On March 5, 2018, the Supreme Court issued an opinion in U.S. Bank Nat’l Ass’n v. Village at Lakeridge, LLC, which addressed a single question: Whether the Ninth Circuit properly reviewed for clear error (rather than de novo) the Bankruptcy Court’s determination that a certain individual was not qualify as a non-statutory insider. The Supreme Court held Ninth Circuit applied that appropriate standard of review.
While the holding is not particularly interesting, the two concurring opinions raise questions as to how bankruptcy courts evaluate whether a person qualifies as a non-statutory insider under the Bankruptcy Code. Specifically, the concurrences made clear that they were not endorsing the Ninth Circuit’s test for non-statutory insider status. Under the Ninth Circuit’s test, a creditor qualifies as a non-statutory insider only if it meets two criteria: “(1) the closeness of its relationship with the debtor is comparable to that of the enumerated insider classifications in § 101(31), and (2) the relevant transaction is negotiated at less than arm’s length.” In re Village at Lakeridge, LLC, 814 F.3d 993, 1001 (9th Cir. 2016) (citation omitted).
In his concurring opinion, Justice Kennedy emphasized that the Court was not endorsing the Ninth Circuit’s test. He encouraged “courts of appeals … [to] continue to elaborate in more detail the legal standards that will govern whether a person or entity is a non-statutory insider under the Bankruptcy Code,” and to specially consider the relevance and meaning of “arms-length transaction” in the bankruptcy context.
Justice Sotomayor also issued a concurrence (joined by Justices Kennedy, Thomas, and Gorsuch), in which she raised concerns with respect to the Ninth Circuit’s two-prong test.
She suggested two approaches that would be consistent with the understanding that insider status inherently presumes that transactions are not conducted at arm’s length. The first approach is to focus solely on a comparison between the characteristics of the alleged non-statutory insider and the statutory insiders to see whether they share sufficient commonalities. The second approach might focus on a broader comparison that includes consideration of the circumstances surrounding any relevant transaction.