1

 1 IN THE UNITED STATES DISTRICT COURT 

 2 FOR THE DISTRICT OF OREGON 

 3 PACIFIC WESTERN BANK and ) 

COASTLINE RE HOLDINGS CORP., ) 

 4 ) 

 Appellants, ) Case No. 3:15-cv-01792-MO 

 5 ) 

 v. ) 

 6 ) 

FAGERDALA USA - LOMPOC, INC., ) April 18, 2016 

 7 ) 

 Defendant. ) Portland, Oregon 

 8 ______________________________) 

 9 

10 

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12 

13 

14 

15 Oral Argument 

16 TRANSCRIPT OF PROCEEDINGS 

17 BEFORE THE HONORABLE MICHAEL W. MOSMAN 

18 UNITED STATES DISTRICT COURT CHIEF JUDGE 

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 2

 1

 2 APPEARANCES 

 3 

 4 FOR THE APPELLANTS: Ms. Teresa H. Pearson 

 Mr. David W. Hercher 

 5 Miller Nash Graham & Dunn, LLP 

 111 S.W. Fifth Avenue, Suite 3400 

 6 Portland, OR 97204 

 7 

 8 

 9 FOR THE APPELLEE: Mr. Douglas R. Pahl 

 Perkins Coie, LLP 

10 1120 N.W. Couch Street, 10th Floor 

 Portland, OR 97209 

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12 

13 

14 COURT REPORTER: Bonita J. Shumway, CSR, RMR, CRR 

 United States District Courthouse 

15 1000 S.W. Third Ave., Room 301 

 Portland, OR 97204 

16 (503) 326-8188 

17 

18 ALSO PRESENT: Holly Hayes (by telephone)

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 3

 1 (P R O C E E D I N G S) 

 2 THE CLERK: Your Honor, this is the time and place

 3 set for oral argument in Case No. 3:15-cv-1792-MO, Pacific

 4 Western Bank, et al. v. Fagerdala USA-Lompoc, Inc.

 5 Counsel, can you introduce yourself for the record.

 6 MR. PAHL: I'm Doug Pahl, counsel for Fagerdala USA,

 7 Inc.

 8 MS. PEARSON: Teresa Pearson of Miller Nash Graham &

 9 Dunn for secured lenders Pacific Western Bank and Coastline RE

10 Holdings Corp.

11 MR. HERCHER: David Hercher of the same client, same

12 law firm.

13 THE COURT: We have someone here on the phone?

14 MS. PEARSON: Your Honor, on the telephone is

15 in-house counsel for Pacific Western Bank, Holly Hayes. I

16 understand she is here to just listen to the argument today.

17 THE COURT: Ms. Hayes, can you hear -- Ms. Hayes, can

18 you hear what's going on in court all right?

19 MS. HAYES: Yes, I can. Thank you, Your Honor.

20 THE COURT: All right. Thank you.

21 We're here with a couple of questions. The first is

22 the allegation that the bankruptcy court erred in granting the

23 motion to designate and in finding that the lender purchased

24 and voted the claims in bad faith.

25 I'm going to do my best to follow the standard of
 4

 1 review in Figter, which I think to the bankruptcy court's

 2 factual findings requires me to review them for clear error,

 3 and otherwise to apply the typical standard of review for mixed

 4 questions or legal questions.

 5 I'm going to just refer to lender and debtor, if

 6 that's all right.

 7 MS. PEARSON: Yes, Your Honor.

 8 THE COURT: So the debtor argues that the bankruptcy

 9 court advances several reasons for this bad faith finding, and

10 I think does so in an attempt to meet the ulterior motive

11 standard. That is, the bankruptcy court referenced some -- at

12 least one case out of the Ninth Circuit with a slightly

13 different formulation of what it would take for it to be error

14 to grant the motion to designate.

15 I'm going to refer to this ulterior motive standard.

16 And so the debtor suggests several things relied on by the

17 bankruptcy court in a finding that this was bad faith. One was

18 just the failure to purchase all but -- any but a small

19 percentage of the unsecured debt and votes; the second, that

20 the plan that was defeated would have paid many or all of the

21 unsecured creditors in full. And, of course, that doesn't

22 happen once the plan is defeated.

23 The third is perhaps the most important one to me,

24 and that is that the lenders were oversecured; that they had

25 excess value on the property. What that says to me is it says
 5

 1 something about the possibility of the lender acting with an

 2 ulterior motive; that is, acting in bad faith.

 3 So what I'm looking for is a reason for the lender to

 4 do what it did that doesn't simply amount to advancing its

 5 legitimate economic interests in the bankruptcy proceeding. I

 6 understand ulterior motive to be to gain some other sort of

 7 advantage not of the type that you gain just by winning

 8 legitimately in the bankruptcy proceeding and advancing your

 9 property, your economic interests in such a proceeding.

10 So, for example, if you're oversecured, then whether

11 you get the plan approved or not approved, whether the whole

12 thing ends up in Chapter 11 or forcibly in Chapter 7, the

13 oversecured lender has, as best I can tell on this record, at

14 least, roughly the same outcome, but other people don't, and so

15 that -- accomplishing that sort of damage to other creditors,

16 where your outcome doesn't change much, is the sort of ulterior

17 motive that I think case law has in mind when it talks about

18 what bad faith is.

19 So I'm curious how the judge arrived at the

20 conclusion that the lender was oversecured and whether that

21 chain of reasoning even flows from the bare fact of being

22 oversecured.

23 And then it goes without saying that the unsecured

24 creditors faced an increased risk of receiving very little or

25 even nothing if the plan fails, even just by virtue of the
 6

 1 failure of the plan, or apparently the judge was concerned that

 2 the failure of the plan would sort of ineluctably drive things

 3 into Chapter 7.

