Chapter 11
Lakeridge filed a chapter 11 petition on June 16, 2011. It owned and operated a commercial real estate development in Reno, Nevada (the "Property"). It purchased the Property in January 2004 and financed the purchase with a loan, evidenced by a promissory note, from Greenwich Financial Products, Inc. Apparently, USB now holds the fully secured claim for the balance due on this loan, which amounts to about $10 million; this is the only secured claim in the bankruptcy case.
The sole member of Lakeridge is MBP Equity Partners 1, LLC ("MBP"). Kathie Bartlett ("Bartlett") is a member of the board of managers of MBP. The only unsecured claim listed in Lakeridge's bankruptcy schedules was one for $2,761,000.00 held by MBP (the "MBP Claim").
Lakeridge filed a Disclosure Statement and Plan of Reorganization on September 14, 2011.
On October 27, 2011, Rabkin purchased the MBP Claim for the sum of $5,000.00. A Notice of Assignment of the MBP Claim to Rabkin was filed with the bankruptcy court on November 4, 2011.
A hearing was held on the Disclosure Statement on November 7, 2011. It does not appear that the Rabkin assignment was discussed at the hearing. The bankruptcy court approved the Disclosure Statement by order on November 23, 2011.
Bartlett was deposed by USB on February 9, 2012, in her capacity as a representative of Lakeridge.
On June 7, 2012, Rabkin testified at a USB deposition. Early in his deposition, Rabkin testified that he had attended a meeting one hour before the deposition with his counsel and counsel for Lakeridge. When asked what he discussed with Lakeridge's counsel, Lakeridge's attorney objected, invoking the "common interest privilege." Rabkin Dep. 11:20-2, June 7, 2012. Rabkin's counsel joined in the objection and ultimately directed Rabkin not to answer the question.
Rabkin testified to the following matters in that deposition: (1) that he had both a business and close personal relationship with Bartlett; (2) that he saw Bartlett regularly, including on the day of the deposition; and (3) that he purchased the MBP Claim for $5,000 as a business investment and expected to be paid a pro rata dividend of $30,000 under the Lakeridge plan. As to any other interest in the Lakeridge bankruptcy case, Rabkin testified as follows:
Rabkin Dep. 82:3-14.
Near the end of the deposition, USB, through counsel, offered to purchase the MBP Claim from Rabkin for $50,000; when he declined, counsel increased the offer to $60,000. Rabkin did not accept the offer.
Shortly after the Rabkin deposition, USB by letter requested that the bankruptcy court intervene in two discovery disputes in the bankruptcy case: (1) whether the common interest privilege applied so as to protect disclosure of communications between Rabkin and Lakeridge's counsel; and (2) to compel Bartlett to sit for a second deposition, this time in her individual capacity as opposed to her first deposition as representative of Lakeridge (previously defined as the "Discovery Requests").
The bankruptcy court held a hearing on June 21, 2012, on USB's Discovery Requests. After reviewing letter briefs from USB, Lakeridge and Rabkin, and hearing from their counsel, the court ruled on the record that the Ninth Circuit's decision in
On July 1, 2012, USB filed the Designation Motion. USB contended in that motion that Rabkin was a statutory insider by virtue of the assignment of the MBP insider claim to him, and that he was a non-statutory insider because of his relationship with Bartlett. USB also argued that the assignment of the claim to Rabkin was in bad faith. Lakeridge responded, arguing that Rabkin was neither a statutory nor a non-statutory insider, and that there was no bad faith involved in Rabkin's acquisition of the claim.
The bankruptcy court held an evidentiary hearing on the Designation Motion on August 1, 2012. USB, Lakeridge, and Rabkin were represented by counsel, and Rabkin and Bartlett testified.
After a recess, the bankruptcy court announced its decision on the record. It granted the Designation Motion in part and denied it in part. The court entered an order to memorialize its ruling on August 20, 2012 (the "Designation Order").
