A designation of “insider” status can impact a wide range of issues within a bankruptcy proceeding and sometimes change the outcome of the case. For example, the preference clawback period is deemed extended to one year for any payments or other transfers made by a debtor to an insider. In addition, transactions involving insiders are required to be reviewed with heightened scrutiny and can impact plan voting disputes. Therefore, a bankruptcy court’s determination regarding insider status is often the subject of appeal. In an important, but arguably narrow, recent decision, the U.S. Supreme Court has opined that the standard of appellate review of a bankruptcy court’s finding of nonstatutory insider status is clear error, as opposed to de novo in U.S. Bank v. Village at Lakeridge, 138 S. Ct. 960 (2018).

In 2007, Village at Lakeridge, commenced Chapter 11. At the time of filing, it was wholly owned by MBP Equity Partners and had two creditors—U.S. Bank and MBP, which were owed in excess of $10 million and $2.7 million, respectively. In order to exit bankruptcy, Lakeridge filed a restructuring plan that would have impaired the claims of both, which U.S. Bank not surprisingly voted against. Therefore, Lakeridge sought to “cramdown” the plan over U.S. Bank’s objection, but to do so, was required to have at least one impaired class of creditors vote in favor. Importantly, however, for a cramdown plan to succeed, the consenting impaired class cannot consist of insiders. As the owner of Lakeridge, MBP was clearly an insider, so to get around this roadblock, one of its officers, Kathleen Bartlett, sold MBP’s claim to Robert Rabkin for $5,000. The transaction was consummated and Rabkin consented to the plan. The problem? Bartlett and Rabkin were reportedly involved in a romantic relationship.