 4 So as I understand it, that's the debtor's basic

 5 position on why the judge was right. Those are the reasons

 6 that support the judge's decision, reasons that at least in

 7 part appear to me to be reviewable for clear error, and

 8 therefore that I should approve the granting of the motion to

 9 designate grounded in those reasons.

10 So let me start with the debtor. Have I got about

11 right your argument about what the judge did and why she did

12 it?

13 MR. PAHL: I think you've gotten most of it, most of

14 it right, Your Honor.

15 I think I would suggest that the idea of ulterior

16 motive is a simple bright line -- either you have an ulterior

17 motive or you don't -- and if you have an ulterior motive, then

18 you lack good faith, because I think there's more to the

19 concept of good faith under 1126(e) than simply whether you

20 have an interest outside of the bankruptcy case that's

21 different.

22 If you were to accept that ulterior motive requires

23 some outside-of-the-bankruptcy-case interest, then we're

24 basically saying that good faith, there is no standard of good

25 faith for conduct within the case. And I think it's really
 7

 1 within the case that the judge was mostly troubled.

 2 THE COURT: Let me ask it this way.

 3 MR. PAHL: Sure.

 4 THE COURT: If you took away the idea of the lender

 5 being oversecured, would you pluck in other facts -- buying

 6 only the minimum number of shares necessary, leaving other

 7 people, you know, unpurchased, voting those shares, the minimum

 8 number of unsecured shares to defeat the plan -- is that bad

 9 faith?

10 MR. PAHL: I think under some circumstances, it can

11 be.

12 THE COURT: Well, I don't want it to be under some

13 circumstances.

14 MR. PAHL: Sure.

15 THE COURT: Because I'm only giving you those facts.

16 If those are the facts that a judge -- a bankruptcy judge has

17 in front of her, should she grant a motion to designate based

18 on the failure to purchase all but a small percentage of the

19 voting shares and then using that vote to defeat the plan? Is

20 that bad faith?

21 MR. PAHL: If we're in a situation, as we are in this

22 case, where unsecured creditors will be paid in full fairly

23 promptly under the bankruptcy plan proposed by the debtor, and

24 a creditor such as the bank here purchases a small percentage

25 of the claims, and I believe that the bankruptcy court believed
 8

 1 that there was significant risk that the failure of the plan

 2 would result in either no or very minimal recovery by unsecured

 3 creditors, that results in an unfair advantage, and I do think

 4 that's a ground for a bad faith finding.

 5 THE COURT: All right. Is that true regardless of

 6 the reason why the lender takes that action? You're adding

 7 another fact, and I appreciate you adding it because it is

 8 important in our case, and that is that not just purchasing the

 9 minimum number of shares and voting them to defeat the plan,

10 and that minimum number ends up being a relatively small

11 percentage. It's not like the number required to purchase and

12 defeat is 75 percent of the unsecured creditors. It's a small

13 percentage. But on top of that, if the plan at issue being

14 voted on is one that, you know, you don't see every day in

15 bankruptcy court, which would pay all the unsecured creditors,

16 if you have that, do you care whether the lender did what it

17 did on that set of facts, adding in your additional

18 consideration, in order to increase its own ability to recover

19 100 percent versus having really no impact on its ability to

20 recover 100 percent?

21 MR. PAHL: I do think that gives you grounds for a

22 lack of good faith finding, which is what the court --

23 THE COURT: What I'm asking is do you feel that even

24 if the lender can be said to have taken that action in order to

25 improve its financial position with regard to the plan?
 9

 1 MR. PAHL: In order to improve its financial position

 2 over and above what it's claiming in the case or just simply

 3 improving in its interest as a creditor?

 4 THE COURT: I'm asking the latter, I think. I want

 5 to clarify and say that it's attempting to defeat the plan out

 6 of a -- out of a -- let's call it a numerically legitimate

 7 position that defeating the plan improves its ability to

 8 collect on its debt in bankruptcy court.

 9 MR. PAHL: Yes. And I think --

10 THE COURT: Even if that's its motive, you'd still

11 claim that it's bad faith to do what a lender like that does?

12 MR. PAHL: I think that's the first step of the

13 analysis is to determine if there's some ulterior motive. If

14 there is, then you have a problem.

15 If there isn't an outside ulterior motive --

16 THE COURT: They just want to improve their position.

17 MR. PAHL: They just want to improve their position,

18 they're being an aggressive creditor and they're to pull any

19 procedural lever that they can in order to protect that

20 provision -- or that position, I think there's some other

21 playground rules that apply here, and I think that's where the

22 bankruptcy judge went. She determined that even acting to

23 protect your claim, it's improper to do so if it would visit a

24 harm on the creditors who did not get an offer. And in this

25 case --
 10

 1 THE COURT: Isn't that principle one that's belied by

 2 cases on bad faith, talking about what it takes to have bad

 3 faith? In other words, isn't there a fairly strong case

 4 supporting the idea of just attempting to improve your position

 5 in bankruptcy court, I guess I'd say, cannot be bad faith if

 6 that's all you have?

 7 MR. PAHL: Okay. I think that the cases -- and we

 8 can look at the Figter case, the language directly on that

 9 question, that the court was comforted by the fact that the

10 creditor in this case offered everyone the same terms and did

11 not take a position that was harmful to other unsecured

12 creditors. The same with Pleasant Hill. You have the same

13 kind of care being taken, and it's important to remember that a

14 bankruptcy court is a court of equity.

