Appellate courts are routinely tasked with adjudicating a wide range of questions that arise out of decisions from lower courts. In some of these decisions, the issue is a question of fact. Did the lower court properly analyze the evidence that was before the court and reach the appropriate conclusion?

Appellate courts have traditionally been very protective of lower court judges–who sat through the trial or hearing, had the opportunity to weigh the credibility and demeanor of the witnesses and had the best opportunity to weigh the veracity and import of the facts in the record. Accordingly, appellate courts review these questions based on “clear error,” i.e., did the lower court reach an incorrect factual conclusion or give inappropriate weight to a given body of evidence?

Other appellate decisions consider questions of law. Even if the parties agree on all of the facts, did the lower court determine the appropriate legal standard and correctly apply that standard to the facts? When an appellate court is asked to consider whether the lower court properly applied the law, the appellate court reviews the lower court’s analysis “de novo,” from the ground up, in order to ensure that the lower court’s judicial reasoning is sound.

Factual Background

In U.S. Bank, N.A. v. The Village at Lakeridge, LLC (In re Village at Lakeridge, LLC), 138 S.Ct. 960 (2018), the Supreme Court granted certiorari to consider a thornier question. What is the appropriate standard for an appellate court to apply when the appellant has raised an issue that presents a mixture of fact and law? The Village at Lakeridge owned a single apartment complex and filed for Chapter 11 bankruptcy. Lakeridge then sought to confirm a “cramdown” plan of reorganization, where it confirmed its plan over the objection of U.S. Bank, its largest creditor. In order to do so, one class of Lakeridge’s creditors had to vote to approve the plan. The accepting class of creditors could not include an “insider” of Lakeridge.

Lakeridge’s second largest creditor was MBP Equity Partners, which was also Lakeridge’s sole owner. Under Section 101(31)(B)(i) of the Bankruptcy Code, MBP, as the controlling owner of Lakeridge, was unquestionably a “statutory insider” of Lakeridge. As a result, it could not vote for the Lakeridge’s cramdown plan.

In an effort to effectuate the cramdown, MBP transferred its claim against Lakeridge to a retired surgeon, who was romantically involved with a member of MBP’s board, for $5,000. The surgeon did not fit any of the definitions of “insider” identified by Section 101(31) of the Bankruptcy Code.

However, in addition to the categories of “statutory insiders,” courts can determine that an individual or entity is a “nonstatutory insider” based on the relationship between the debtor and the alleged insider. After considering the evidence, the Bankruptcy Court concluded that MBP’s transfer of its claim to the surgeon was an arm’s-length transaction, and therefore held that the surgeon was not an insider of the debtor. As a consequence, the surgeon was not prohibited from voting for the cramdown plan. The U.S. Court of Appeals for the Ninth Circuit upheld the bankruptcy court’s decision.

“Mixed Question” of Law and Fact

The Lakeridge case presented the Supreme Court with a “mixed question” of law and fact. U.S. Bank argued that the Supreme Court should consider the entire appeal “de novo,” reviewing both the Bankruptcy Court’s findings of fact and its application of the Bankruptcy Code and Ninth Circuit case authority. MBP argued that the central issue regarding whether the surgeon was a non-statutory insider was so intertwined with the facts surrounding the relationship between the surgeon and MBP that the appellate court should review the case for “clear error.” As noted above, this standard is much more protective of, and deferential to, the trial court.

The Supreme Court considered the factual situation presented in Lakeridge and determined that the appeal was so factually intensive that the appellate courts should review the trial court decision for clear error. The court declined to place its interpretation of the evidence over that of the Bankruptcy Court, which had listened to, and interpreted, all of the evidence regarding the surgeon’s ties to MBP.

The Broader Holding in Lakeridge

The Lakeridge decision actually stands for the larger overarching conclusion that there is no fixed, pre-ordained answer as to which standard of review an appellate court should apply when an appeal presents mixed questions of law and fact. The Lakeridge court held that where cases require the appellate court to develop auxiliary legal principles that would be applicable to other cases, appellate courts should apply a de novo standard to ensure that the law evolves correctly and consistently. When appellate courts are forced to immerse themselves in fact-specific issues, however, that compel them to make credibility judgments, marshal and weigh evidence and address issues arising out of special, narrow facts, it is much more appropriate to defer to the trial court and apply a clear error standard.

In short, in cases where an appeal presents a mixed question of law and fact, appellate courts are going to engage in a case by case determination as to the appropriate standard of review, based on that appellate court’s assessment as to whether adjudicating the appeal entails primarily factual or legal work.

The Impact on Parties Contemplating an Appeal

When a lower court enters an adverse ruling, either from a trial verdict or a ruling on a motion, parties often spend considerable time and institutional energy considering whether to appeal. Parties should consider not only the merits of the issues to be addressed on appeal, but the costs of preparing and arguing an appeal and the possible impact of an unfavorable appellate decision on pending or future cases involving the same or similar issues.

In the wake of Lakeridge, counsel and clients that are considering filing an appeal should formulate their arguments as quickly as possible (well in advance of the initiation of the briefing schedule), and try to determine, as best they can, whether issues of fact or law predominate the arguments.

If the primary thrust of the argument is that the court misconstrued the evidence or reached conclusions of law that are contrary to the evidence and without evidentiary support, counsel should consider Lakeridge as a determination that the appellate court will lean heavily toward the clear error standard. If this is, in fact, the appellate standard, counsel and clients should understand that the clear error standard is highly deferential to the trial judge, and the bar for obtaining a favorable result on appeal will be very high.

If, on the other hand, the primary argument is that the trial court misread or misunderstood controlling authority, or improperly applied case authority in reaching its decision, the appellate court will conduct its review de novo. Under this standard, if the trial court did, in fact, make an unwitting or witless error in applying the law, the appellate court will do its heavy lifting with the law, and review the trial court’s decision de novo.

After Lakeridge, lawyers will serve their clients well if they assess their possible appellant arguments early and often and advise their clients as to i) what the appropriate standard of review is likely to be, and ii) how that will impact the client’s chances for prevailing on the appeal.

John Thomson, Adams & Reese, Atlanta John Thomson, Adams & Reese, Atlanta

John A. Thomson Jr. is an attorney with Adams and Reese and a member of the banking and financial services practice team. A commercial litigator and bankruptcy attorney for more than three decades, he represents a variety of clients in matters related to debtor and creditor issues, commercial bankruptcies and commercial finance.