Pac. W. Bank v. Fagerdala United States—lompoc, Inc. (In re Fagerdala United States—lompoc, Inc.)

Decision Date04 June 2018
Docket NumberNo. 16-35430,16-35430
Citation891 F.3d 848
Parties IN RE FAGERDALA USA—LOMPOC, INC., Debtor, Pacific Western Bank; Coastline re Holdings Corp., Appellants, v. Fagerdala USA—Lompoc, Inc., Appellee.
CourtU.S. Court of Appeals — Ninth Circuit

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.

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" 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 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 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 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 Figterspecifically 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

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 , ––– U.S. ––––, 138 S.Ct. 960, 968 n.7, 200 L.Ed.2d 218 (2018). Legal error constitutes clear error in the ultimate determination. Cf. Koon v. United States , 518 U.S. 81, 100, 116 S.Ct. 2035, 135 L.Ed.2d 392 (1996).

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. 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...

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