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In re Fagerdala USA -Lompoc, Inc.

United States Court of Appeals, Ninth Circuit

June 4, 2018

In re Fagerdala USA -Lompoc, Inc., Debtor,
v.
Fagerdala USA - Lompoc, Inc., Appellee. Pacific Western Bank; Coastline RE Holdings Corp., Appellants,

          Argued and Submitted March 9, 2018 Portland, Oregon

          Appeal from the United States District Court for the District of Oregon Michael W. Mosman, Chief Judge, Presiding D.C. No. 3:15-cv-01792-MO

          Teresa H. Pearson (argued) and David W. Hercher, Miller Nash Graham & Dunn LLP, Portland, Oregon; David K. Eldan, Parker Milliken Clark O'Hara & Samuelian, Los Angeles, California; for Appellants.

          Douglas R. Pahl (argued), Perkins Coie LLP, Portland, Oregon, for Appellee.

          Before: N. Randy Smith, Morgan Christen, and Andrew D. Hurwitz, Circuit Judges.

         SUMMARY [*]

         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.

          OPINION

          N.R. SMITH, CIRCUIT JUDGE

         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. Bad faith requires more. See Figter Ltd. v. Teachers Ins. & Annuity Ass'n of Am. (In re Figter), 118 F.3d 635, 639 (9th Cir. 1997). 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." Id. Accordingly, 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. Id. In the absence of some ulterior motive, the mere failure to make purchase offers to all outstanding creditors does not support a bad faith finding-even if the outstanding creditors will be adversely affected by a decision to block the reorganization plan.

         I. Factual Proceedings

         A. The Parties

         Fagerdala USA - Lompoc, Inc., the debtor, owns real property worth approximately $6 million. Pacific Western Bank, through its wholly-owned entity, Coastline RE Holdings Corp. (collectively "Pacific Western"), holds the senior, secured claim (in excess of $3.95 million) on Fagerdala's real property.

         B. Bankruptcy Court Proceedings

         Fagerdala filed for Chapter 11 bankruptcy on August 14, 2014. Fagerdala filed an initial reorganization plan on November 14, 2014 and a first amended plan of reorganization on April 27, 2015. Both plans placed Pacific Western's claim in Class 1, and the general unsecured claims in Class 4.[1] All claims were deemed impaired in both plans.[2]Therefore, to "cramdown" ...


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