F OR P UBLICATION



### UNIT E D ST AT E S CO URT O F APPE AL S FO R T H E NINT H CIRCUIT

I N R E F A G E R

D A L A USA

- L O M P O C , I

N C ., Debtor,

P A C I F I C W E S T E R

N B A N K ; C O A S T L I

N E RE H O L D I

N G S C O R

P ., Appellants,

v.

F A G E R D A L A U SA

- L O M P O C , I

N C ., Appellee. No. 16-35430

D.C. No. 3 :15-cv-01792-MO

OPI NI ON

A ppeal from the United States District Court for the District of Oreg on Michael W . Mosman, Chief J u dg e, Presiding

Arg ued and Submitted March 9, 2018

Portland, Oreg on

F iled J une 4, 2018

B efore: N. Randy

Smith, Morg an Christen, and Andrew D. Hurwitz
, Circuit J udg es.
Opinion by

J udg e N.R. SmithI N R E F A G E R

D A L A USA

- L O M P O C , I

N C ., 2

SUMMARY *

Bankruptcy

The panel (1) reversed the district court’s order affirming the bankruptcy court and ( 2 ) vacated the bankruptcy court’s order g rantin g a chapter 11 d ebtor’s motion to desig nate claims for bad faith and preclude the claims from being voted
ag ainst a plan of reorg aniz ation.

A secured creditor purchased a number of general

unse c u red claims and voted its secured claim and the purchased claims ag a inst the plan. The bankruptcy court desig nated the purchased claims for bad faith.

The panel held that, under 11 U.S.C. § 1126(e), a bankruptcy court may not desig nate claims fo r b ad faith simply b ecause (1) a creditor offers to purchase only a subset of available claims in order to b lock a plan of reorg aniz ation, and/or (2) blo cking the plan will adversely impact the remaining creditors. The panel held that, at a minimum, there
must be some evidence that the cre ditor is seeking to secure

some untoward advantag e over other creditors for some ulterior motive. According ly
, the bankruptcy c ourt e rr ed when it refused to analy

z e whether the secured creditor acted under an ulterior motive bey ond its mere enlig htened selfinterest in protecting its secured claim. The p anel remanded the case to the bankruptcy court.

* T h is su m m ary co n stitu

tes n o p art o f th e o pin io n o f th e co u rt. It h as b een p rep ared b y

co u rt staf

f f o r th e co n v en i en ce o f

th e read er.I N R E F A G E R

D A L A USA

- L O M P O C , I

N C ., 3

COUNSEL

Teresa H. Pearson ( a

rg ued) and David W

. Hercher, Miller Nash Graham & Dunn L L P, Portland, Oreg on; David K

. Eldan, Parker Milliken Clark O ’Hara & Samuelian, L os Ang eles, California; for Appellants.

Doug las R. Pahl (arg

ued), Perkins Coie L L P, Portland, Oreg on, for Appellee.

OP INION

N.R. SMI TH, Circuit J udg e :

Under 11 U.S.C. § 1126(e), a bankr u ptcy court may not desi gn ate claims for bad faith simply because (1) a creditor offers t o p urchase only a subset of available claims in order
to block a p lan of reorg a

niz ation, and/or (2) blocking the p lan will adversely impact the remaining c reditors. B ad faith requires more. See Figter Ltd. v

. Teachers Ins. & Annuity A s s ’ n of Am. (

In re Figter ), 118 F .3d 635, 639 (9th Cir

. 1997). A t a mi n i m u m , there must be some evidence that a creditor is seeking “to secure some untoward advantag e over other creditors for some ulterior motive.” Id. A ccording ly
, the b a nkruptcy c ourt e r

red w hen it refused to analy z e wh e t h e r Pacific W e stern acted under an “ulterior motive,” bey ond its “mere enlig h tened self interest” in p rotecting its secured claim. Id. I n the a b s e n ce of some ulterior motive, the mere f a ilure to make purchase offers to all outstanding creditor s does not support a bad faith finding —even if the outstanding creditors will b e adversely affected by a decision to block the
reorg aniz ation plan.I N R E F A G E R

