Mar. 21, 2018
U.S. Bank National Ass’n v. Village at Lakeridge, 583 U.S. ___ (2018) (Kagan, J.).
Response by Alan B. Morrison
Geo. Wash. L. Rev. On the Docket (Oct. Term 2017)
Slip Opinion | SCOTUSblog
U.S. Bank National Ass’n v. Village at Lakeridge: Reviewing Mixed Questions of Fact & Law
The outcome in U.S. Bank National Ass’n v. Village at Lakeridge1 depended on whether one of the creditors was an “insider” under the Bankruptcy Code.2 The bankruptcy judge concluded that the creditor was not an insider, and the Ninth Circuit affirmed. The Supreme Court limited its grant of certiorari to the question of the proper standard of appellate review of the decision by the bankruptcy judge: clear error or de novo. The Court, in a unanimous opinion by Justice Elena Kagan (albeit with two concurrences on other aspects of a broader issue), concluded that clear error was the proper standard and hence affirmed the decision below.
If there were ever a case that would appear to be of interest only to the bankruptcy bar, this would seem to be it; but appearances can be deceiving. Justice Kagan’s thoughtful opinion, explaining how and why she got to her conclusion, provides a roadmap for answering similar questions involving the scope of appellate review in a number of other contexts.
As Justice Kagan’s opinion makes clear, context is everything in answering the standard of review question. In U.S. Bank, the insider question arose when an individual, who was admittedly an insider, disposed of a claim of $2.76 million for $5000, to a person with whom the insider was having a “romantic” relationship.3 If that transaction was nonetheless “at arm’s length,” then the new creditor would not be an insider. After a hearing, the bankruptcy judge ruled that the purchase was a “speculative investment” that met the arm’s-length standard, which the Ninth Circuit upheld under the highly deferential clear error standard.4
Justice Kagan observed that the determination of whether a person who purchased a claim in bankruptcy was an insider might be a factual one. For example, in this case, was there in fact a relationship between the seller and the buyer and if so, what were the relevant details? In that situation, it was agreed that the clear error standard would apply under Federal Rule of Bankruptcy Procedure 7052, the bankruptcy counterpart to Federal Rule of Civil Procedure 52(a)(6).5 Or it might be a legal question, such as whether arm’s-length was the appropriate standard, or whether a finding that the purchase was a speculative investment was enough to satisfy the arm’s-length standard. In that situation, the decision would be reviewed de novo, as are all questions of law. Finally, the question could be a mixed question of law and fact, as the Court concluded in this case, but for those questions there is no prescribed standard.
In theory, the Court could have placed all mixed questions into either the factual or legal category, or created some kind of intermediate standard, which would give the judge that heard the case some deference, but less than clear error deference. But it did not. Instead, it recognized that at “a high level of generality,” the decision could be characterized as one of fact or law, but then held that the proper course is to determinate “whether answering [the question] involves primarily legal or factual work” and apply the standard of review for that type of work.6 Under that approach, the Court concluded that the decision that this was a valid speculative investment was much more factual than legal, primarily because the dispute was whether the buyer’s intent was to do the seller (a former creditor) a favor, or instead to take a gamble and perhaps reap a big reward in the bankruptcy. To be sure, the question of a person’s intent can involve legal aspects to it, but the answer to that question in this context is much more likely to turn on the objective facts, and the trier of facts’ assessment of them, than it is to be decided as a legal issue. Or, to put it another way, would a bankruptcy judge faced with similar facts—a close relation between buyer and seller (insider creditor) and a large debt purchased for a small sum compared to the size of the claim—always have to reach one conclusion and not another? Unless the answer to that question is “yes,” then the issue in this case was properly found to be more factual than legal.
The method to be employed in future bankruptcy cases by appellate courts is clearly set forth in Justice Kagan’s opinion and seems the most logical outcome, absent some intermediate standard not found in any current rule of procedure applicable to these kinds of determinations made in federal courts.7 The only drawback of this approach is that it does not create a bright-line rule and requires the appellate court to engage in a careful analysis to determine precisely what the lower court decided. Although Justice Kagan’s opinion goes on to suggest that deciding whether the issue is “primarily” legal or factual is “[u]sually but not always” the proper course, the Court also observes that the analysis may differ in some constitutional adjudications.8 But at the very least, this opinion will become the starting place for analysis of how appellate courts should review determinations of mixed questions of law and fact in bankruptcy cases.