15 THE COURT: And you think that Pleasant Hill and

16 Figter are stating the same standard of what is or isn't bad

17 faith?

18 MR. PAHL: I think Pleasant Hill may be a little more

19 expansive in certain ways. It talks about different --

20 different models of determining good faith. Young v. Higbee is

21 sort of an early case, and I think it's PR Holdings, different

22 philosophies about how you get to a good faith or bad faith

23 conclusion.

24 THE COURT: Well, what your opponent has cited -- and

25 there's a series of quotes, some out of Figter itself, for
 11

 1 example -- for the idea that as long as a creditor acts to

 2 preserve what he reasonably perceives as his fair share of the

 3 debtor's estate, bad faith will not be attributed to his

 4 purchase of claims to control a class vote.

 5 MR. PAHL: That's a very strong part of the Figter

 6 case or the Lenders case, but the court goes on to talk about

 7 the fact that this is a -- not a single-factor test, that it's

 8 left to the discretion of the bankruptcy court to view things

 9 based on the bankruptcy court's experience.

10 THE COURT: Well, I've never said to you any

11 hypothetical or description of what the bankruptcy court did

12 that is single factor or simple. I mean, I think we all agree

13 that a number of factors would need to be taken into account

14 here.

15 But what I'm asking is whether you think that at the

16 end of the day you need to show something beyond a lender

17 seeking to improve or protect its position in bankruptcy court

18 itself, as opposed to in some other way.

19 MR. PAHL: Well, I think the Court is on to something

20 with the fact that this likely results in a foreclosure and

21 that we have an oversecured creditor.

22 THE COURT: Well, let's start there, then, or go

23 there, then. Let's assume that something else is, in fact,

24 required, just for the moment. What is your view on whether

25 the actions taken by the lender here in some ways, according to
 12

 1 the bankruptcy court, seem almost superfluous to its legitimate

 2 financial interest in the bankruptcy proceeding? It's

 3 oversecured and that it didn't need to ruin the plan in order

 4 to protect its position, it took steps that hurt other people

 5 without any real -- the subtext I'm getting from the bankruptcy

 6 judge is it ruined those chances of unsecured creditors getting

 7 paid without any real significant advancement of its own

 8 interests. Is that is what you see happening here?

 9 MR. PAHL: Well, it was a tradeoff, I think, for the

10 lender, and they made that determination. Lenders do that all

11 the time. The determination was we don't want to be paid back

12 over a long period of time, as you're proposing in the plan, so

13 we're going to fight that and we're going to fight you on the

14 interest rate.

15 So it's --

16 THE COURT: We don't want to be paid back over a long

17 period of time. Instead, we want what?

18 MR. PAHL: We want our remedies now or --

19 THE COURT: What remedies now?

20 MR. PAHL: Dismissal of the bankruptcy case if the

21 plan can't be confirmed, conversion of the bankruptcy case to

22 Chapter 7.

23 THE COURT: And foreclosure?

24 MR. PAHL: Well, either it stays in Chapter 7, if the

25 Chapter 7 trustee wants to keep it and sees a benefit to
 13

 1 managing the case. It seems to me unlikely that would occur,

 2 and I think we end up outside of a Chapter -- of a bankruptcy

 3 process, either Chapter 7 or Chapter 11. It's possible,

 4 though. Those are possibilities.

 5 THE COURT: So in your view, the motive behind the

 6 lender's actions here was to seek a faster payoff of roughly

 7 the same amount of debt?

 8 MR. PAHL: And then while being fully secured, amply

 9 secured on that payment, correct.

10 THE COURT: Either way, it gets paid 100 percent, it

11 just gets paid quicker and more simply perhaps --

12 MR. PAHL: Correct.

13 THE COURT: -- if the plan isn't approved?

14 MR. PAHL: Yes.

15 THE COURT: All right. Thank you.

16 I'd like to sort of start at the end.

17 MS. PEARSON: Sure.

18 THE COURT: The premise that we've been discussing so

19 far is that -- is that you were, in fact -- your client was, in

20 fact, oversecured and was going to get paid the amount of the

21 debt whether the plan was approved or not. Is that premise

22 accurate?

23 MS. PEARSON: I think generally that's correct, Your

24 Honor, but it's not the same thing to get paid in full today as

25 it is to be paid in full a year from now, and it's not the same
 14

 1 thing to be paid in full today as it is to take additional risk

 2 over time.

 3 And Figter recognized that. If you look at the facts

 4 of Figter, what the secured lender in that case was concerned

 5 about was that its lien situation would become more complex;

 6 that instead of having a building where all of its units would

 7 be its collateral, it would be forced to take on collateral

 8 changes, where some of the units would be sold and some of the

 9 units would be rented, and it would have a building where only

10 part of the building was its collateral, which is a much more

11 complex and difficult asset for a lender to deal with.

12 THE COURT: Well, wouldn't that be true of almost

13 every bankruptcy plan, that some lender's position becomes both

14 more complex and perhaps drawn out over a slightly longer

15 period of time than just quick payment?

16 MS. PEARSON: It's true that most bankruptcy plans do

17 provide for the secured lender's position to become more

18 complex in some way, but the bankruptcy code also recognizes,

19 and I think case law also recognizes that it's entirely within

20 a secured lender's prerogative to either agree with those

21 changes and consent to them or to oppose them in its

22 enlightened self-interest as a creditor. So, for example, in

23 Figter, the Ninth Circuit said it was perfectly acceptable for

24 the secured lender in that case not to want to have a more

25 complex lien situation.
 15

 1 In this case, as you may recall from the record,

 2 there was a fight over the interest rate. There's a difference

 3 between being paid at a low interest rate over time and being

 4 paid at a high interest rate over time. You can understand how

 5 it would be in the bank's economic self-interest to have an

 6 interest rate that it thinks is an appropriate recognition of

 7 its risk in lending money, and --

 8 THE COURT: Wouldn't it be the case that there's a

 9 difference between being paid a low interest rate versus a high

10 interest rate but that that difference starts to diminish or

11 disappear if your choices are two: one, a low interest rate

12 over a long period of time versus a high interest rate over a

13 short period of time?