D A L A USA

- L O M P O C , I

N C ., 4

I. F actual P roceedings

A. The P arties

F ag e rdala USA - L ompoc, I nc., the debtor, own s r e al
p r o perty worth approx imately $6 million. Pacific W estern B ank, throug h its wh o l l y -owned entity
, Coastline RE Holding s Corp. (collectively “Pacific Western”), h o lds the senior, secured c l a i m (in ex cess of $3.95 million) on F ag erdala’s real property

.

B. Bankruptcy Court P r oceedings

F ag e rdala f

iled for Chapter 11 bankruptcy on Aug ust 14, 2014. F ag erdala filed a n i nitial reorg aniz ation p lan on November 14, 2014 and a first amended plan o f
reorg aniz ation on April 27, 2015. B oth plans p la c e d Pacific W e stern’s claim in Class 1, and the g eneral unsecured c laims in Class 4. 1 All claims were d eemed impaired in both plans. 2 T herefore, to “cramdown” the plan under § 1129(a)(10), F ag erdala n eeded the approval of at least one impaired c lass.

To block F ag erdala’s pro p o s e d p lan, Pacific W estern purchased a number of the g eneral unsecured claims. Pacific W e stern’s le ga l counsel testified that its “motivation was to acquire f or the bank a b locking position in t h e unsecured

1 Class 2 co n tain ed o n ly a t a x c l aim b y San ta B arb ara Co u n t y an d Class 3 co n sisted o f an in sid er claim b y Max w el l M o r g a n, w h i ch w as

su b o rd in ated

to P acif ic W estern

.

2 Sp ecif ically
, Pacif

ic W est ern ’ s claim w as im p aired b ecau se th e p ro p osed in terest rate w as lo w er th an th e pen alty in terest rate f o r th e lo an , an d bo t h p lan s m od if

ied th e len g th o f t

h e term an d o th er lo an p ro v isio n s.I N R E F A G E R

D A L A USA

- L O M P O C , I

N C ., 5

c l ass” and that the sole g oal was “to do what was b est fo r [ Pacific W estern] eco n o mically

. ” Pacific W estern provided its leg al counsel a budg et, which was insufficient to purchase al l the g eneral unsecured claims. Pacific W estern’s offer to purchase was rejected by some unsecured c reditors, and it could not contact other unsecured creditors. F urther, Pacific W e stern’s counsel testified that he did not see k t o p urchase (1) claims that w e re valued at zero; (2) claims he believed

were either insider controlled o r would alert F age r d ala to Pacific W estern’s claim purch as e s ; or (3) claims to which F ag erdala objected. U ltimately
, Pacific W estern purchased

more than half of the c laims by nu m b e r , but only
approx imately ten percent by value (approx imately $13,000) (hereinafter “Purchased Claims”).

F ag e rdala filed its second amended plan o n J une 2, 2015. The nex t d ay , Pacific W estern voted its secured claim and the Purchased Claims ag ainst the plan. Be c a use the Purchased Claims constituted at least “ one-half in n u m b e r ” of the
g eneral un s e cured class, Pacific W estern’s votes were sufficient to block the second amended plan. § 1126(c).

After the vote, F ag e rdala moved to desig nate the votes o f the Purchased Claims, arg u ing that Pacific W estern had not p u rchased the claims in g ood faith. The bankruptcy court heard a rg ument on the motion on J une 10, 2015, and Aug ust 25, 201 5

. A t t h e outset o f the hearing
, the bankruptcy court stated it wanted an answer to the question of “whether o r not the bank offered to buy all the cla i m s , o r d id they just buy a few.” Pacific W estern’s counsel stated tha t he “did not attemp t t o buy every claim” a nd that “[ w] ith respect to any claim th a t I d i d not attempt to buy
, there were specific, and, i n m y v i ew , g ood reasons to not a ttempt to buy it.” He a lso

o f f e red ex amples o f prior cases where a creditor had sou gh tI N R E F A G E R

D A L A USA

- L O M P O C , I

N C ., 6

to block a plan by purchasing claims. I n response, the bankruptcy court ex plicitly stated, a s “a matter of law,” it was not g oing to con s i d er Pacific W estern’s motivation o r rationale for offering

to purchase only

a subset of claims.

