I think Judge Clifton is right.
It's not that Judge Randy Smith doesn't have a point. It's a bankruptcy case, and the central issue is a factual one. So we give lots of deference to the district court. Which is in substantial part why Judge Smith writes the majority opinion and affirms. Even though one might get a sense from reading that opinion that Judge Smith isn't so confident that the district court's factual call was necessarily the right one on the merits.
So Judge Smith starts out with a huge lead. Standard of review.
But Judge Clifton, I think, gets it right. Yeah, there's a lot of deference there. But it's not infinite.
I, too, have a definite and firm conviction -- like Judge Clifton -- that the district court's factual finding was wrong. And the more I think about it, the more confident I am in that regard.
To get a glimpse into the machinations of the underlying transaction, three paragraphs from Judge Clifton's dissent will suffice:
T"he facts make it clear that this transaction was
negotiated at less than arm’s length. Rabkin paid $5,000 to
MBP (the sole member of the debtor, Lakeridge), for an
unsecured claim against Lakeridge nominally worth $2.76
million. MBP did not offer the interest to anyone else. The
purchase was not solicited by Rabkin. It was proposed to
Rabkin by Kathie Bartlett, a member of the MBP board.
There was no evidence of any negotiation over price —
Rabkin didn’t offer less, and MBP didn’t ask for more.
Rabkin knew little if anything about Lakeridge (or, for that
matter, MBP) before he bought the claim, nor did he conduct
any investigation to ascertain the current value of that
unsecured claim. Even after he purchased the claim, he did
not bother to find out more about what it might be worth.
Prior to his deposition Rabkin did not even know what the proposed plan of reorganization would pay him for the claim.
After he learned that the payment under the plan would be
$30,000, he was offered as much as $60,000 for his interest,
but he declined that offer.
The motives of MBP and Bartlett are clear and not
denied. MBP is the sole member of Lakeridge. The
Lakeridge reorganization plan cannot be approved unless
there is a class of creditors willing to vote to approve it.
Without the sale of this claim to Rabkin and his anticipated
vote to approve the plan, that plan is dead in the water,
Lakeridge will be liquidated, and there will be no hope for
MBP to obtain anything for either the unsecured claim or,
more importantly, its ownership of Lakeridge. It may have
wanted to recover something from its unsecured claim, but it
did not look for the best possible price because its Lakeridge
ownership was far more important. MBP was primarily
motivated to place the unsecured claim in the hands of a
friendly creditor who could be counted on to vote in favor of
the reorganization plan, opening the door to the possibility of
obtaining approval of the proposed plan of reorganization.
Rabkin’s motivation is a bit murkier, but it is clear that
the transaction cannot be understood as a primarily economic proposition on his part. There was no evidence that he had a
habit of making blind bets, say by helping out Nigerian
princes or buying the Brooklyn Bridge. There is an
alternative explanation that makes a lot more sense. As the
majority opinion acknowledges, at 6, Rabkin had a “close
business and personal relationship” with Bartlett, the person
who proposed this transaction to him. I don’t have to know
the precise details of the relationship between Rabkin and
Bartlett to conclude that it offers the only logical explanation
for Rabkin’s actions here. He did a favor for a friend, and if
it made some money for himself, so much the better."
Sounds right to me. X owns a claim benefits if that claim is voted it in his favor, but X can't vote it himself since he's a bankruptcy insider. So X sells the claim to a friend for $5,000 -- a friend who knows virtually nothing about the deal, votes it in X's favor, and won't sell the claim for ten times what he paid for it (and double what he could possibly hope to achieve in the bankruptcy). Yes, the lower court said that transaction seemed fine. But it's not. It was a sham designed to make the vote happen in X's favor. I'm convinced of that. Sufficiently convinced to reverse. Even on a factual finding.
Judge Smith says that a contrary finding would be a "logical" interpretation of the facts. That may well be true. It might be a "logical" conclusion that the investor was just taking a flyer on a $5,000 investment hoping to make money. That's nothing internally inconsistent -- i.e., illogical -- with such a conclusion.
It's just not a persuasive view -- however logical -- of the facts. It's way less likely, in my view, than the alternative explanation. Indeed, on the facts of this case, such an interpretation of the facts may border on the affirmatively implausible.
So I think Judge Clifton has the better of the argument here.