Circuit used the correct Standard of Review, it did. All of the Justices agreed that the 9th Circuit was correct on that issue.

At the same time, two concurring opinions were filed, and these concurrences questioned other aspects of the 9th Circuit's reasoning.

US Bank v Village at Lakeridge Decision

Case background 

As we explained in our argument explainer, US Bank and Dr. Rabkin were the only two creditors of Village at Lakeridge who would be asked to consent to Village at Lakeridge's bankruptcy reorganization plan. If Dr. Rabkin was determined to be an insider to the company, his vote would not suffice to fight off US Bank's desire to have the company liquidated.

And so the inquiry into Dr. Rabkin's status as a creditor began. Despite that Dr. Rabkin had had a romantic relationship with one of Village at Lakeridge's board members and that he was directly approached to purchase the claim, in the end, the bankruptcy court determined that Dr. Rabkin was not an insider.

US Bank appealed and lost again in the 9th Circuit. The 9th Circuit had given deference to the bankruptcy court's determination. On US Bank's last chance appeal to the Supreme Court, US Bank argued the 9th Circuit should have used a different Standard of Review.

Standards of Review

If you are not already familiar with the concept, we recommend you review our infographic explainer on Standards of Review. 

To sum it up:

Appeals court judges are higher order legal experts than trial court judges. But trial court judges are higher order factual experts than appeals court judges.

"Standards of Review"

See our infographic explainer!

If the determination of Dr. Rabkin's status was primarily a question of fact, then the appeals court judges must defer (give respect to) the bankruptcy court's decision. On the other hand, if the determination of Dr. Rabkin's status was primarily a legal question, then the appeals courts should take a fresh look at the determination. In this case, the 9th Circuit decided the determination was primarily one of fact, so it gave deference to the bankruptcy court.

The decision

The Supreme Court ruled against US Bank on the Standard of Review question. The Court said the decision was primarily a factual one and it affirmed the 9th Circuit decision. None of the Justices questioned that issue.

But Justice Kennedy and Justice Sotomayor wrote separately to question the 9th Circuit's rule on whether someone is an insider (a non-statutory insider to be specific). They both suggested that the 9th Circuit should have taken a closer look at the relationship and the transaction between Rabkin and the Village at Lakeridge board member. Furthermore, had the 9th Circuit done a potentially more proper inquiry into what qualifies as an "arms-length transaction," the appeals court review might have involved more legal analysis.