First, the Designation Order recited that "The court finds and concludes as a matter of law that Dr. Rabkin is not a non-statutory insider because, among other things: (a) Dr. Rabkin does not exercise control over the Debtor; (b) Dr. Rabkin does not cohabit with Ms. Bartlett and does not pay Ms. Bartlett's bills or living expenses; (c) Dr. Rabkin has never purchased expensive gifts for Ms. Bartlett." Designation Order at ¶ 2, August 20, 2012. The bankruptcy court also concluded that the converse was true: that Bartlett exercised no such control or provided gifts to Rabkin.
Next, the bankruptcy court decided that the MBP Claim "was not assigned to Dr. Rabkin in bad faith." Designation Order at ¶ 3. It explained that Dr. Rabkin was not compelled to sell his claim to USB, his purchase of the MBP claim was a legitimate investment, and that Bartlett never asked him to vote in favor of the plan.
However, the bankruptcy court reasoned, "Because [MBP] is a statutory insider, Dr. Rabkin, as the assignee of the claim, acquired the same status as a statutory insider when he purchased the claim." Designation Order at § 6. The court supported its conclusion with citation to several authorities. The Designation Order gave no other explanation for its ruling that Rabkin was a statutory insider. As a consequence, the court decided that "[b]ecause Dr. Rabkin's vote cannot be considered for voting purposes in order to confirm the Debtor's Plan, the Debtor does not have an impaired, assenting class of claims necessary to confirm his Plan." Designation Order at ¶ 9.
Lakeridge and Rabkin both filed timely appeals of the Designation Order. USB also filed a timely cross-appeal challenging the provision of the Designation Order that Rabkin was not a non-statutory insider, and also seeking review of the bankruptcy court's prior order denying the Discovery Requests.
The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and 157(b)(2)(A),(L) and (O). We have jurisdiction under 28 U.S.C. § 158.
1. Whether the bankruptcy court erred in deciding that Rabkin was an insider of Lakeridge under § 101(31).
2. Whether the bankruptcy court erred in deciding that Rabkin's acceptance of the Lakeridge plan would be excluded under § 1129(a)(10).
3. Whether the bankruptcy court erred in declining to designate that Rabkin's acceptance of the plan was not in good faith for purposes of § 1126(e).
4. Whether the bankruptcy court abused its discretion in declining to order that Bartlett submit to a second deposition.
5. Whether the bankruptcy court erred in refusing to compel Rabkin to answer questions during his deposition based on the common interest privilege.
Whether a party is an insider in relation to a debtor is a question of fact reviewed for clear error.
We review issues of statutory construction, including a bankruptcy court's interpretation of the Bankruptcy Code, de novo.
We review good faith determinations under § 1126(e) for clear error.
The bankruptcy court's decisions resolving deposition disputes are reviewed for an abuse of discretion.
A trial court's application of the attorney-client privilege is reviewed de novo.
De novo review requires the Panel to review an issue independently, without giving deference to the bankruptcy court's conclusions.
Clear error is found when the reviewing court has a definite and firm conviction that a mistake has been committed.
We apply a two-part test to determine objectively whether the bankruptcy court abused its discretion.
The fundamental issue raised in this appeal is whether Rabkin was an "insider" as to Lakeridge. If he was an insider, his vote to accept the Lakeridge plan must be excluded under § 1129(a)(10).
The Bankruptcy Code definition of an insider in § 101(31) for a case involving a corporate debtor
The term "insider" includes— . . .
If a word or phrase is defined in the statute, then that definition governs.
It is not disputed that Rabkin would not be included in any of the categories of insiders set forth expressly in § 101(31): he is not a director, officer, or a controlling party, relative of a controlling party, or a managing agent of Lakeridge. However, the statutory list of insiders is not exclusive.
