Pacific Western Bank v. Fagerdala USA - Lompoc, Inc.

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
IN RE FAGERDALA USA - No. 16-35430
LOMPOC, INC.,
Debtor, D.C. No.
3:15-cv-01792-MO
PACIFIC WESTERN BANK;
COASTLINE RE HOLDINGS CORP., OPINION
Appellants,
v.
FAGERDALA USA - LOMPOC, INC.,
Appellee.
Appeal from the United States District Court
for the District of Oregon
Michael W. Mosman, Chief Judge, Presiding
Argued and Submitted March 9, 2018
Portland, Oregon
Filed June 4, 2018
Before: N. Randy Smith, Morgan Christen,
and Andrew D. Hurwitz, Circuit Judges.
Opinion by Judge N.R. Smith
2 IN RE FAGERDALA USA - LOMPOC, INC.,
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.
*
This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
IN RE FAGERDALA USA - LOMPOC, INC., 3
COUNSEL
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.
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.
4 IN RE FAGERDALA USA - LOMPOC, INC.,
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” the plan under § 1129(a)(10),
Fagerdala needed the approval of at least one impaired class.
To block Fagerdala’s proposed plan, Pacific Western
purchased a number of the general unsecured claims. Pacific
Western’s legal counsel testified that its “motivation was to
acquire for the bank a blocking position in the unsecured
1
Class 2 contained only a tax claim by Santa Barbara County and
Class 3 consisted of an insider claim by Maxwell Morgan, which was
subordinated to Pacific Western.
2
Specifically, Pacific Western’s claim was impaired because the
proposed interest rate was lower than the penalty interest rate for the loan,
and both plans modified the length of the term and other loan provisions.
IN RE FAGERDALA USA - LOMPOC, INC., 5
class” and that the sole goal was “to do what was best for
[Pacific Western] economically.” Pacific Western provided
its legal counsel a budget, which was insufficient to purchase
all the general unsecured claims. Pacific Western’s offer to
purchase was rejected by some unsecured creditors, and it
could not contact other unsecured creditors. Further, Pacific
Western’s counsel testified that he did not seek to purchase
(1) claims that were valued at zero; (2) claims he believed
were either insider controlled or would alert Fagerdala to
Pacific Western’s claim purchases; or (3) claims to which
Fagerdala objected. Ultimately, Pacific Western purchased
more than half of the claims by number, but only
approximately ten percent by value (approximately $13,000)
(hereinafter “Purchased Claims”).
Fagerdala filed its second amended plan on June 2, 2015.
The next day, Pacific Western voted its secured claim and the
Purchased Claims against the plan. Because the Purchased
Claims constituted at least “one-half in number” of the
general unsecured class, Pacific Western’s votes were
sufficient to block the second amended plan. § 1126(c).
After the vote, Fagerdala moved to designate the votes of
the Purchased Claims, arguing that Pacific Western had not
purchased the claims in good faith. The bankruptcy court
heard argument on the motion on June 10, 2015, and August
25, 2015. At the outset of the hearing, the bankruptcy court
stated it wanted an answer to the question of “whether or not
the bank offered to buy all the claims, or did they just buy a
few.” Pacific Western’s counsel stated that he “did not
attempt to buy every claim” and that “[w]ith respect to any
claim that I did not attempt to buy, there were specific, and,
in my view, good reasons to not attempt to buy it.” He also
offered examples of prior cases where a creditor had sought
6 IN RE FAGERDALA USA - LOMPOC, INC.,
to block a plan by purchasing claims. In response, the
bankruptcy court explicitly stated, as “a matter of law,” it was
not going to consider Pacific Western’s motivation or
rationale for offering to purchase only a subset of claims.
The bankruptcy court then granted Fagerdala’s
designation motion, stating:
The plan of reorganization under
consideration proposes to pay Class 4 claims
in full with interest within 60 days of
confirmation. It is undisputed that unsecured
creditors will not be paid in a liquidation or in
the event this reorganization fails and [Pacific
Western] forecloses.
