SCOTUS Recap: What Lies Ahead for the Lower Courts' Tests for “Non-Statutory Insiders”

Ultimately, though, Village at Lakeridge is noteworthy for what the Court did not decide. The case concerned the bankruptcy judge's determination that an investor who cast the critical vote for confirmation of a cramdown plan was not a “non-statutory insider.” In granting certiorari, the Supreme Court declined to address whether the lower courts' various “non-statutory insider” tests should be refined. As concurrences from Justices Sotomayor and Kennedy emphasized, though, that issue is ripe for increased scrutiny. The test used by the Ninth Circuit in Village at Lakeridge is particularly problematic and should be reconsidered in light of the Code's intent and legislative history.

Background

Beneath this case's dull exterior lies a tale of corporate intrigue and romance (or, at least, as much as one can expect from a bankruptcy appeal). The debtor, Village at Lakeridge, LLC (Lakeridge), is a commercial real estate development in Reno, NV, wholly owned by MBP Equity Partners (MBP). Saddled with debt, Lakeridge tried to reorganize under Chapter 11. It had two major debts: over $17 million due to U.S. Bank for the balance on a loan, and $2.76 million owed to MBP. Both creditors were impaired under Lakeridge's proposed plan. U.S. Bank aggressively opposed Lakeridge's reorganization efforts.

After failing at consensual confirmation, Lakeridge sought to achieve plan confirmation through the Code's cramdown provision, 11 U.S.C. §1129(b). Lakeridge needed the consent of at least one class of impaired creditors that was not an insider. See, 11 U.S.C. §1129(a)(10). That posed a problem. U.S. Bank refused to consent to the cramdown plan, and MBP could not provide the necessary consent because, as Lakeridge's parent company, it was an insider. See, 11 U.S.C. §101(31)(B)(i)–(iii) (defining “insider” to include director, officer, or “person in control” of an entity).