The b ankruptcy court then g ranted F agerdala’s desig nation motion, stating :

The plan of reorg aniz atio n under

c o n sideration proposes to pay Class 4 claims in f ull with in t erest w ithin 60 day s o f confirmation. I t is u ndisputed that unsecured creditors will not be paid in a liquidation or in the e vent this r eorg aniz ation fails and [ Pacific W e stern] forecloses.

I conclude that desig n ation is appropriate in this case because [P a cif ic We s t e rn] will have an unf

air advantag e over the unsecured cr e d i t ors who did not receive a purchase of

f er and w ho hold the la rgest percentage o f claim s in this in term s of

am ount.

. . . .

Good faith does not r equi re a creditor to act w ith selfl e ss disinterest. And the fact that

a c reditor purchases claims to take a blocking position is n o t , per se, b ad faith under [ § 1126]

. H o w e v er, a creditor’s conduct in f urther of its ow n interest should not result in an unf

air disadvantage to otherI N R E F A G E R

D A L A USA

- L O M P O C , I

N C ., 7

creditors. [ In re Pleasant Hill Partners, L.P.
, 163 B .R. 388 (B a

nkr. N.D. Ga. 1994]

.

That pri nciple was a factor in – in Figter where the court affirmed th e b ankruptcy court’s deni a l o f a motion under Section 1126(e). I n doing so the court in Figter specif ically noted that the secured creditor of f ered to purchase all of the unsecu red claim s at issue. See also [ Principal Mut. Life Ins. Co. v

. Lakeside Assocs

. ( In re Deluca)
, 194 B .R

. 7 9 7 (B ankr. E.D. Va. 1996)]

. [ 2 5 5 Park Plaza Assocs. Ltd. v. Conn. Gen

. Life Ins. Co. (

In re 225 Park Plaza Assocs. Ltd.) , 100 F .3d 1214 (6th Cir. 1996)]

.

Allow ing [P a c if

ic Western] to block

c o n f irm ation by purchasing such a sm all percentage of the unsecured d e bt in this

case w ould be highly prejudicial to t h e creditors holding m ost of the unse c u red debt; and, t h e r e f

ore, I am going t o designate.

W ith the Purchased Claims removed from voting , F a g erdala had sufficient creditors in the general unsecured class to accept the plan. The bankruptcy c o u rt ultimately confirmed the fourth amended plan. 3

3 In b etw een th e tw o h earin g s , Fag erd ala f iled a th ird am en d ed p lan

. T h e th ird am en d ed plan sp lit Class 1 in t o t w o p arts: Class 1A (co n tain in g P acif ic W estern ’ s secu red claim ), an d Class 1B (co n tain in g t h e P u rch ased Claim s). Ev en th o u g h Fag erd ala m o v ed t h e P u rch ased Claim s in to a d if f eren t class, i t treated bo th Class 1 B an d Class 4
, t h e rem ain in gI N R E F A G E R

D A L A USA

- L O M P O C , I

N C ., 8

C. District Court P roceedings

T he district court affirmed the bankruptcy cour t ’s desig nation o f the Purchased Claims with reservation. Pacific W e stern timely appealed. W e have jurisdiction u n d er 28 U.S.C. § 158(d)(1), and we reverse. 4