I conclude that designation is appropriate
in this case because [Pacific Western] will
have an unfair advantage over the
unsecured creditors who did not receive a
purchase offer and who hold the largest
percentage of claims in this in terms of
amount.
....
Good faith does not require a creditor to
act with selfless disinterest. And the fact that
a creditor purchases claims to take a blocking
position is not, per se, bad faith under
[§ 1126]. However, a creditor’s conduct in
further of its own interest should not result
in an unfair disadvantage to other
IN RE FAGERDALA USA - LOMPOC, INC., 7
creditors. [In re Pleasant Hill Partners, L.P.,
163 B.R. 388 (Bankr. N.D. Ga. 1994].
That principle was a factor in – in Figter
where the court affirmed the bankruptcy
court’s denial of a motion under Section
1126(e). In doing so the court in Figter
specifically noted that the secured creditor
offered to purchase all of the unsecured
claims at issue. See also [Principal Mut. Life
Ins. Co. v. Lakeside Assocs. (In re Deluca),
194 B.R. 797 (Bankr. E.D. Va. 1996)].
[255 Park Plaza Assocs. Ltd. v. Conn. Gen.
Life Ins. Co. (In re 225 Park Plaza Assocs.
Ltd.), 100 F.3d 1214 (6th Cir. 1996)].
Allowing [Pacific Western] to block
confirmation by purchasing such a small
percentage of the unsecured debt in this
case would be highly prejudicial to the
creditors holding most of the unsecured
debt; and, therefore, I am going to
designate.
With the Purchased Claims removed from voting, Fagerdala
had sufficient creditors in the general unsecured class to
accept the plan. The bankruptcy court ultimately confirmed
the fourth amended plan.3
3
In between the two hearings, Fagerdala filed a third amended plan.
The third amended plan split Class 1 into two parts: Class 1A (containing
Pacific Western’s secured claim), and Class 1B (containing the Purchased
Claims). Even though Fagerdala moved the Purchased Claims into a
different class, it treated both Class 1B and Class 4, the remaining
8 IN RE FAGERDALA USA - LOMPOC, INC.,
C. District Court Proceedings
The district court affirmed the bankruptcy court’s
designation of the Purchased Claims with reservation. Pacific
Western timely appealed. We have jurisdiction under
28 U.S.C. § 158(d)(1), and we reverse.4
II. Standard of Review
We review the bankruptcy court’s ultimate determination
of good faith for clear error. Figter, 118 F.3d at 638. “To the
extent that our review requires us to define the general
parameters of a good faith determination, we are reviewing a
question of law. To the extent that we must review a pure
historical fact determination, we are reviewing a question of
fact.” Id. “[A]n appellate court must correct any legal error
infecting a bankruptcy court’s decision. So if the bankruptcy
court somehow misunderstood the nature of the [legal
question]—or if it devised some novel multi-factor test for
addressing that issue—an appellate court should apply de
novo review.” U.S. Bank Nat’l Ass’n v. Vill. at Lakeridge,
LLC, 138 S. Ct. 960, 968 n.7 (2018). Legal error constitutes
clear error in the ultimate determination. Cf. Koon v. United
States, 518 U.S. 81, 100 (1996).
unsecured general creditors, the same. These classes were left in place in
the fourth amended plan, which the bankruptcy court confirmed on
September 14, 2015.
4
Fagerdala’s Motion to Dismiss the Appeal as Moot, filed after this
case was submitted, is DENIED.
IN RE FAGERDALA USA - LOMPOC, INC., 9
III. Discussion
Pacific Western argues that the district court erred by
considering only the effect of Pacific Western’s actions,
without respect for its motivation. We agree. The bankruptcy
court found that “designation is appropriate in this case
because [Pacific Western] will have an unfair advantage over
the unsecured creditors who did not receive a purchase offer
and who hold the largest percentage of claims in this in terms
of amount.” In the bankruptcy court’s ruling, only two facts
were relevant: (1) Pacific Western did not make an offer to all
unsecured creditors; and (2) if Pacific Western’s Purchased
Claims were voted, it would “have an unfair advantage” and
be “highly prejudicial” to other creditors. However, under
§ 1126(e), neither of these considerations—alone or
together—are by themselves sufficient to support a finding of
bad faith. To explain, we outline the basic principles of good
faith determinations under § 1126(e) and then turn to the two
errors made by the bankruptcy court.
