Argument analysis: Justices unsure whether to resolve case about standard of review for findings of insider status

The argument yesterday morning in U.S. Bank National Association v. The Village at Lakeridge displayed a bench not at all certain the case is worth deciding. The basic problem is that the justices agreed to consider the standard of review for a judges determination that a particular individual is or is not an insider for purposes of a bankruptcy proceeding, but now that theyve reviewed the briefs theyre not at all sure what the legal standard is for deciding if somebody is an insider. Because they explicitly declined to grant review as to the legal standard, they dont have briefs on that question, so they are reluctant to resolve it. And without knowing exactly what the standard is, they find themselves unable to decide if it looks more like a factual question or a legal question.

Some background information about the Bankruptcy Code is needed to understand the quandary the justices face. The Bankruptcy Code includes a definition of insider, designed to identify a group that the bankruptcy court should view with suspicion; the general idea is that the insolvent bankrupt might engage in transactions that favor insiders and thus disadvantage other less-favored creditors. The statute enumerates a lengthy list of obvious insiders (partners, officers, directors, parents, spouses and the like), but all agree that the statutory definition reaches relations that do not fall within the enumerated categories if the facts of a particular case justify treating them as insiders.

This case, for example, involves a purchase of a claim against the debtor by one Robert Rabkin. At the time of the transaction, Rabkin was involved in a romantic relationship with the principal individual representative of the bankrupt, Kathleen Bartlett. Bartletts role with the debtor made her an enumerated insider; the bankruptcy court concluded that Rabkins romantic relationship with her was not enough to make him an unenumerated insider, largely because of the level of negotiating in which he engaged before making the purchase. Rabkins status was important because the bankruptcy court could not have confirmed the plan of reorganization that the debtor proposed if Rabkin had been an insider. The U.S. Court of Appeals for the 9th Circuit affirmed the bankruptcy courts ruling.

The simplest way to think of the case pressed on the justices by Daniel Geyser on behalf of the debtor, the Village at Lakeridge, and Morgan Goodspeed on behalf of the U.S. solicitor general is that insider status depends entirely on whether the transaction proceeded at arms length. And if that is the test, then it would make sense to treat the application of that test to any particular situation as a question of fact, which appellate courts review only for clear error in contrast to questions of law, which are generally reviewed de novo, or without deference to the lower courts decision. Early in the argument, several of the justices seemed to see the case in just that way. Chief Justice John Roberts, for example, suggested that arms length was not invented by the Court here. Arms length is a legal concept that goes back beyond Blackstone. Its a familiar legal test for lawyers. Similarly, in a colloquy with Gregory Cross (representing U.S. Bank, the creditor challenging the plan), Justice Ruth Bader Ginsburg asked if there was anything more to the standard than whether they deal with each other as if they were strangers? Isnt that the definition? Jumping in to the discussion at that point, Justice Samuel Alito, noting that Ginsburgs definition comes right out of Blacks Law Dictionary, seemed certain that it was a question of fact: Isnt that very close to a question of pure fact?

Cross faced a tricky problem in his argument, though, because he thinks the legal standard is more complicated: In his view, the proper standard turns not only on the arms-length features of the transaction but also on whether the closeness of the parties is similar to the closeness of enumerated insiders. So when Cross suggested that the standard was more complex than Ginsburg had described, Alito cut him off, interjecting: I think youre talking about two separate questions. And its not your fault that the two are hard to separate because we took one question and we didnt take the other. But the issue here is what is the standard of appellate review with respect to the standard that was applied by the Ninth Circuit. I take it that is the question.

By the time Geyser appeared, presenting argument on behalf Lakeridge, several of the justices had homed in on that problem. When Geyser tried to press the easy propriety of clear-error review for determinations of arms-length status, Justice Elena Kagan interrupted him to point out that its not really the legal test according to the Ninth Circuit, right, because the Ninth Circuit has the arms-length component of its legal test, but it also has this question whether the closeness of the relationship with the debtor is comparable to that of the enumerated insider classifications in the statute. And how any particular set of facts does or does not meet that prong of the test does not seem much of a factual question.