14 MS. PEARSON: But in this case there were facts that

15 made payment over a long period of time more difficult for the

16 lender, and that was specifically --

17 THE COURT: First I'd like you to answer my question.

18 It wasn't rhetorical. I want to make sure I'm tracking you,

19 so --

20 MS. PEARSON: Okay.

21 THE COURT: -- is that correct that you're facing

22 basically two options: a low interest rate over a lengthier

23 period of time -- let's call it a year -- versus a higher

24 interest rate in which you see things brought to payment much

25 more rapidly than a year? Are those the two choices you faced
 16

 1 with regards to interest rates?

 2 MS. PEARSON: No. The choices over interest rates

 3 were that each party had argued that a different interest rate

 4 appropriately recognized the risk that applied in this case for

 5 payment. The secured lender thought that the risk was higher

 6 and a higher interest rate was appropriate. The debtor thought

 7 that a low interest rate -- that this was a less risky

 8 proposition and proposed a lower interest rate. It wasn't

 9 necessarily a choice between low rate over short period of

10 time/high rate over long period of time.

11 THE COURT: That isn't what I said.

12 MS. PEARSON: Okay. I didn't understand your

13 question.

14 THE COURT: I understand how the idea of the lower

15 interest rate came up, and I understand why your client

16 wouldn't like to have its interest rate reduced, and I further

17 understand how that can be a part of what you called

18 enlightened financial self-interest here.

19 What I'm getting at is the plan that would have

20 shoved a lower interest rate down your client's throat would

21 have paid that lower interest rate, made payments on the debt

22 over -- also over a longer period of time than your other

23 choice, which was to defeat the plan and take whatever steps

24 you wanted to take to get collection on your debt at the

25 agreed-upon higher interest rate.
 17

 1 Weren't those your two options: defeat the plan and

 2 get paid faster than the plan contemplated, or agree to the

 3 plan and get paid over a longer period of time at a lower

 4 interest rate? Were those your two choices?

 5 MS. PEARSON: No. Because I think there's an

 6 assumption baked into that that if this plan were not confirmed

 7 that no other acceptable plan could ever have been proposed.

 8 In this situation, if the plan were not confirmed,

 9 the only outcome of that is that the plan was not confirmed.

10 The debtor would be free to propose a plan that we would have

11 thought was acceptable. That wouldn't necessarily have

12 involved foreclosure, that would not necessarily have involved

13 a Chapter 7 plan. It may simply have been that the debtor

14 would have proposed payment terms that the creditor would have

15 liked better.

16 We don't know what would have happened, so we can't

17 say with certainty it was choice A, the plan; or choice B, we

18 stick with our contract interest rate and we get to go

19 foreclose, because those weren't the choices.

20 The choice the bankruptcy judge was making was --

21 THE COURT: Well, as between them, as between those

22 two choices, without the addition of the new proposed plan,

23 doesn't the idea that what you're seeking, among other things,

24 is higher interest rate start to matter less just by

25 comparison? That is, that you're just going to get paid. The
 18

 1 gap between the amount of interest you collect on the debt is

 2 going to be smaller than if the payment period, high interest

 3 versus low interest, were the same. That's fairly obvious,

 4 isn't it? If you get paid a high amount of interest for three

 5 months versus a low amount of interest for 12 months, the

 6 amount you collect in interest is going to be closer than if

 7 both of the options I just gave you are for payment over 12

 8 months.

 9 MS. PEARSON: If both of those things were to happen

10 with certainty, and the math worked out right, I think I would

11 agree with you. But we had some other factors here, and one of

12 the other factors that was very important in trial was that

13 there was tenants in this property whose lease was going to

14 expire, and there was a real question about whether or not that

15 tenant was going to reup on its lease. And that lease was the

16 source of payment over time. So the lender had legitimate

17 concerns that a plan that proposed to pay it over a long period

18 of time, where there was no certainty that the lease would be

19 renewed, was a riskier plan to the lender, not mathematically,

20 in terms of whether short period of interest -- low interest in

21 a short period of time, high interest over a long period of

22 time, but going to the factor of whether those payments were

23 ever going to actually be completely made by the time you got

24 to the end of the longer period of time at all.

25 THE COURT: And that's independent of the value of
 19

 1 the property itself, or is that built into the value of the

 2 property itself? When I'm told that your client was

 3 oversecured, were you oversecured based just on the sale value

 4 of the property itself or is somehow the value of the property

 5 including the idea that it has a high-bidding tenant?

 6 MS. PEARSON: I think that the tenant in place paying

 7 rent is a significant function of the value of the property.

 8 An empty building is not worth as much as a building with a

 9 regularly paying tenant, all other things being equal, two

10 buildings in the same place, and they're constructed

11 identically, they're the same size, the same shape, the same

12 color --

13 THE COURT: I understand that. As an abstract

14 matter, I completely agree. What I'm asking is on this record,

15 on these facts, in terms of the actual security in place here,

16 can you say that you were, in fact, concerned that your

17 position of being oversecured was at risk by the departure of

18 the tenant?

19 MS. PEARSON: I think the bank did believe it -- the

20 lender did believe it had that risk.

