New Supreme Court Precedent on Clear Error Versus de Novo Review. On March 5, 2018, the Supreme Court decided a case nominally about bankruptcy, but which may have broader implications regarding the standard of review in a wide variety of contexts. In U.S. Bank National Association v. Village at Lakeridge, 584 U.S. ___ (2018), the Supreme Court addressed whether an appellate court should apply de novo or clear-error review to a bankruptcy court’s determination that a person is a “non-statutory insider” of a debtor, which often turns on whether the person’s transactions with the debtor (or another of its insiders) were at arm’s length. In a unanimous opinion by Justice Kagan, the Court held that this is a mixed question of fact and law, and that the clear-error standard of review applies.
In reaching this conclusion, the Court carefully examined the dividing line between de novo and clear-error review. The Court first explained that the legal test for non-insider status, which the Ninth Circuit held to incorporate a requirement that the transaction not be conducted at arm’s length, is clearly subject to de novo review. Slip op. at 5-6. The Court then recognized that the historical facts relevant to the legal test—“addressing questions of who did what, when or where, how or why”—were unquestionably subject to clear-error review. Id. at 6. The remaining issue was a mixed question of law and fact regarding “whether the historical facts found satisfy the legal test chosen for conferring non-statutory insider status.” Id. at 7. And the standard of review for that question rests on “the nature of the mixed question here and which kind of court (bankruptcy or appellate) is better suited to resolve it.” Id. at 8. In particular, “the standard of review for a mixed question all depends—on whether answering it entails primarily legal or factual work.” Id. at 9. Thus, when a mixed question “require[s] courts to expound on the law, particularly by amplifying or elaborating on a broad legal standard,” then “appellate courts should typically review a decision de novo.” Id. at 8. And in contrast, when a mixed question requires courts “to marshal and weigh evidence, make credibility judgments, and otherwise address” factual issues, then “appellate courts should usually review a decision with deference” (though this deference may not apply in the “constitutional realm”). Id. at 7-8 & n.4.
Applying this approach, the Court held that the clear-error standard governed review of whether the facts showed an arm’s-length transaction. The Court reasoned that an arm’s-length transaction can be defined as “a transaction conducted as though the two parties were strangers,” and applying this definition to the facts “is about as factual sounding as any mixed question gets.” Id. at 10. In addition, the Court noted that de novo review is unnecessary because courts “have never tried to elaborate on the established idea of a transaction conducted as between strangers,” and “there is no apparent need to further develop ‘norms and criteria,’ or to devise a supplemental multi-part test, in order to apply the familiar term.” Id. at 10-11. Nonetheless, the Court held that “if an appellate court someday finds that further refinement of the arm’s-length standard is necessary to maintain uniformity
among bankruptcy courts, it may step in to perform that legal function.” Id. at 11 n.7. But “what it may not do is review independently a garden-variety decision, as here, that the various facts found amount to an arm’s-length (or a non-arm’s-length) transaction and so do not (or do) confer insider status.” Id.
Because the Court relied on numerous precedents outside the bankruptcy context and its reasoning does not limit itself to that context, lower courts are likely to find it applicable in any case concerning a mixed question of law and fact. And while U.S. Bank’s analysis did not purport to break new ground, its synthesis of the precedents in this area of law is instructive. Indeed, it is rare for courts to engage in the kind of detailed, principled analysis of which standard of review to apply to a mixed question based on how factual the inquiry really is and whether there is a need for guidance in the application of the standard at issue. Accordingly, U.S. Bank may lead some courts to reconsider their views on whether particular issues are subject to de novo or clear-error review. One commentator has noted that negligence, which is arguably as fact-dependent and resistant to multi-part tests as the standard for arm’s-length transactions, is one area where courts may see U.S. Bank as suggesting that clear-error review is required. See Alan B. Morrison, U.S. Bank National Ass’n v. Village at Lakeridge: Reviewing Mixed Questions of Fact & Law, Geo. Wash. L. Rev. On the Docket (Oct. Term 2017), see https://www.gwlr.org/u-s-bank-national-assn-v-village-at-lakeridge.
U.S. Bank also shows the need for litigants to keep in mind the connection between the nature of the argument on the merits and the argument on the standard of review. For instance, if a litigant wants de novo review, then it may need to explain how the issue at hand is susceptible to some specific sub-tests, and how it would benefit from appellate-court guidance for consistent application. In contrast, if a litigant seeks clear-error review, then the merits argument may benefit from focusing on an overall application of the facts to the standard being applied without delving into possible criteria or multi-part tests for application of the standard. In any event, U.S. Bank suggests that simply noting that a question is a mixed one is not enough to decide the standard of review, and that a careful, issue-specific analysis is now required.