The US Supreme Court [official website] ruled [opinion, PDF] unanimously Monday in US Bank National Association v. Village at Lakeridge [SCOTUSblog materials] that the correct standard of review for determining whether an individual is an “insider” for bankruptcy proceeding purposes is clear error.

The case involves a purchase of a claim against a debtor, Robert Rabkin, who had a romantic relationship with the principal individual of the bankrupt, Kathleen Bartlett, at the time of the transaction. The Bankruptcy Code [text] identifies groups of creditors (e.g. relatives, partners, officers, directors) as “insiders” [definitions] with whom the insolvent bankrupt may partake in transactions that favor those insiders and by extension, disadvantage other, less-favored creditors. Here, the bankruptcy court [materials] determined that the romantic relationship with Bartlett was not enough to make Rabkin an enumerated insider. The US Court of Appeals for the Ninth Circuit [official website] affirmed [opinion, PDF] the bankruptcy court, ruling that the review of the bankruptcy court’s definition of “non-statutory insider” is a purely factual question.

The Supreme Court ultimately agreed with the Ninth Circuit’s standard of review, finding that this case centered around what kind of “mixed question” of law and fact and the appropriate standard of review for a mixed question “depends on whether answering it entails primarily legal or factual work.” The court found that the determination of whether Rabkin was an insider was primarily a factual question, because it depends upon whether the transaction was conducted at arms length.

Justice Elena Kagan wrote:

This [question] is about as factual sounding as any mixed question gets. Such an inquiry primarily belongs in the court that has presided over the presentation of evidence, that has heard all the witnesses, and that has both the closest and deepest understanding of the record-i.e., the bankruptcy court. One can arrive at the same point by asking how much legal work applying the arm’s-length test requires. It is precious little-as shown by judicial opinions applying the familiar legal term without further elaboration. Appellate review of the arm’s-length issue-even if conduct de novo-will not much clarify legal principles or provide guidance to other courts resolving other disputes. The issue is therefore one that primarily rests with a bankruptcy court, subject only to review for clear error.

The court, however, refused to rule on whether the correct legal standard was chosen to decide if someone is an insider. Rather the court used the Ninth Circuit’s two-part test in deciding the correct standard of review.