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Acquisition of Claims for Plan Control
The United States Court of Appeals for the Ninth Circuit recently provided additional guidance to creditors seeking to block confirmation of a plan by acquiring claims against the debtor. In Pacific Western Bank, et al. v. Fagerdala USA-Lompoc, Inc. (In re Fagerdala USA-Lompoc, Inc.), 891 F.3d 848 (9th Cir. 2018), the court held that a bankruptcy court may not designate claims under section 1126(e) of the Bankruptcy Code for bad faith simply because a creditor offers to purchase only a subset of available claims to block confirmation of a plan or because blocking confirmation will adversely impact the remaining creditors.
Relying heavily and expanding on the court's twenty-year old decision in Figter Ltd. v. Teachers Ins. & Annuity Ass'n of Am. (In re Figter, Ltd.), 118 F.3d 635 (9th Cir.), cert. denied, 522 U.S. 996 (1997), the court held that “[a]t a minimum, there must be evidence that a creditor is seeking 'to secure some untoward advantage over other creditors for some ulterior motive.'” 891 F.3d at 854, citing Figter, 118 F.3d at 639.
The Case
In Fagerdala, Pacific Western Bank, which held the senior secured claim against the debtor through its wholly owned subsidiary Coastline RE Holdings Corp. (Pacific Western), had its votes designated in respect of unsecured claims it acquired to block confirmation of the debtor's plan. The court 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.” 891 F.3d at 852.
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