II. Standard of

Review

W e review the bankruptcy court’s ultimate determination of g ood faith for clear error. Figter
, 118 F .3d at 638. “To the

ex tent that o u r review requires us to define the g eneral parameters of a g ood faith determination, we a re reviewing a question o f law. To the ex tent th a t we must review a pure historical fact determination, we a re reviewing

a question of fact.” Id. “[ A ] n a p p ellate court must correct any leg a l error infecting a bankruptcy court’s decision. So if the bankruptcy
court somehow misunderstood the nature of the [ leg al question]

— or if it devised some novel mult i-factor test for addressing that issue—an a ppellate court s h o u l d apply de

novo review.” U.S. Bank Nat’l Ass’n v

. V i l l

. at Lakeridge, LLC , 138 S. Ct. 960, 968 n.7 (2018). L eg al error constitutes clear error in the ultimate determination. Cf. Koon v. United States , 518 U.S. 81, 100 (1996).

u n secu red g en eral cred ito rs, t h e sam e. T h ese classes w ere lef t in p lace in th e f o u rth am en d ed p lan
, w h i c h th e b an k ru p tcy co u rt co n f irm ed on Sep tem b er 1 4 , 2 0 1 5

.

4 Fag erd ala’ s Mo tio n

to Dism i ss t

h e A p p eal as Mo o t, f

iled af ter th is

case w as su

b m itted , is DENIED

.I N R E F A G E R

D A L A USA

- L O M P O C , I

N C ., 9

III. Discussion

Pacific W estern ar gu e s that the d istrict court erred b y considering only the ef

f e ct of Pacific W estern’s a ctions, without r espect for its motivation. W e ag ree. The bankruptcy
court found that “desig na tion is appropriate in this case because [ Pacific W estern] will have an unfair advantag e over the unsecured creditors who did not receive a p urchase offer and who hold the larg est p ercentag e o f claims in this in terms of amount.” I n the bankruptcy co u r t’s ruling
, only two facts

were relevant: (1) Pacific W estern did n ot make an o ffer to all

unse c u red creditors; and ( 2) if Pacific W estern’s Purchased Claims were voted, it would “have an unfair advantag e” a nd be “hig hly prejudicial” to other creditors. H o w e v er, under § 1126(e), neither of these considerations—alone o r tog ether—are by themselves sufficient to support a finding o f bad faith. To e x plain, we outline the basic principles of g ood faith determinations under § 1126(e) and then turn to the two errors made by

the bankruptcy

court.

A. G eneral P rinciples of G ood F aith Under § 1126(e)

“On request of a party in interest, a n d after notice and a hearing
, the c ourt may d esig nate any entity whose acceptance

or rejection of such plan was not in g ood faith, or was not solicited or procured in g ood fa i t h

. . . .” § 1126(e). T o “desig nate” means the votes for the claims will n o t be counted in voting to accept or reject the plan. Figter
, 118 F .3d
at 638. The definition o f “g o od faith” is not pr o v i d e d in statute and was “left to the courts” by Cong ress. I

d.

“[ T] he concept of g ood f

aith is a fluid one, and no sing le f a c t o r c an be said to inex orably demand an u ltimate result,

nor must a sing le set of factors be considered.” Id. at 639.I N R E F A G E R

D A L A USA

- L O M P O C , I

N C ., 10

Generally
, § 1126(e) “appl[ ies] to those who were not attempting to protect their own p roper interests, but w ho
were, instead, attempt i n g to obtain some benefit to which they were not entitled.” I

d. at 638. An entity acts in bad faith when it “seeks to secure some u ntoward advantag e over other creditors for some ulterior purpose.” Id. at 639.

However, a s “fluid” as the concept of g ood faith may be, bad faith ex plicitly does not include “enlig htened self interest,

even if it a

ppears selfish to those who d o not benefit from it.” Id. “I t is alway s necessary to keep in mind the d i f f e r e nce between a creditor’s self interest a s a cr editor and a motive

w h i c h is ulterior to the purpose of protecting a creditor’s interest.” Id. Th u s , “the mere fact that a creditor has purchased additional claims for the p urpose of protecting his

own ex isting claim does not d e m o n s trate bad f a ith o r an ulterior motive.” Id. “[ P] urchas[ ing ] . . . claims for the very purpose of blocking confirmation of

. . . [ a] propos e d plan” “is not to be condemned.” I d.