A. General Principles of Good Faith Under § 1126(e)
“On request of a party in interest, and after notice and a
hearing, the court may designate any entity whose acceptance
or rejection of such plan was not in good faith, or was not
solicited or procured in good faith . . . .” § 1126(e). To
“designate” means the votes for the claims will not be
counted in voting to accept or reject the plan. Figter, 118 F.3d
at 638. The definition of “good faith” is not provided in
statute and was “left to the courts” by Congress. Id.
“[T]he concept of good faith is a fluid one, and no single
factor can be said to inexorably demand an ultimate result,
nor must a single set of factors be considered.” Id. at 639.
10 IN RE FAGERDALA USA - LOMPOC, INC.,
Generally, § 1126(e) “appl[ies] to those who were not
attempting to protect their own proper interests, but who
were, instead, attempting to obtain some benefit to which
they were not entitled.” Id. at 638. An entity acts in bad faith
when it “seeks to secure some untoward advantage over other
creditors for some ulterior purpose.” Id. at 639.
However, as “fluid” as the concept of good faith may be,
bad faith explicitly does not include “enlightened self interest,
even if it appears selfish to those who do not benefit from it.”
Id. “It is always necessary to keep in mind the difference
between a creditor’s self interest as a creditor and a motive
which is ulterior to the purpose of protecting a creditor’s
interest.” Id. Thus, “the mere fact that a creditor has
purchased additional claims for the purpose of protecting his
own existing claim does not demonstrate bad faith or an
ulterior motive.” Id. “[P]urchas[ing] . . . claims for the very
purpose of blocking confirmation of . . . [a] proposed plan”
“is not to be condemned.” Id.
B. Failure to Offer to Purchase all Claims in a Class
Neither Figter nor the Bankruptcy Code support the
bankruptcy court’s conclusion that failing to make an offer to
all members of a class is (by itself) sufficient evidence of bad
faith. In Figter, the creditor sought to purchase all the claims
in the class, but that fact was only one—of several—that
contributed to the bankruptcy court’s finding of good faith.
118 F.3d at 640. The Figter creditor was not advancing
another plan, was not a competing entity in the apartment-
owning business, faced a complex lien situation if the
building was divided into condos (rather than keeping it as an
apartment building) as proposed in the debtor’s plan, and
“acted to protect its interests as [the] major creditor.” Id.
IN RE FAGERDALA USA - LOMPOC, INC., 11
Considering all those facts as a whole, we found the
bankruptcy court did not commit clear error by finding the
Figter creditor acted in good faith. Id. The fact that the Figter
creditor offered to purchase all claims was not the singular,
dispositive factor; it was one among several.
It is also true that, while offering to purchase all claims is
certainly an indicator of good faith, failing to do so cannot be
evidence of bad faith. As we have explicitly emphasized: “the
mere fact that a creditor has purchased additional claims for
the purpose of protecting his own existing claim does not
demonstrate bad faith or an ulterior motive.” Id. at 639; see
also 225 Park Plaza Assocs., 100 F.3d at 1219 (“Indeed, ‘the
mere fact that a purchase of creditors’ interests is for . . .
securing the approval or rejection of a plan does not of itself
amount to bad faith.’ If bad faith could be found any time a
claim is purchased to block approval of a plan, there would be
no incentive to purchase claims.” (citations omitted) (quoting
In re Allegheny Int’l Inc., 118 B.R. 282, 289 (Bankr. W.D.
