U.S. Bank National Association v. Village at Lakeridge

QUESTION OF PURE FACT?

U.S. Bank faults the Ninth Circuit majority for reviewing the bankruptcy court’s definition of “non-statutory insider” as a purely factual question and the bankruptcy court’s determination that Rabkin was a non-statutory insider as a purely factual question whereas U.S. Bank contends that insider status is a mixed question of law and fact. U.S. Bank argues that this cannot be a purely factual question because the historical facts in the case are undisputed and thus the bankruptcy court had only to engage in legal analysis to apply the facts to the Ninth Circuit’s definition of non-statutory insider. The clarifications the bankruptcy court made to the unclear legal standard, U.S. Bank continues, also involved a quintessential legal judgment in deciding what factors were relevant in determining non-statutory insider status. Further, U.S. Bank contends, such relevance determinations are inherently legal and should be subjected to de novo review because they exclude a great deal of factual evidence rather than deciding what the facts were in a particular case. Thus, U.S. Bank argues, the determination of non-statutory insider status is not a pure question of fact.

Lakeridge counters that the question presented is a question of pure fact. Lakeridge contends that because courts must assess the closeness of the parties and whether transactions between the parties were conducted at arm’s length in order to determine whether a party is a non-statutory insider, the courts must engage in a highly fact-intensive inquiry. Lakeridge admits that although courts may have to balance historical facts to make a determination, the determination is still based on facts rather than broad legal principles or normative judgments. Thus, Lakeridge argues that Federal Rule of Civil Procedure 52 commands that this is a question of pure fact subject to clear error review. Further, Lakeridge asserts that the facts of motivation, intent, and the nature of the transaction in this case are in dispute. Finally, Lakeridge and the U.S. Government, in support, assert that the Ninth Circuit correctly engaged in two separate reviews—the bankruptcy court’s definition of non-statutory insider status under a de novo review and a factual inquiry of whether Rabkin met the definition of non-statutory insider under a clear-review standard. Lakeridge argues that because application of law to fact follows a court’s factual conclusions, the Ninth Circuit correctly first concluded that the transaction occurred at arm’s length, then correctly found that Rabkin was not a non-statutory insider.

QUESTION OF MIXED LAW AND FACT?

U.S. Bank argues that the determination of who is a non-statutory insider is a mixed question of law and fact. This is because, U.S. Bank explains, non-statutory insider status is a catch-all category for creditors with relationships similar to those of insiders, but not actually enumerated in 11 U.S.C. §101(31). Thus, determining who is a non-statutory insider, U.S. Bank maintains, requires courts to interpret the statute as applied to certain facts. U.S. Bank contends that courts apply four tests to determine appropriate standards of review for mixed questions of law and fact, and under each test, the de novo standard is appropriate. According to U.S. Bank, the first test—the predominance of law and fact test—says that where a question is predominantly legal, it should be reviewed de novo and where it is predominantly factual it should be reviewed according to the clear error standard. Here, because the bankruptcy court engaged in normative decision-making by developing its own standards to fill the gap between a vague legal statute and undisputed historical facts, the question is a predominately legal one, and is subject to de novo review. The second test—the historical practice test—also would apply de novo review because, U.S. Bank contends, there is a historical precedent of appellate courts using de novo review for determining insider status and other mixed questions of bankruptcy law and facts. U.S. Bank argues that under the third test—the functional analysis test—de novo review is appropriate in this case because the question of who counts as a non-statutory insider is best left to appellate courts in light of the heavy legal implications of the decision, the low concerns regarding credibility and potential factual disputes, and the need for uniform standards leading to consistent outcomes. Finally, U.S. Bank maintains that the fourth test—the ultimate issue test—indicates that de novo review is called for because, here, the determination of insider status is dispositive of the broader question under consideration and thus clearly implicates a legal standard.

Lakeridge disagrees and argues that even if this is a mixed question, the Court’s usual framework dictates that clear error review applies. Lakeridge argues that the framework, rather than being four separate tests, looks first at the statutory standard, then to historical tradition, and lastly to functional considerations. Lakeridge maintains that there is no applicable statutory directive, outside of Rule 52, that favors the clear error standard. Rather, Lakeridge argues that the issue here involves non-statutory insiders, a category not explicitly found in the statute, but implied from the open-ended definition in 11 U.S.C. 101(31). In opposition to U.S. Bank, Lakeridge also argues that there is no historical directive because courts are divided 4–3 on the appropriate standard of review. Lakeridge further contends that functional analysis suggests a clear error standard for four reasons. First, Lakeridge posits that appellate judges would be at a disadvantage using a cold record to make fact-intensive inquiries and case-by-case determinations based on the totality of the circumstances. Next, Lakeridge indicates that judicial and party resources would be wasted with de novo review because such review requires multi-judge panels to revisit an entire evidentiary record. Third, Lakeridge argues that bankruptcy cases, by their nature, involve limited funds, and such funds should be used to pay back legitimate creditors or increase the odds of successful reorganizations rather than being wasted on expensive litigation. Finally, Lakeridge contends that clear error review would allow bankruptcy trial court judges with comparative experience and expertise to try cases. Lakeridge concludes by arguing that whether or not fact-finding resolves the ultimate issue in this case is irrelevant because even if fact finding dictates the end result, “ultimate” facts are still facts.