B. F ailure to Of

f er to P urchase all Claim s in a Class

Neither Figter nor the B ankruptcy Code support the bankruptcy court’s conclusion that failing to make an offer to all members of a class is (by itself) sufficient evidence o f b ad faith. I n Figter
, the creditor soug ht to purchase all the c laims in the c l a s s, but that fact was only o ne—of several—that

co n t r ibuted to the bankruptcy court’s finding of g ood faith. 118 F

. 3d a t 640. The F igter creditor was n ot advancing another p lan, was not a comp e ting entity in the apartmentowning business, faced a c o m p lex lien situation if the building was divided into condos (rather than keeping it a s an

a partment building ) as proposed in the debtor’s plan
, a n d “acted to protect its interests as [ the] major creditor.” Id.I N R E F A G E R

D A L A USA

- L O M P O C , I

N C ., 11

Considering all those f ac t s as a whole, we found the b a n k ruptcy c ourt did not c ommit clear error by f inding t h e Figter creditor acted in g ood faith. Id. The fact that the Figter creditor o ffered to purchase all c lai m s w a s not the sing ular, dispositive factor; it was one among several.

I t is also true that, while offering to purchase all claims is certainly a

n indicator of good

faith
, failing to do so cannot be evidence of bad

faith

. As w e have ex p licitly e mphasiz ed: “the

mere fact that a c reditor has purchased a dditional claims for the purpose of protecting his o w n ex isting c laim does not demonstrate b ad faith or an ulterior motiv e .” I d. at 639; see also 2 25 Park Plaza Assocs.
, 100 F .3d at 1219 (“I ndeed, ‘the

mere fact that a purchase of c reditors’ intere s t s is for

. . . securing the approval or rejection of a plan does not of itself

am o u n t t o b ad faith.’ I f bad faith c ould 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 (B ankr. W .D. Pa. 1990)); In re Dish Network Corp. v. DBSD N. Am. Inc. ( I n

re DBSD N. Am. Inc. )
, 6 3 4 F .3d 79, 102 (2d Cir. 2 011) (“Merely purchasing claims in bankruptcy ‘for the purpose o f securing the approval or rejection of a plan does not of itself

a m o u n t to bad faith.’” (quoting In re P -R Holding Corp

. , 147 F .2d 895, 897 (2d Ci r

. 1 9 4 5 )). “Thus, if [ the creditor] acted out of enlig hten e d s e l f interest, it is not to be condemned simply because it frustrated [ the debtor’s] d e s i r e s. That is true, even if [ the creditor] purchased [ the] claims for the very purpose of blocking c onfirmation of [ the debtor’s] proposed plan.” Figter
, 118 F .3d at 639. B locking a p lan 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 a m ount a ndI N R E F A G E R

D A L A USA

- L O M P O C , I

N C ., 12

more than one-half in number of the allowed c laims

. . . .”). Doing someth i n g a llowed by the B ankruptcy Code and case law, w ithout evidence o f 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 ne c e ssary to desig nate votes under § 1126(e). As such, the bankruptcy court erred by finding b ad faith based on Pacific W e st e r n’s d ecision to not offer to purchase all the g eneral unsecured claims.

C. Consideration o f t h e Ef f ect of Blocking a P lan on Other Creditors

The b ankruptcy co urt’s conclusion that allowing Pacific W e stern to vote th e P u r c hased Claims would g ive it an “unfair advantag e” over other creditors incorrectly ex a mined only the negative effect of the action, not the motivation of the creditor, and failed to establish whether Pacific W estern h ad acted to “ secure some untoward a dvantag e o ver other creditors for some u lterior motive .” Figter
, 118 F .3d at 639 ( e m phasis added). The b ankruptcy court borrowed t h e concept of “ un fa i r advantag e” from In re P leasant Hill Partners
, a Northern District of Georg ia Ba n k ruptcy Court decision, which h eld that “[ t ] h e creditor’s conduct in furtherance of its own interest

. . . should not result in unfair disadvantag e to other c re d i t o rs or the d ebtor.” 163 B

. R. at 395. However, this concept is not supported by o ur case law in Figter nor the precedents in other Circuits.