21 THE COURT: And do you know if that was expressed to

22 the bankruptcy judge ever on this record or not?

23 MS. PEARSON: There was testimony on record about the

24 concern about the tenant not remaining in place, and I believe

25 it also factored into the interest rate discussion, because I
 20

 1 believe that was one of the reasons that the secured lender

 2 thought that the higher rate was appropriate to reflect that

 3 risk.

 4 THE COURT: All right. So far you've told me a

 5 couple things that you contend were within your client's

 6 enlightened self-interest here. One was not to lose out on a

 7 higher interest rate, and the second was not to lose out

 8 on a -- well, the second was the risk of losing out at the

 9 upcoming expiration of a lease of a paying tenant. And what

10 follows from that is the possibility that it even goes as much

11 as not just affecting cash flow but your secured position with

12 regard to the property. Right?

13 MS. PEARSON: I believe that's correct.

14 THE COURT: At least reduces it, if not --

15 MS. PEARSON: Reduces it. I don't know that I can

16 say eliminate.

17 THE COURT: Do you know if it reduces it to a point

18 where you're no longer what we would call oversecured or not?

19 MS. PEARSON: I don't know, Your Honor.

20 THE COURT: All right. Anything else that you want

21 to contend was part of your client's legitimate financial

22 interest in defeating the plan?

23 MS. PEARSON: The lender did not like the proposed

24 payment terms, payment over such an additional period of time.

25 There was a concern that with the duration of the plan being
 21

 1 contingent upon the risk of the tenant leaving, that the bank's

 2 position would be at risk. Cash was very important to the

 3 bank. Banks are not generally interested in repossessing

 4 property. They would rather have the payment.

 5 We know from the record that the debtor did discovery

 6 and tried to find some other interest that the bank might have

 7 and was unable to find that, unable to put any evidence on the

 8 record about that.

 9 THE COURT: Is it your position that so long as the

10 bank didn't have some interest in play that it was seeking to

11 advance outside the context of the money and property

12 associated with the plan itself, that it couldn't have been

13 acting in bad faith? In other words, it can do pretty much

14 whatever it wants, as long as it's doing something to advance

15 its interest in bankruptcy as opposed to, you know, a personal

16 beef against one of the borrowers or some other business

17 interest it's trying to advance by anticompetitive behavior.

18 As long as that's not what's in play, nothing else is bad

19 faith?

20 MS. PEARSON: I think that you have to have that

21 ulterior motive, that competitive advantage you're seeking, or

22 you have to have outside malice towards the debtor, or you have

23 the goal of driving someone else out of business for your

24 competitive purposes, or an effort to try to maintain control

25 of the debtor, or some ulterior motive you can point to that's
 22

 1 in addition to the lender trying to protect its own claims. If

 2 you don't have that additional ulterior motive under Figter,

 3 it's our view that you do not have bad faith.

 4 THE COURT: So you'd give a different answer than

 5 Mr. Pahl to the hypothetical that says if what you have is a

 6 lender who buys a small amount of the number of shares, just

 7 the amount necessary to have enough votes, leaves a large

 8 percentage of the unsecured creditors outside of the circle of

 9 purchased shares, and does so in a setting where -- somewhat

10 unusual -- the plan itself would likely result in nearly

11 complete payment to nearly all the unsecured creditors, and

12 defeat of the plan means that's unlikely to happen, if you have

13 all of those facts but the bank is, let's say, concerned about

14 the departure of a tenant and anything else that advances its

15 financial interest, that cannot be bad faith, in your view?

16 MS. PEARSON: I do believe that, and I think that

17 comes --

18 THE COURT: Do you feel that the judge here applied

19 the wrong standard then or just got the facts wrong?

20 MS. PEARSON: I think the judge applied the wrong

21 standard because I don't think any of the facts were in

22 dispute. The facts were that the lenders bought 11 of the

23 claims. There were three claims that the lenders didn't buy

24 from two creditors, one of them because it was over budget and

25 there was a concern that that claim had had a close
 23

 1 relationship with the debtor.

 2 THE COURT: Sure. I'm familiar with those sale

 3 facts.

 4 Was the judge aware of the financial interest facts

 5 that we've just discussed with regard to interest rate and the

 6 tenant?

 7 MS. PEARSON: Yes, Your Honor. There was an entire

 8 hearing on the interest rate issues that happened in June.

 9 THE COURT: So all the facts were before the judge,

10 and you believe she had the facts correctly present before her

11 and applied the wrong legal standard?

12 MS. PEARSON: I think that there is no evidence that

13 the lenders in this case had an ulterior motive.

14 THE COURT: Let me ask it a different way, then. Do

15 you think that Pleasant Hill Partners posits a different

16 standard than Figter?

17 MS. PEARSON: I do.

18 THE COURT: And do you think that's the standard the

19 judge applied here or not?

20 MS. PEARSON: I do think the judge applied the

21 Pleasant Hill standard here.

22 THE COURT: So to come back to my original question,

23 do you think the judge applied the wrong legal standard to the

24 correct facts?

25 MS. PEARSON: I do, because what Figter says -- and
 24

 1 this is straight from Figter: "It is always necessary to keep

 2 in mind the difference between a creditor's self-interest as a

 3 creditor and a motive which is ulterior to the purpose of

 4 protecting the creditor's interest."

 5 In other words, there are two boxes: there is the

 6 creditor protecting the creditor's own interest, which the

 7 creditor is allowed to do and the creditor should have

 8 significant latitude to do; and the second box, which is the

 9 creditor acting from an ulterior motive, something that's

10 improper and exterior to the case, like a competitive motive or

11 malice or an effort to take control of the debtor for its own

12 business purposes.