Elaborating on that point, Kagan seemed convinced that under the two-part standard (closeness plus arms-length) clear-error review made little sense: One way of thinking of this is that once you have the facts and the facts are uncontested and youre trying to figure out whether those facts satisfy a given legal standard, here whether theyre comparably close to the statutory insiders, what the Court is then doing is trying to figure out how important each fact is, given the legal test. And that sounds like a legal inquiry to me.

Faced with colleagues on one side suggesting that arms-length status is a quintessential fact question and Kagan on the other side suggesting that the actual 9th Circuit standard cant be treated as a fact question, Justice Neil Gorsuch pressed the view that the court simply cant decide the standard of review without first deciding what the legal rule is: [H]ere were being asked to decide what the right standard of review is. Can we do that with any degree of assurance when we dont know what the right legal test is? And dont we run the risk, perhaps, of sending the wrong signal to lower courts that were endorsing the Ninth Circuits formulation of what the test is? Closing with a quip, he suggested the problem posed a high degree of difficulty, like one of those high dives, you know its a 10 out of 10 difficulty.

Geysers response was to stand by his view that the legal test is the single question of whether a transaction is conducted at arms length, but Gorsuch would not accept that position, reporting that he had a law clerk survey that for me and Ive looked at it and Im not sure I entirely agree. Joined by Justice Sonia Sotomayor, Gorsuch pressed Geyser hard to admit that the lower-court cases consider both closeness and arms length. Ultimately, though, Gorsuch returned to the idea that perhaps we [should] wait to see what the courts of appeals sort out on all this before we decide what the standard of review is? I should point out that it is easy for Gorsuch to complain that the justices decided to review the wrong question the court granted review in this case a week before he was confirmed.

Aside from the serious questions about whether the justices have a case in front of them apt for resolution, the most interesting strain of the argument was the protracted debate about whether the issues in the case are better suited for resolution at the bankruptcy-court level or the appellate level.

Recognizing the strong element of finance, several of the justices seemed to find the whole area one best committed to the bankruptcy courts. Sotomayor, for example commented that I think its better left in the hands of the bankruptcy judge who deals with financial transactions all the time. In the same vein, Alito asked pointedly, Which entity is better positioned based on role and experience to determine whether a particular transaction is the kind of transaction in which strangers would engage, the bankruptcy judge or a panel of the court of appeals[?] Continuing in that vein, Roberts commented:

I think its pertinent whether theyre more difficult for the district judge or more difficult for the court of appeals. And it seems to me that a lot of the issues were talking about here are the sort of things that district court judges, bankruptcy court judges, look at all the time. But to get the intense factual record on a subsidiary issue and ask the court of appeals to look at it after the district court has already done it Im not quite sure thats desirable.

Justice Stephen Breyer piled on, preoccupied with the importance of oral testimony to the bankruptcy courts deliberations (He heard them. He saw them.) and the relative incapacity of an appellate court left only with a cold record.

Taking the opposite tack, Justice Anthony Kennedy seemed to wax poetic over the important role that appellate courts can play in developing law over the long run. Responding to Geysers suggestion that it is wasteful for multiple levels of appellate panels to review bankruptcy-court factual findings, Justice Kennedy retorted:

[Y]oure assuming that its not cost-effective for courts over a period of time to elaborate certain standards for the guidance of district courts Thats not the way the system works. [A]n appellate opinion after it makes a resolution explains neutral standards that are principles that are applicable to other cases. Thats the whole function of the judicial process. . You say Oh, thats inefficient. We might as well just let everybody do everything they want every time.

Trying to make sense of the argument as a whole, it is hard to see an obvious path to a decision. It seems quite likely that most of the justices would find treatment as a factual question appropriate if the legal standard were the unitary arms-length test pressed by the debtor and the solicitor general. It is almost as likely that most of the justices would find the closeness-to-an-enumerated-category testa legal question. If those alignments hold, though, the dispute turns on the correct definition of the legal standard. Nothing in the argument suggested any appetite for reaching out to articulate the legal standard directly. Of course, the justices could ask for briefs on that question and perhaps set the case for reargument, but presumably the eight of them who were on the bench in March already have decided that the question is not ripe or suitable for plenary consideration. The justices might be reluctant to drop another case from a calendar already truncated by the departure of the Trump travel- ban cases and the dismissal of the PEM matter in August. But in truth this case seems a likely candidate for dismissal.