Figter certainly stated that determining g ood f aith was a “fluid” concept and that “no si n g le factor” or “sing le set o f factors” was c onclusive. 118 F .3d at 639. However, we also pointedly stated that the r e is a “necessary ” distinction between “a creditor’s self interest as a creditor and a motiveI N R E F A G E R

D A L A USA

- L O M P O C , I

N C ., 13

which is ulterior to the purpose of p r o t e c ting a creditor’s interest.” Id. To ensure this d istinction is maintained, Figter repeatedly focuses the bad faith inquiry on the motive of the creditor, particularly
, on w hether the creditor h a s an “ulterior motive,” and is seeking “to secure some untoward advantag e.” Id. W e ex plicitly held that creditors do not need “to approach reorg aniz ation plan v otes with a hig h d eg ree o f altruism and with the desir e t o help the debtor a nd their fellow creditors. Far from it .” Id. (emphasis added). Thus, a creditor’s a c t i o ns are not b ad faith simply because they “appear selfish to those w ho do not benefit from it.” I d. “[ I ] f [ the c reditor] acted out of enlig htened self interest, it is not to be condemned simply b e c a u se it frustrated [ the debtor’s] desires. That is true, even i f [the c reditor] 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 o b tain some benefit to which [it] w[as]
not entitled .” Id. at 638 (emphasis adde d )

. As the Second Circuit noted, bad faith is found when “[ t] he purchasing party

. . . was less interested in max imiz ing the return on its claim than in diverting the p rog r e ss of the proceeding s to achieve

an outside benefit .” In re DBSD N. Am. Inc.
, 634 F .3d at 104 (emphasis ad ded). 5 Noted ex amples of bad faith include: a

5 T h is d ef

i n i t i o n ref

lects th e p u rp o se b eh in d th e “ g o o d f aith ”
req u irem en t, w

h ich w as en acted in resp o n se to th e Fif th Circu i t’ s d ecisio n in Texa s Ho tel S

ecu rities Co rp

. v. W

a co Develo

p me n t C o

. , 8 7 F.2 d 3 9 5 (5 th Cir. 1 9 36 ). See Yo u n g v. Hig b ee Co

. , 3 2 4 U.S. 2 0 4
, 2 11 n .1 0 (1 9 4 5 ). In T exa s Ho tel
, W aco Dev elo p m en t, w h ich o w n e d th e Ro o sev elt Ho tel, f iled f o r b an k ru p t c y

. 8 7 F .2 d at 3 9 7

. W aco Dev elo p m en t’ s p ro po s ed

reo rg an izatio n p lan g ran ted a t h ird

- p arty t

h e lease to o perate th e h o tel. Id

. A T ex as Ho tel su

b sid iary h ad h eld th e leas e t o o p erate th e h o tel in th eI N R E F A G E R

D A L A USA

- L O M P O C , I

N C ., 14

non-preex isting creditor “purchas[ ing ] a c l a i m f o r t h e purpose of blocking an action a ga i nst it,” competitors purchasing claims t o “destroy the debtor’s business in order to f urther their own,” or a debtor arrang ing to have an insider purchase claims. See Figter
, 118 F. 3 d at 6 39 (citing In re Keyworth
, 47 B

. R. 966, 971–72 (B ankr. D. Colo. 1985); In re MacLeod Co.
, 63 B .R. 654, 655 (B ankr. S.D. O h i o 1 9 8 6); In re Allegheny I

nt’l, Inc.
, 118 B. R. at 289; In re Holly Knoll P’ship
, 167 B .R. 381, 389 (B ankr. E.D. Pa. 1994); In re Applegate Pr o

p ., Ltd.
, 133 B .R. 827, 834–35 (B a nkr. W .D. Tex

. 1991)). Merely protect i n g a c laim to its fullest ex tent cannot be evidence of bad faith. T h e r e must be some evidence bey

ond neg ative impact on other creditors.