13 THE COURT: All right. With that in mind, I assume

14 you would assert that the standard of review that I apply to

15 what happened in the bankruptcy court is different; that is,

16 the judge had the correct facts and I don't need to worry about

17 finding clear error. Instead, I apply a less deferential

18 standard of review as to whether the judge got the legal

19 standard right. Is that your position?

20 MS. PEARSON: I think we have to go back to the

21 standard of review that's in Figter, because we do recognize

22 that it's binding authority. And I think it starts out with

23 the first concept that you're talking about, which is to the

24 extent that --

25 THE COURT: I don't want you to go where I started
 25

 1 out. I want you to go to where I ended up.

 2 Do you agree that I would apply an essentially de

 3 novo standard of review to the judge's decision about what

 4 legal standard to apply to the otherwise relatively agreed-upon

 5 facts or not?

 6 MS. PEARSON: Yes. It's a de novo review of the

 7 legal standard. It's clear error review of the facts.

 8 THE COURT: All right. Then finally, where in the

 9 record can you point me to to discern -- to learn what

10 standard, what legal standard the judge applied to the facts?

11 MS. PEARSON: Your Honor, in the ruling that the

12 judge cited to Pleasant Hill, and specifically cited to the

13 position that the Court should consider the impact on other

14 creditors -- and I will point you to that in the ruling. And

15 that is in the excerpt of record from pages 469 to 473 in the

16 course of her ruling, and I've quoted it on page 19 of our

17 brief. 

18 "Good faith does not require a creditor to act with

19 selfless disinterest. And the fact that a creditor purchases

20 claims to take a blocking position is not, per se, bad faith

21 under 1129 - 1126(e). However, a creditor's conduct in

22 furtherance of its own interest should not result in an unfair

23 disadvantage to other creditors. In re Pleasant Hill Partners,

24 LE," and goes on to give the cite.

25 THE COURT: And your view is that is simply an
 26

 1 incorrect statement of the law, right?

 2 MS. PEARSON: That is correct.

 3 THE COURT: Thank you. Did I miss anything regarding

 4 that?

 5 MS. PEARSON: Not at this point, Your Honor.

 6 THE COURT: And I guess if you win on designation on

 7 reclassifying, you simply rely on your brief for the argument

 8 that you can't use a dragnet clause like this for debts

 9 acquired after bankruptcy is filed, right?

10 MS. PEARSON: That is correct. And the Fifth Circuit

11 has spoken on that, both before and after the bankruptcy code

12 was adopted. I think the rule stated, and the Fifth Circuit is

13 correct, which is that the nature of the claim is based on what

14 it was at the time that the case was filed. Otherwise, an

15 oversecured lender would simply go out and check favorable

16 terms, could go out and buy a bunch of unsecured claims and

17 turn them into secured claims.

18 THE COURT: All right. Thank you.

19 MS. PEARSON: And that would defeat the purpose of

20 the bankruptcy code.

21 THE COURT: Thank you.

22 Mr. Pahl, I really just have two questions. One is

23 Ms. Pearson suggests that really the facts that you all argue

24 were all present before the bankruptcy judge; she didn't miss

25 any of the important facts we're discussing today.
 27

 1 MR. PAHL: And I guess I would supplement a little

 2 bit. We're not here to talk about the interest rate issue, but

 3 the judge did take testimony from the debtor's expert, as well

 4 as the lender's expert, and applied the controlling authority

 5 at least in this district, the U.S. Supreme Court case of Till,

 6 which basically sets a prime plus risk factor.

 7 THE COURT: I'm not so much concerned about that as

 8 to just whether -- so today appellant advances fundamentally

 9 two reasons -- there are sort of sub-reasons that flow from

10 that, but two reasons why the lender was acting in its own

11 legitimate financial self-interest in what it did. One is that

12 it legitimately sought to defeat imposition of a lower interest

13 rate, and two is that it had concerns about the upcoming

14 possible loss of a tenant as it related to both cash flow and

15 security.

16 So just as to whether those facts were before the

17 bankruptcy court, do you agree?

18 MR. PAHL: I do agree, although there wasn't -- the

19 existing loan with the lender, between the lender and the

20 debtor had expired. So -- and the interest rate approved by

21 the bankruptcy court, as well as the interest rate proposed by

22 the debtor, I believe, was equivalent to the existing loan rate

23 on the expired loan. And the loan interest rate approved by

24 the bankruptcy court was a point and a quarter higher.

25 THE COURT: All right.
 28

 1 MR. PAHL: So there wasn't an option for higher

 2 interest rate except on a different evidentiary finding by the

 3 court.

 4 THE COURT: And then on that same point, Ms. Pearson

 5 has told me that she can't be certain whether the possible loss

 6 of the tenant would have affected not just cash flow but the

 7 lender's position of being fundamentally oversecured or not.

 8 Do you know if it would have dropped the value

 9 significantly enough to result in the lender being less than

10 fully secured?

11 MR. PAHL: I don't think we have facts about that.

12 THE COURT: It seems like it's too speculative to

13 know.

14 MR. PAHL: It's speculative. And the court heard

15 evidence about the likelihood of the tenant renewing and

16 renewing a second option to renew.

17 THE COURT: All right. So we have fundamentally

18 agreed-upon facts, and so the core of your opponent's

19 argument -- or really the whole thing is that the judge applied

20 the wrong legal standard.

21 MR. PAHL: I understand that.

22 THE COURT: Because if it's legitimate -- I'm going

23 to turn to page 19 of your opponent's brief again.

24 (Loudspeaker announcement.) 

