U.S. Court of Appeals for the Ninth Circuit
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In an Alert published today, Audrey Noll examines the Ninth Circuit’s recent decision in U.S. Bank N.A. v. The Village at Lakeridge, LLC (In re The Village at Lakeridge, LLC), 2016 WL 494592 (9th Cir. Feb. 8, 2016):

Earlier this month, the Ninth Circuit ruled that an insider can sell its claim to a friendly third party, whose vote fulfills Bankruptcy Code section 1129(a)(10)’s requirement of an impaired consenting class, unless the third party has a close relationship with the debtor and negotiated the claim purchase at less than arm’s length. See U.S. Bank N.A. v. The Village at Lakeridge, LLC (In re The Village at Lakeridge, LLC), 2016 WL 494592 (9th Cir. Feb. 8, 2016).

When the Village at Lakeridge (the debtor) filed for bankruptcy, it had two primary creditors: the bank with a $10 million secured claim and the debtor’s sole equity holder (MBP) with a $2.76 million unsecured claim. After the debtor filed a plan seeking to cram down the bank, MBP sold its claim to a third party (Rabkin) for $5,000. Rabkin had no prior relationship with the debtor but had a close and personal relationship with one of MBP’s members.

To confirm the plan over the dissent of the bank, the debtor had to satisfy Bankruptcy Code section 1129(a)(10), which requires that at least one class of impaired creditors vote to accept the plan, excluding the votes of any insider. Bankruptcy Code section 101(31) defines “insider” as individuals and entities that fall within certain categories (e.g., officers, directors, affiliates, etc.), referred to as “statutory insiders.” Section 101(31) is not exclusive (“[t]he term ‘insider’ includes”), and courts have developed additional categories of “non-statutory insiders.”

The bank moved to designate Rabkin’s vote. The bankruptcy court held that although Rabkin was not a non-statutory insider and did not acquire the claim in bad faith, his vote should be disregarded because he acquired the claim from a statutory insider and the insider status tainted the claim. On appeal, the Bankruptcy Appellate Panel (BAP) reversed the ruling that Rabkin became a statutory insider by acquiring the claim of an existing statutory insider.

 To read Audrey’s full discussion of the Ninth Circuit’s ruling, please visit the Fox Rothschild website.

Audrey Noll is counsel in the firm’s Financial Restructuring & Bankruptcy Department, in its Las Vegas office.