The question of whether this approach will apply beyond the bankruptcy courts seems to be answered in the affirmative by the opinion itself, which relied on several Supreme Court decisions that are not bankruptcy cases. The Court cites Pullman-Standard v. Swint, 456 U.S. 273, 289 n.19 (1982), where the issue was the standard of review used to determine whether the defendant had engaged in intentional discrimination in violation of Title VII. The Court there discussed and cited lower court cases in a variety of substantive areas of civil law, wrestling with the proper standard of review. The discussion in that footnote in Swint also suggested that some of the Court’s rulings in other areas supported de novo review for mixed questions of law and fact. But unlike U.S. Bank, that footnote seemed to imply that the choice is binary and across the board, an approach that Justice Kagan rejected. Justice Kagan also cited Miller v. Fenton, 474 U.S. 104, 114 (1985), a federal habeas case in which the petitioner claimed that a confession was involuntary, and the precise issue was whether a contrary determination by a state court was one of fact entitled to a presumption of correctness. The Court also cited Commissioner v. Duberstein, 363 U.S. 278, 291 (1960) where clear error review was used on the question of whether a particular transaction was a gift under the Internal Revenue Code. Thus, the citation and discussion of nonbankruptcy cases having nothing to do with insiders of any kind, together with the logic of the opinion, which all the Justices joined, are strong signals that this approach is likely to be applied to other similar nonbankruptcy questions.9
One area of law in which mixed questions arise are cases in which the historic facts are not disputed, and the question is whether the defendant’s conduct fell below the standard of care, generally that of negligence. In many respects, that question resembles the arm’s-length issue in U.S. Bank. However, in most cases, the question is tried to a jury, whose decisions are subjected to very limited review because of the Seventh Amendment. For this reason, the appellate review question will probably be decided differently in such cases. But in cases against the United States under the Federal Tort Claims Act, in which there is no jury, the U.S. Bank approach could quite sensibly be followed, which would result in using the clear error standard in some, but not all situations.
Finally, the criticism of those, including the author of this comment, who sometimes suggest that the standard of review is an afterthought designed to enable the Court to reach its preferred conclusion, is surely not relevant in this case. First, the petition asked the Court to conclude that the error here was clear, and that the transaction was plainly not at arm’s length, even if the clear error standard applied. The Court, however, declined to grant review on that question. Second, reading between the lines of Justice Kagan’s opinion, and even more so in the concurring opinion of Justice Anthony Kennedy, the Court was quite dubious that the Ninth Circuit had properly applied the clear error rule, so the Court’s decision cannot reasonably be read as an endorsement of the bankruptcy judge’s conclusion. Third, Justice Sonia Sotomayor’s concurring opinion, calling for a re-examination of the arm’s length legal standard, is based in part on her implicit unhappiness with the outcome approved by the appellate courts. Thus, in the face of facts strongly suggesting that the insiders probably abused the bankruptcy process and harmed other creditors, the Court did not let that fact affect its legal ruling on the proper scope of appellate review in this case.
Dean Alan B. Morrison is the Lerner Family Associate Dean for Public Interest & Public Service Law, at The George Washington University Law School, where he teaches civil procedure and constitutional law. Dean Morrison is an experienced Supreme Court advocate, having argued twenty cases before the Court. He frequently does moot courts for advocates and files amicus briefs in the Supreme and other courts. He is a former President of the American Academy of Appellate Lawyers and is a regular High Court commenter for On the Docket and other publications.
- No. 15-1509, Slip op. (U.S. Mar. 5, 2018).
- 11 U.S.C. § 101(31) (2012).
- U.S. Bank, slip op. at 3.
- Id. at 4–5 (internal quotation marks and citation omitted).
- Compare Fed. R. Civ. P. 52(a)(6) (mandating clear error review for “[f]indings of fact”), with Fed. R. Bankr. P. 7052 (requiring the application of Federal Rule of Civil Procedure 52 “in adversary proceedings”).
- U.S. Bank, slip op. at 9.
- According to 5 U.S.C. § 706(2)(E) (2012), courts may set aside certain agency determinations that are not based on “substantial evidence,” which would seem to call for review somewhere between clear error and de novo review. Then there is the “arbitrary and capricious” standard in § 706(2)(A), which occupies an uncertain place on the spectrum among the standards of judicial review, but is surely less rigorous than de novo review. That standard, which was applied in Pierce v. Underwood, 487 U.S. 552 (1988), is used by district courts when determining whether a decision by a federal agency was “substantially justified.” Pierce, 487 U.S. at 554. The Court saw this standard as neither strictly factual nor legal.
- U.S. Bank, slip op. at 9 n.4.
- The Court did cite one case arising under the Bankruptcy Act of 1898, Pepper v. Litton, 308 U.S. 295 (1939), but there was no issue of appellate review in that case. The Court in Pepper simply said the appeals court erroneously overturned the district court’s ruling that the claim of the creditor was invalid and should have been disallowed.
- See 28 U.S.C. § 2402 (2012).
Recommended Citation Alan B. Morrison, Response, U.S. Bank Nat’l Ass’n v. Village at Lakeridge: Reviewing Mixed Questions of Fact & Law, Geo. Wash. L. Rev. On the Docket (Mar. 19, 2018), https://www.gwlr.org/u-s-bank-national-assn-v-village-at-lakeridge.