Here, the bankruptcy

court ex pressly

refused to consider Pacific Western’s motivations or d etermine w hether Pacific W e stern was seeking an “untoward advantag e over other creditors for some ulterior motive,” i.e
., “to obtain some benefit to which [ Pacific W estern] w[ as] n o t e n t itled.” Id. 638–39. 6 The bankruptcy court erred both by considering the

p ast, b u t af

ter it d ef au lted
, th e lease w as can celled b y j u d icial ord er. Id

. at 3 9 8

– 9 9

. T ex as Ho tel p u rch ased en ou g h claim s to b lo ck th e plan
, w ith th e

“ h o p e[] to f

o rce [a p lan ] th at w ou ld g iv e th em ag ain th e o p eratio n

o f th e h o tel o r o th er w ise [sic] reestab lish an in terest th at th ey f elt th ey j u stly h ad in th e p ro p erty .” Id

. at 3 9 8

. T h e d istrict co u rt d isallo w ed t h e v otes. Id

. at 3 9 7

. H o w ev er, on ap p e a l
, th e Fif th Circu it h eld th e Ban k

ru p tcy A ct did

n o t au th o rize scru tin izin g th e m o tiv atio n s o f th o se p u rch asin g claim s an d allo w ed th e claim s to b e v o ted

. Id

. at 4 0 0

. L ater, in Yo u n g , th e S u p rem e Co u rt n o ted th at th e “ g o o d f aith ” p ro v isio n s w ere en acted to “ b ar cred i to rs f ro m a v o te w

h o w ere p ro m

pted b y s u ch a p u rp o se [as seen in Texa s Ho tel ].” 3 2 4 U.S. at 2 1 1 n .1 0.

6 Co n t rary to Fag erd ala’ s arg u m en ts on ap p eal, t h e b an k ru ptcy co u rt

ex p licitly s tated it w as n o t co n sid erin g P acif ic W estern ’ s m o tiv atio n as a

m atter o f law ; o n ly th e fa ct th at P acif ic W estern h ad n o t m ad e an o f f er toI N R E F A G E R

D A L A USA

- L O M P O C , I

N C ., 15

effect on other creditors, without additional evidence of b ad faith, and n o t making a c tual finding s on Pacific Western ’s motivations.

IV. Conclusion

Therefore, we reverse the district c ourt’s order affirming the bankruptcy court, vacat e t h e bankruptcy court’s order
g ranting F a g erdala’s motion to desig n ate the Purchased Claims, and r e m a nd this case to the bankruptcy court for proceeding s c onsistent with this o pinion. 7 Each party shall bear its own costs.

REVERSED, VACATED, and REMANDED.

all cred ito rs m attered

.

7 In ad d i tio n t o t

h e d esig n atio n issu e, P acif ic W estern arg u ed th at th e b an k ru p tcy co u rt erred b y allo w in g th e P u rch ased Claim s to be seg reg ated f ro m th e o th er g en eral u n secu red claim s. In its b r i e fi n g , Fag erd ala

co n ced ed th e classif

i catio n i ssu e if th e b an k

ru p tcy co u rt w ere rev ersed on th e d esig n atio n q u estio n

. Sin ce w e fi n d t he b an k ru p tcy co u rt co m

m i tted leg al erro r b y d esig n atin g th e v o tes o f th e P u rch ased Claim s, w e also f in d th at Fag erd ala h as co n ced ed th at P u rch ased Claim s w ere im p ro p erly classif ied sep arately

f ro m th e o th er g en eral u n secu red claim s.