Pacific Western Bank v. Fagerdala USA-Lompoc, Inc., No. 16-35430 (9th Cir. 2018)
Annotate this CaseUnder 11 U.S.C. 1126(e), a bankruptcy court may not designate claims for bad faith simply because (1) a creditor offers to purchase only a subset of available claims in order to block a plan of reorganization, and/or (2) blocking the plan will adversely impact the remaining creditors. At a minimum, there must be some evidence that a creditor is seeking "to secure some untoward advantage over other creditors for some ulterior motive." In this case, the Ninth Circuit reversed the district court's order affirming the bankruptcy court and vacated the bankruptcy court's order granting a chapter 11 debtor's motion to designate claims for bad faith and preclude the claims from being voted against a plan of reorganization. The panel held that the bankruptcy court erred when it refused to analyze whether Pacific Western acted under an "ulterior motive," beyond its "mere enlightened self interest" in protecting its secured claim. The panel remanded for further proceedings.
Court Description: Bankruptcy. The panel (1) reversed the district court’s order affirming the bankruptcy court and (2) vacated the bankruptcy court’s order granting a chapter 11 debtor’s motion to designate claims for bad faith and preclude the claims from being voted against a plan of reorganization. A secured creditor purchased a number of general unsecured claims and voted its secured claim and the purchased claims against the plan. The bankruptcy court designated the purchased claims for bad faith. The panel held that, under 11 U.S.C. § 1126(e), a bankruptcy court may not designate claims for bad faith simply because (1) a creditor offers to purchase only a subset of available claims in order to block a plan of reorganization, and/or (2) blocking the plan will adversely impact the remaining creditors. The panel held that, at a minimum, there must be some evidence that the creditor is seeking to secure some untoward advantage over other creditors for some ulterior motive. Accordingly, the bankruptcy court erred when it refused to analyze whether the secured creditor acted under an ulterior motive beyond its mere enlightened self- interest in protecting its secured claim. The panel remanded the case to the bankruptcy court. IN RE FAGERDALA USA - LOMPOC, INC., 3
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