Because the Code's definition of an insider is not exclusive, courts must necessarily develop the factors that may render a party a non-statutory insider. As explained by the Panel, at bottom, this category includes those individuals or entities whose business or professional relationship with the debtor "compels the conclusion that the individual or entity has a relationship with the debtor, close enough to gain an advantage attributable simply to affinity rather than to the course of business dealings between the parties."
Besides the control test and examination for an arms-length transaction, other courts have expanded the non-statutory insider group to include those with a close personal or romantic relationship with the debtor.
In sum, then, to find that a party is a non-statutory insider as to a debtor, the bankruptcy court must consider: (1) the closeness of the parties and the relative control each has over the other, and (2) whether the degree of control is such that it would render its transaction with the debtor not arms-length.
Here, the bankruptcy court found that, despite his personal relationship with Bartlett, there was no control exerted by Rabkin over Lakeridge and/or Bartlett, and vice versa. Hr'g Tr. 77:25-78:6. The court also indicated in its comments on the record that it had reviewed the case law concerning personal relationships and determined that they would not support USB's argument that the relationship between Rabkin and Bartlett was such as to confer non-statutory insider status on Rabkin:
The cases that have found non-statutory insiders have
Hr'g Tr. 77:14-24.
The bankruptcy court heard testimony from Rabkin and Bartlett concerning Rabkin's motivations for purchasing the MBP Claim, the lack of control exerted by either Rabkin or Bartlett over each other's actions, and the nature of their relationship. The court concluded in its Designation Order:
Designation Order at ¶ 2, August 20, 2012. As noted above, whether a party is an insider is a question of fact we review for clear error. The bankruptcy court's determination in this case was consistent with case law and supported by the testimony of the witnesses and other evidence presented at the hearing. While others might come to a different conclusion, where two permissible views of the evidence exist, the fact finder's choice between them cannot be clearly erroneous.
We conclude that the bankruptcy court did not clearly err in deciding that Rabkin was not a non-statutory insider as to Lakeridge. We therefore reject USB's contention in the cross appeal that Rabkin was a non-statutory insider and AFFIRM this portion of the bankruptcy court's decision.
As noted above, none of the parties asserted that Rabkin was a statutory insider of Lakeridge as specified in the statute, because he was clearly not a member of one of the enumerated categories in § 101(31)(B). Despite this, however, in its order, the bankruptcy court reasoned, "[b]ecause [MBP] is a statutory insider, Dr. Rabkin, as the assignee of the claim, acquired the same status as a statutory insider when he purchased the claim." Designation Order at § 6. In short, the bankruptcy court apparently ruled that, as a matter of law, a non-insider becomes a statutory insider automatically by acquiring an insider claim. In making this decision, the court did not rely upon any facts other than the existence of the assignment of Bartlett's claim to Rabkin.
The bankruptcy court's conclusion is not supported in the case law it cited for the proposition and, indeed, it is inconsistent with the Panel's published decisions. The Panel has on multiple occasions explained that "insider determination . . . is made on a case-by-case basis, after the consideration of various factors."
Two of the three cases cited by the bankruptcy court in its ruling do not support its conclusion that when, by purchase or assignment, a non-insider acquires a claim from an insider, the new holder of the claim also assumes insider status. One case cited by the court,
The one case cited by the bankruptcy court that partly supports its conclusion that a non-insider who acquires an insider claim "steps into the shoes of that claimant" is the unpublished decision of our Court of Appeals,
There is also a logical and legal inconsistency in the bankruptcy court's reasoning that the assignment of a claim by itself may change the insider status of the claimant. If assignment of an insider claim to a non-insider alone changes the non-insider's status to insider, then it would follow that an assignment or purchase of a non-insider claim by an insider would change the insider into a non-insider. As both the
The bankruptcy court applied an erroneous legal rule in this case when it determined that Rabkin, who was otherwise a non-insider, became an insider in the Lakeridge bankruptcy case by merely purchasing an insider's claim. This portion of the bankruptcy court's decision is therefore REVERSED.