25 MS. PEARSON: It got our attention.
 29

 1 THE COURT: If it's legitimate expression, to quote

 2 from Pleasant Hill Partners, to take into account whether the

 3 creditor's conduct results in an unfair advantage or

 4 disadvantage to the other creditors, then I guess my view would

 5 be that if that's the correct legal standard on these facts,

 6 then the judge is entitled to clear error review, and I would

 7 not find clear error.

 8 So your core argument against you is that that's

 9 actually an incorrect statement of the legal standard and that

10 it's stricter under Figter. What's your response to that?

11 MR. PAHL: Well, I don't believe that the Ninth

12 Circuit in Figter would have talked about the fact that the

13 lender in Figter had offered the same terms to every creditor,

14 and the actions of the lender in purchasing the claims would

15 not result in an unfair advantage or prejudice to the -- to

16 unsecured creditors, even though it may. And I think that's

17 part of the Figter decision. I'm not sure why the Court would

18 go through that discussion when it actually gets to the point

19 in the case where it's applying the test. It's reviewing

20 exactly what the bankruptcy court below had done. 

21 And the second factor it lists -- it discussed was

22 the equality, the equity in how the lender believed Teachers or

23 TIAA approached its acquisition of claims. And I think it read

24 a lot into that. That's good faith. Is the opposite of that

25 bad faith?
 30

 1 I think you back up a couple paragraphs in Figter and

 2 you look at the fact that this is a really fluid concept and

 3 it's based heavily on the experience and knowledge, the

 4 presence of the bankruptcy court when the evidence is coming

 5 in.

 6 THE COURT: I have Figter in front of me, so when I

 7 back up a couple paragraphs, where am I?

 8 MR. PAHL: Sorry. Let me go to Figter. I'm looking

 9 at the paragraph that starts with the word "Here."

10 "Here the bankruptcy court did exactly that."

11 THE COURT: Give me a little bit more to go on to

12 find where you are.

13 MR. PAHL: I'm sorry.

14 THE COURT: The discussion sub A, good faith, where

15 are you in relation to that?

16 MS. PEARSON: It's in subparagraph A right before --

17 two paragraphs before subparagraph B, Your Honor, the top of

18 page 640.

19 THE COURT: Thank you. I'm there.

20 MR. PAHL: Good. So actually the prior paragraph is,

21 "In short, the concept of good faith is a fluid one, and no

22 single factor can be said to inexorably demand an ultimate

23 result, nor must a single set of factors be considered," going

24 through and basically talking about the importance of the

25 judgment of the bankruptcy court in assessing this. 
 31

 1 And then it talks about, "Here, the bankruptcy court

 2 did exactly that." And it talks about nor did Teachers seek to

 3 purchase a small number of claims for the purpose of blocking

 4 Figter's plan while injuring other creditors, even though it

 5 could do that in some circumstances. "Rather, Teachers offered

 6 to purchase all Class 3 claims, and only some of those

 7 claimants' refusals to sell precluded it from doing so," so a

 8 discussion that does not match with a bright-line ulterior

 9 motive standard of -- legal standard.

10 So I think the court looking at this, looking at the

11 Pleasant Hill case, came to view the ulterior motive standard

12 as not just a bright line but as one aspect of determining good

13 faith.

14 On the question of whether this is a legal standard

15 of review, a mixed question of law and fact, and what the

16 standard of review should be, the Figter court went through

17 that in detail as well and recognized that part of a good faith

18 determination are questions of law to be reviewed on appeal

19 de novo, and some are questions of fact. And often it's a

20 mixed question of law and fact that the Court was very clear in

21 the instruction that it is to be reviewed for clear error.

22 THE COURT: What is to be reviewed for clear error?

23 MR. PAHL: The good faith determination.

24 THE COURT: Does that include separating out the

25 legal standard? You contend that if the legal standard is the
 32

 1 real issue in play, that I should review whether it was the

 2 correct legal standard for clear error?

 3 MR. PAHL: Well, I think the judge did apply the

 4 correct legal standard.

 5 THE COURT: I know that. Otherwise, you wouldn't be

 6 here.

 7 MR. PAHL: Right.

 8 THE COURT: But if she didn't, then do I apply that

 9 decision, the standard of review of clear error?

10 MR. PAHL: If the Court is of the view that the

11 bankruptcy court applied the wrong legal standard, I do think

12 that's a de novo issue.

13 THE COURT: Do you believe that defining what in the

14 abstract does or does not constitute bad faith or ulterior

15 motive is a question of law?

16 MR. PAHL: I think it's a mixed question of law and

17 fact.

18 THE COURT: What are the facts that are mixed into

19 that question?

20 MR. PAHL: I think the circumstances in the case, in

21 particular, were very influential to the court, the fact

22 that --

23 THE COURT: The facts of the case are always

24 influential when one applies a legal test. That's the next

25 thing is you figure out what the legal test is and then you
 33

 1 apply it to the facts. But isn't there at some point even in a

 2 case like this a predicate legal test that has to be applied?

 3 MR. PAHL: I do think there is one. And, again,

 4 that's a basic good faith test, and if the court got it

 5 horribly wrong --

 6 THE COURT: Why do you have to get it horribly wrong?

 7 Why can't you just get the legal test wrong?

 8 MR. PAHL: Well, I do think it's difficult here

 9 because it is essentially a mixed question of law and fact.

10 There are legal standards that apply, but those come to life as

11 you apply the facts to them, and given the mixed nature of it,

12 I think the Figter court was clear in saying in this general

13 area, we're going to apply clear error standard because the

14 facts are so intertwined with the application of the legal

15 standard.