Pa. 1990)); In re Dish Network Corp. v. DBSD N. Am. Inc. (In
re DBSD N. Am. Inc.), 634 F.3d 79, 102 (2d Cir. 2011)
(“Merely purchasing claims in bankruptcy ‘for the purpose of
securing the approval or rejection of a plan does not of itself
amount to bad faith.’” (quoting In re P-R Holding Corp.,
147 F.2d 895, 897 (2d Cir. 1945)). “Thus, if [the creditor]
acted out of enlightened self interest, it is not to be
condemned simply because it frustrated [the debtor’s] desires.
That is true, even if [the creditor] purchased [the] claims for
the very purpose of blocking confirmation of [the debtor’s]
proposed plan.” Figter, 118 F.3d at 639. Blocking a plan
takes only a numerical majority of the class, not the entire
class or a majority of the class by value. § 1126(c) (“A class
of claims has accepted a plan if such plan has been accepted
by creditors . . . that hold at least two-thirds in amount and
12 IN RE FAGERDALA USA - LOMPOC, INC.,
more than one-half in number of the allowed claims . . . .”).
Doing something allowed by the Bankruptcy Code and case
law, without evidence of ulterior motive, cannot be bad faith.
Not offering to purchase all the claims in a class (to later use
those claims to block a plan) is not—alone—sufficient to
evidence the bad faith necessary to designate votes under
§ 1126(e). As such, the bankruptcy court erred by finding bad
faith based on Pacific Western’s decision to not offer to
purchase all the general unsecured claims.
C. Consideration of the Effect of Blocking a Plan on
Other Creditors
The bankruptcy court’s conclusion that allowing Pacific
Western to vote the Purchased Claims would give it an
“unfair advantage” over other creditors incorrectly examined
only the negative effect of the action, not the motivation of the
creditor, and failed to establish whether Pacific Western had
acted to “secure some untoward advantage over other
creditors for some ulterior motive.” Figter, 118 F.3d at 639
(emphasis added). The bankruptcy court borrowed the
concept of “unfair advantage” from In re Pleasant Hill
Partners, a Northern District of Georgia Bankruptcy Court
decision, which held that “[t]he creditor’s conduct in
furtherance of its own interest . . . should not result in unfair
disadvantage to other creditors or the debtor.” 163 B.R. at
395. However, this concept is not supported by our case law
in Figter nor the precedents in other Circuits.
Figter certainly stated that determining good faith was a
“fluid” concept and that “no single factor” or “single set of
factors” was conclusive. 118 F.3d at 639. However, we also
pointedly stated that there is a “necessary” distinction
between “a creditor’s self interest as a creditor and a motive
IN RE FAGERDALA USA - LOMPOC, INC., 13
which is ulterior to the purpose of protecting a creditor’s
interest.” Id. To ensure this distinction is maintained, Figter
repeatedly focuses the bad faith inquiry on the motive of the
creditor, particularly, on whether the creditor has an “ulterior
motive,” and is seeking “to secure some untoward
advantage.” Id. We explicitly held that creditors do not need
“to approach reorganization plan votes with a high degree of
altruism and with the desire to help the debtor and their
fellow creditors. Far from it.” Id. (emphasis added). Thus, a
creditor’s actions are not bad faith simply because they
“appear selfish to those who do not benefit from it.” Id. “[I]f
[the creditor] acted out of enlightened self interest, it is not to
be condemned simply because it frustrated [the debtor’s]
desires. That is true, even if [the creditor] purchased [the]
claims for the very purpose of blocking confirmation of [the
debtor’s] proposed plan.” Id. (emphasis added).
Rather, bad faith is determined when the creditor was “not
attempting to protect [its] own proper interests, but . . . w[as],
instead, attempting to obtain some benefit to which [it] w[as]
not entitled.” Id. at 638 (emphasis added). As the Second
Circuit noted, bad faith is found when “[t]he purchasing party
. . . was less interested in maximizing the return on its claim
than in diverting the progress of the proceedings to achieve
an outside benefit.” In re DBSD N. Am. Inc., 634 F.3d at 104
(emphasis added).5 Noted examples of bad faith include: a
5
This definition reflects the purpose behind the “good faith”
requirement, which was enacted in response to the Fifth Circuit’s decision
in Texas Hotel Securities Corp. v. Waco Development Co., 87 F.2d 395
(5th Cir. 1936). See Young v. Higbee Co., 324 U.S. 204, 211 n.10 (1945).
