FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

IN RE FAGERDALA USA -

LOMPOC, INC.,

Debtor,

PACIFIC WESTERN BANK;

COASTLINE RE HOLDINGS CORP.,

Appellants,

v.

FAGERDALA USA - LOMPOC, INC.,

Appellee.

No. 16-35430

D.C. No.

3:15-cv-01792-MO

OPINION

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 selfinterest 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 apartmentowning 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 claimforthe 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.