16 THE COURT: Thank you.

17 I'll take a brief break and come back.

18 THE CLERK: This court is in recess.

19 (A recess is then taken.) 

20 THE COURT: Thank you for your patience in waiting.

21 I'm going to do three things. I'm going to tell you the

22 answers so there's no confusion about it, and I'm going to

23 explain my answer in two parts, and there will not be a written

24 opinion following this.

25 First I'm going to explain what I think is -- what
 34

 1 I'd call the pristine analysis of this case, the analysis that

 2 most closely tracks the sort of a typical application of a

 3 legal standard, factual findings and the application of facts

 4 to those findings. I'm going to say that if that's what

 5 happened, if that were, in fact, the correct way to approach a

 6 case like this, then I would find that the judge here applied

 7 the wrong legal standard and relied or emphasized what should

 8 be viewed as irrelevant facts and committed error.

 9 But what I'm going to say at the end then is that in

10 my reading of Figter and the standard of review suggests that

11 these cases present an unusual situation, where that sort of

12 pristine, clear-cut analysis of abstract legal standard factual

13 findings and applying the facts to the standard isn't the

14 correct way to approach these kind of cases per the Ninth

15 Circuit in Figter. And that has persuaded me that I need to

16 take a more -- almost gestalt-ish approach to this case and

17 apply only the clear error standard to the overall reasoning of

18 the judge and affirm.

19 So, first, as I said, the result here is that I do

20 not find it was error in granting the motion to designate, and

21 therefore I will affirm. That requires me not to have to reach

22 the second issue briefed by the parties and only briefly

23 discussed here today.

24 Here's what I think would be the normal way to look

25 at this case. You'd say that there is a definition out there
 35

 1 of what is bad faith, and that it -- once you're done applying

 2 a lot of things that fold into that analysis, you do, I think,

 3 eventually get to the point where so long as a lender is acting

 4 in pursuit of its legitimate financial interests in the

 5 bankruptcy proceedings, the consequences on other creditors

 6 becomes irrelevant, and that is sort of how we start out

 7 looking at bad faith. We look at -- a lot of other things

 8 could matter, but they only really start to matter when the

 9 creditor -- the lender here is seeking something beyond its

10 legitimate financial interests in the bankruptcy proceeding.

11 And I would say that the application of outside

12 circuit law, particularly Pleasant Hill Partners, represents a

13 slight, at least, deviation from that abstract test that one

14 would apply across all these cases.

15 And I further say that the lender here, both today

16 and in bankruptcy court, posited legitimate financial interests

17 that it was entitled to seek to preserve or advance in the

18 bankruptcy proceeding, specifically rejecting a lower interest

19 rate, preserving an important cash flow, and preserving the

20 impact of that cash flow on the security position it had in the

21 property.

22 And so here, the bankruptcy court clearly placed

23 heavy reliance on the impact that defeating the plan -- buying

24 the votes and defeating the plan would have on the unsecured

25 creditors, and probably did so because of a pretty unusual
 36

 1 fact -- not unheard of, but a pretty unusual fact, which is

 2 that she saw this as a risk of the case going from complete

 3 100 percent payment to unsecured creditors to potentially many

 4 unsecured creditors getting nothing.

 5 However, in Figter, the Ninth Circuit was clear to

 6 explain that this sort of classical and pristine view of the

 7 three-part analysis -- figure out what the abstract test is,

 8 figure out what the facts are, apply the facts to the test --

 9 isn't really what's going on in these sorts of cases, and

10 that's why it makes clear to district courts that they ought to

11 keep in mind that whether someone acted in good faith is

12 essentially a factual inquiry that is driven by, quote, the

13 data of practical human experience, close quote. It's

14 ultimately reviewed for clear error.

15 So, in my view here, what I take from that is that

16 this abstract definition is not intended to set hard -- a hard

17 perimeter around the bad faith definition, but it's subject to

18 further analysis by the bankruptcy courts and the data of human

19 experience that they take a harder look at that themselves as

20 cases develop, and that I shouldn't be using the de novo legal

21 review standard here to strictly enforce an abstract legal

22 definition of bad faith when the inquiry is such a practical

23 one.

24 Further, that here the bankruptcy judge did have an

25 unusual fact to take into account not found in the existing
 37

 1 precedent, this idea of nearly full payment, and that in the

 2 mix of things, taking that fact into account, taking into

 3 account a somewhat flexible definition of what bad faith is or

 4 isn't, reading the language in Figter that at least defines

 5 good faith in terms of taking care of competing creditors to

 6 some degree in purchasing shares, all of that mixed into a

 7 whole, I don't find to be clear error.

 8 I'll say candidly that I'm not fond of the analysis

 9 set out, in my view, in Figter. I think it upends the

10 longstanding understanding of what de novo review means when

11 it's applied to the abstract legal definition, but I can't

12 figure out how to apply Figter the way I would apply it without

13 essentially overruling it, which, of course, I'm not at liberty

14 to do. Therefore, I affirm the decision of the bankruptcy

15 judge below.

16 Thank you all. We'll be in recess.

17 MS. PEARSON: Thank you.

18 THE CLERK: This court is adjourned.

19 (Proceedings concluded.)

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 1 

 2 --o0o-- 

 3 

 4 I certify, by signing below, that the foregoing is a

 5 correct transcript of the record of proceedings in the

 6 above-entitled cause. A transcript without an original

 7 signature or conformed signature is not certified.

 8 

 9 

/s/Bonita J. Shumway 5/5/2016

10 ________________________________ _________________

BONITA J. SHUMWAY, CSR, RMR, CRR DATE

11 Official Court Reporter

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