In Texas Hotel, Waco Development, which owned the Roosevelt Hotel,
filed for bankruptcy. 87 F.2d at 397. Waco Development’s proposed
reorganization plan granted a third-party the lease to operate the hotel. Id.
A Texas Hotel subsidiary had held the lease to operate the hotel in the
14 IN RE FAGERDALA USA - LOMPOC, INC.,
non-preexisting creditor “purchas[ing] a claim for the purpose
of blocking an action against it,” competitors purchasing
claims to “destroy the debtor’s business in order to further
their own,” or a debtor arranging to have an insider purchase
claims. See Figter, 118 F.3d at 639 (citing In re Keyworth,
47 B.R. 966, 971–72 (Bankr. D. Colo. 1985); In re MacLeod
Co., 63 B.R. 654, 655 (Bankr. S.D. Ohio 1986); In re
Allegheny Int’l, Inc., 118 B.R. at 289; In re Holly Knoll
P’ship, 167 B.R. 381, 389 (Bankr. E.D. Pa. 1994); In re
Applegate Prop., Ltd., 133 B.R. 827, 834–35 (Bankr. W.D.
Tex. 1991)). Merely protecting a claim to its fullest extent
cannot be evidence of bad faith. There must be some
evidence beyond negative impact on other creditors.
Here, the bankruptcy court expressly refused to consider
Pacific Western’s motivations or determine whether Pacific
Western was seeking an “untoward advantage over other
creditors for some ulterior motive,” i.e., “to obtain some
benefit to which [Pacific Western] w[as] not entitled.” Id.
638–39.6 The bankruptcy court erred both by considering the
past, but after it defaulted, the lease was cancelled by judicial order. Id. at
398–99. Texas Hotel purchased enough claims to block the plan, with the
“hope[] to force [a plan] that would give them again the operation of the
hotel or other wise [sic] reestablish an interest that they felt they justly had
in the property.” Id. at 398. The district court disallowed the votes. Id. at
397. However, on appeal, the Fifth Circuit held the Bankruptcy Act did
not authorize scrutinizing the motivations of those purchasing claims and
allowed the claims to be voted. Id. at 400. Later, in Young, the Supreme
Court noted that the “good faith” provisions were enacted to “bar creditors
from a vote who were prompted by such a purpose [as seen in Texas
Hotel].” 324 U.S. at 211 n.10.
6
Contrary to Fagerdala’s arguments on appeal, the bankruptcy court
explicitly stated it was not considering Pacific Western’s motivation as a
matter of law; only the fact that Pacific Western had not made an offer to
IN RE FAGERDALA USA - LOMPOC, INC., 15
effect on other creditors, without additional evidence of bad
faith, and not making actual findings on Pacific Western’s
motivations.
IV. Conclusion
Therefore, we reverse the district court’s order affirming
the bankruptcy court, vacate the bankruptcy court’s order
granting Fagerdala’s motion to designate the Purchased
Claims, and remand this case to the bankruptcy court for
proceedings consistent with this opinion.7 Each party shall
bear its own costs.
REVERSED, VACATED, and REMANDED.
all creditors mattered.
7
In addition to the designation issue, Pacific Western argued that the
bankruptcy court erred by allowing the Purchased Claims to be segregated
from the other general unsecured claims. In its briefing, Fagerdala
conceded the classification issue if the bankruptcy court were reversed on
the designation question. Since we find the bankruptcy court committed
legal error by designating the votes of the Purchased Claims, we also find
that Fagerdala has conceded that Purchased Claims were improperly
classified separately from the other general unsecured claims.