United States: Ya Gotta Have [Good] Faith: Court Of Appeals For The Ninth Circuit Holds That In The Context Of Plan Voting, A Bad Faith Showing Requires More Than A Negative Impact On Creditors

When it comes to voting on a plan, Section 1126(e) of the Bankruptcy Code provides that a bankruptcy court may designate (or disallow) the votes of any entity whose vote to accept or reject was not made in “good faith” (a term that is not defined in the Bankruptcy Code). On June 4, 2018, the United States Court of Appeals for the Ninth Circuit issued a decision reversing that of the lower courts and holding that 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 remaining creditors. This decision confirms that a creditor may cast its votes in order to protect its own interests. On the other hand, bad faith may be found where a creditor votes in order to obtain some benefit to which it was not otherwise entitled or for some ulterior purpose unrelated to its role as creditor.

Background

Pacific Western Bank, through its wholly-owned entity Coastline RE Holdings Corp., held the senior secured debt on the real property of debtor Fagerdala USA – Lompac, Inc. Fagerdala filed for Chapter 11 relief on August 14, 2014, and filed a first amended plan of reorganization on April 27, 2015. The plan placed Pacific Western’s secured claim in Class 1, and general unsecured claims in Class 4. All classes of claims were deemed impaired; accordingly, Fagerdala needed the approval of at least one impaired class in order to confirm the plan.1

Pacific Western purchased a large number of—but not all—general unsecured claims in order to block Fagerdala’s proposed plan, as blocking the plan was in Pacific Western’s economic interest. Ultimately, Pacific Western purchased more than half of the claims by number, but only approximately ten percent by value. Fagerdala filed its second amended plan on June 2, 2015. Pacific Western voted its secured claim, as well as the claims it had purchased, against the plan, which was sufficient to block the plan.2  

Fagerdala moved to designate Pacific Western’s votes with respect to the purchased claims, arguing that the purchase was not made in good faith. At the bankruptcy court hearing, Pacific Western stated that it had good and specific reasons for not attempting to purchase certain claims. The bankruptcy court responded that, 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 granted Fagerdala’s designation motion, stating that “…a creditor’s conduct in further of its own interest should not result in an unfair disadvantage to other creditors…” and “[a]llowing [Pacific Western] to block confirmation by purchasing such a small percentage of the unsecured debt would be highly prejudicial to the creditors holding most of the unsecured debt.”  On appeal, the district court affirmed the designation of the purchased claims. Pacific Western appealed to the Court of Appeals for the Ninth Circuit.

Decision

The Court of Appeals reversed and vacated the bankruptcy court’s order granting the motion to designate. The Court of Appeals distinguished between a case where a creditor purchases additional claims in order to protect its own economic interests, which does not demonstrate bad faith or an ulterior motive unrelated to collection of its claim as creditor, as opposed to a case where a creditor attempts to gain some benefit to which it was not otherwise entitled (e.g., a competitor purchasing claims to destroy the debtor’s business in order to further its own).

The Court of Appeals stated that neither of the two facts relied on by the bankruptcy court—either alone or together—was sufficient to support a finding of bad faith. First, the conclusion that Pacific Western’s failure to make an offer to all unsecured creditors evidenced bad faith is not supported by case law or the Bankruptcy Code. While offering to purchase all claims is an indicia of good faith, failing to do so cannot itself evidence bad faith.  Second, the Court of Appeals disagreed with the bankruptcy court’s finding that if Pacific Western’s purchased claims were voted, it would “have an unfair advantage” and be “highly prejudicial” to other creditors, noting that the bankruptcy court incorrectly examined only the negative effects of Pacific Western’s purchases, but did not consider its motivation (to protect its interests as a creditor). Bad faith is determined when a creditor was not attempting to protect its own economic interests, but was instead attempting to obtain a benefit to which it was not otherwise entitled.

As the Court of Appeals stated, “[m]erely protecting a claim to its fullest extent cannot be evidence of bad faith. There must be some evidence beyond negative impact on other creditors.” Because the bankruptcy court expressly refused to consider Pacific Western’s motivations, or determine whether it was seeking an “untoward advantage over other creditors for some ulterior motive,” the Court of Appeals vacated the bankruptcy court’s order granting Fagerdala’s designation motion and remanded the case to the bankruptcy court.

Discussion

The Court of Appeals cited its prior decision in In re Figter  3 where it noted that 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. This decision is good news for creditors who can now safely execute on a strategy to block confirmation of a plan that puts its current interest as a creditor at risk. The decision also serves as a reminder, however, that a purchaser’s motivations for purchasing claims will be considered by the bankruptcy court, and so a creditor should be prepared to prove that its actions were in furtherance of its own proper interests and not for an impermissible ulterior motive unrelated to its role as creditor.

Footnotes

1   If all of the confirmation requirements set forth in the Bankruptcy Code, other than the requirement that all impaired classes vote in favor of the plan, are met, the bankruptcy court can still confirm the plan via “cram down” if the plan does not “discriminate unfairly” and is “fair and equitable” with respect to each class of claims or interests that is impaired under, and has not accepted, the plan.

2  A class of claims has accepted a plan if the plan has been accepted by voting creditors that hold at least two-thirds in amount and more than one-half in number of the allowed claims. Because Pacific Western purchased more than half of the claims by number, it was able to block the plan, even though it only voted approximately 10% by value of all outstanding claims.

Figter Ltd. v. Teachers Ins. & Annuity Ass’n of Am. (In re Figter), 118 F.3d 635 (9th Cir. 1997).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions