Acquisition of Claims for Plan Control

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.

The debtor's plan had only two impaired classes of claims — Class 1 containing Pacific Western's secured claim and Class 4 containing the general unsecured claims. Pacific Western selectively acquired a voting majority of the general unsecured claims to give it a blocking position in Class 4 even though the acquired claims represented only about 10% (approximately $13,000) of the value of the claims in the class. Pacific Western's ability to block both impaired classes denied the debtor the ability to satisfy the plan confirmation requirement in section 1129(a)(10) of the Bankruptcy Code requiring the affirmative acceptance of the plan by at least one impaired class of claims.