Section 1129 provides the requirements for confirmation of a chapter 11 plan of reorganization. Of interest in this appeal is one such requirement, § 1129(a)(10). This provision dictates that, if a chapter 11 plan proposes to impair a class or classes of claims, to be confirmed at least one impaired class must affirmatively accept the plan, and that class acceptance must be determined without including the "acceptance of the plan by any insider."
In this case, Lakeridge has just two creditors. Its proposed plan separately classified each creditor: Class 1 for secured creditor USB and Class 3 for Rabkin, the sole unsecured creditor. Because the plan does not provide for full payment to Class 3 creditors, that class is impaired. § 1124(1) (providing that a class is impaired unless, as to each claim in the class, the plan leaves unaltered the contractual rights of the claim). According to a ballot summary submitted to the bankruptcy court on July 30, 2012 by Lakeridge's counsel, Class 1 (USB) voted to reject the plan. However, Class 3 (Rabkin) voted to accept the plan.
Since the bankruptcy court determined that Rabkin was an insider, though, his vote would necessarily be excluded in determining whether Class 3 had accepted the plan. We conclude the bankruptcy court's decision that his vote must be excluded was incorrect because Rabkin was not an insider, and § 1129(a)(10) does not require that his acceptance of the Lakeridge plan be excluded in determining whether Class 3 accepted that plan.
Even if Rabkin is not an insider and his claim is not excluded under § 1129(a)(10), USB argues that his acceptance of the Lakeridge plan should be "designated" under § 1126(e). That Code provision permits the bankruptcy court, on request of a party in interest, to disqualify any plan vote that was not made in good faith, or that was not solicited in good faith or in accordance with the provisions of the Bankruptcy Code.
In this context, "good faith" does not require a creditor to act with selfless disinterest:
Rabkin testified that he purchased the MBP Claim as a business investment with the expectation of receiving a $30,000 return through the Lakeridge plan on a $5,000 investment. Rabkin Dep. 82:3-14. USB contends that Rabkin was involved in a romantic relationship with Bartlett, a principal of Lakeridge, and conspired with her to acquire the MBP claim solely to accept Lakeridge's plan of reorganization. On the one hand, Rabkin's argument that he was interested in making money is not an example of bad faith.
USB insists that Rabkin did not act in accordance with his financial interests, and as evidence, it points to his deposition where counsel for USB offered Rabkin $50,000, and then $60,000, to acquire his claim, which would generate an immediate profit of $20,000-30,000 above what Rabkin expected to gain through the plan. According to USB, Rabkin's refusal to take the bait clearly demonstrated his motive in the case was something other than financial gain. When a creditor appears to act against self-interest, that may be an indication of bad faith.
The bankruptcy court addressed this argument both at the hearing on August 29, 2012, and in the order denying USB's motions. At the hearing, Rabkin expressed outrage that he was pressured to make a deal in the context of a deposition hearing. The court agreed that USB's tactic was "appalling" and apologized "on behalf of the legal profession" for USB's counsel's behavior. Hr'g Tr. 21:1-2. In the order, the court characterized USB's ploy during the deposition as "offensive" and noted that Rabkin was under no obligation to accept the offer. Designation Order at ¶ 3. The court also decided in the order that Rabkin's purchase of a $2,671,000.00 unsecured claim under these circumstances for $5,000, with a $30,000 expected gain, was an example of a speculative investment and that no special due diligence was required by Rabkin.
As to USB's arguments concerning the Rabkin-Bartlett personal relationship, the bankruptcy court made several findings on the record, discussed above, indicating that the evidence presented to him did not support insider standing on the basis of a putative romantic relationship between Rabkin and Bartlett. Designation Order at ¶ 2. In addition, in the order, the court found that, on the evidence before it, "Ms. Bartlett did not ask Dr. Rabkin to vote in favor of the Debtor's Plan." Designation Order at ¶ 3(c). In general, bad faith solicitation of a vote requires a "specific request" for a creditor's official vote.
Whether Rabkin's vote on the Lakeridege plan should be designated as "not in good faith" under § 1126(e) is a question of fact reviewed for clear error.
Rules 9014 and 7030 incorporate Civil Rule 30 in contested matters. Civil Rule 30 states, "Unless otherwise stipulated or ordered by the Court, a deposition is limited to 1 day of 7 hours." Civil Rule 26, also incorporated in this context by Rules 9014 and 7026, provides in relevant part,
Civil Rule 26(b)(2)(C).
USB contends that Bartlett was originally deposed only in her capacity as representative of Lakeridge, and not in her personal capacity. Lakeridge and Rabkin counter that USB did indeed have the opportunity in the first deposition to question Bartlett about personal matters, including her relationship with Rabkin. At the hearing on June 12, 2012, the bankruptcy court declined to order Bartlett to appear at a second deposition because USB already had the opportunity to question Bartlett in the deposition on personal matters as part of an "extensive" discussion. The record on appeal supports this conclusion:
Bartlett Dep. 55:14-20, February 9, 2012.
The bankruptcy court's ruling that USB had ample opportunity to obtain the information it needed at the original deposition is consistent with Civil Rules 30 and 26, and is not (1) illogical, (2) implausible, or (3) without support in inferences that may be drawn from the facts in the record. The bankruptcy court did not abuse its discretion in refusing to order that Bartlett submit to a second deposition.
Whether the bankruptcy court correctly determined that the common interest privilege applied to protect Rabkin's discussions with Lakeridge's attorney is an issue of law we review de novo.
The bankruptcy court announced its decision on the record of the hearing on June 21 regarding the Discovery Requests, including its ruling that the common interest privilege applied and Rabkin was not required to respond to questions from USB's counsel about his discussions with Lakeridge's lawyer. The bankruptcy court was apparently unaware that the Ninth Circuit had just issued a published opinion relating to the common interest privilege a few weeks earlier, on May 10, 2012, in
The Common Interest Privilege (also known as Joint Defense Privilege) has long been recognized in the Ninth Circuit.
The bankruptcy court received a letter from Rabkin's attorney describing the nature and scope of the communications at issue:
Lakeridge and Rabkin shared a common interest in that they both wanted to obtain confirmation of the plan of reorganization, Lakeridge as the debtor and plan proponent, and Rabkin for his financial interests. As a result, while they had separate counsel, they were engaged in furtherance of a common legal enterprise.
The bankruptcy court noted that "I believe there is a Common Interest Privilege. I believe the Ninth Circuit has defined it. . . So your motion is denied." Hr'g Tr. 9:7-11, June 21, 2012.
However, because the bankruptcy court was not aware of the newer,
Because the bankruptcy court did not make the necessary finding that, in addition to sharing a common interest in the outcome of the litigation, an express or implied agreement existed between Rabkin and Lakeridge to pursue a joint strategy, we must VACATE that portion of the order denying the Discovery Requests relating to the common interest privilege.
We AFFIRM that part of the bankruptcy court's order denying the Discovery Requests that Bartlett need not submit to a second deposition. We VACATE the part of that order that the common interest privilege applied to Rabkin's discussions with Lakeridge's attorney.
As to the Designation Order, we AFFIRM the bankruptcy court's decision that Rabkin is not a non-statutory insider, and AFFIRM its decision declining to designate that Rabkin's acceptance of the plan was not in good faith for purposes of § 1126(e). We REVERSE the bankruptcy court's decision that Rabkin is a statutory insider, and REVERSE the decision excluding Rabkin's vote to accept the plan. We VACATE that part of the order deciding that the Debtor does not have an impaired, assenting class of claims necessary to confirm the plan, and the decision denying confirmation of the Lakeridge plan of reorganization. We REMAND these matters to the bankruptcy court for further proceedings consistent with this decision.
