70068416.2 

United States District Court Case No. 3:15-cv-01792-MO 

United States Bankruptcy Court Case No. 14-34642-tmb11 

_________________________________________ 

IN THE UNITED STATES DISTRICT COURT 

FOR THE DISTRICT OF OREGON 

________________________________________ 

In re FAGERDALA USA – LOMPOC, INC., Debtor 

____________ 

PACIFIC WESTERN BANK and COASTLINE RE HOLDINGS CORP., 

Appellants, 

v. 

FAGERDALA USA – LOMPOC, INC., Appellee 

_________________________________________ 

Appeal from the Order Granting Motion to Designate Votes, Entered on 

September 9, 2015, and the Order Confirming Fourth Amended Plan of 

Reorganization, Entered on September 14, 2015, in the 

United States Bankruptcy Court for the District of Oregon 

Honorable Trish M. Brown 

United States Bankruptcy Judge 

_________________________________________ 

APPELLANTS’ OPENING BRIEF 

_________________________________________ 

Teresa H. Pearson, OSB No. 953750 

teresa.pearson@millernash.com 

David W. Hercher, OSB No. 812639 

david.hercher@millernash.com 

Miller Nash Graham & Dunn LLP 

111 S.W. Fifth Avenue, Suite 3400 

Portland, Oregon 97204 

(503) 224-5858 

David K. Eldan, admitted Pro Hac Vice 

deldan@pmcos.com 

Parker, Milliken, Clark, O’Hara & 

Samuelian 

555 S. Flower Street 

Los Angeles, California 90071-2440 

(213) 683-6500 

Attorneys for Appellants Pacific Western Bank and Coastline RE Holdings Corp.
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CORPORATE DISCLOSURE STATEMENT 

In accordance with Fed. R. Bankr. P. 8012(a), appellants, Pacific 

Western Bank and Coastline RE Holdings Corp., make the following disclosures: 

1. Coastline RE Holdings Corp. is wholly owned by Pacific 

Western Bank. 

2. Pacific Western Bank is wholly owned by PacWest Bancorp. 

3. PacWest Bancorp is a publicly-held company
TABLE OF CONTENTS

Page

 -iI. STATEMENT OF BASIS FOR SUBJECT MATTER AND 

APPELLATE JURISDICTION ...................................................................... 1 

A. Bankruptcy Court Jurisdiction ............................................................. 1 

B. District Court Jurisdiction .................................................................... 1 

C. Timeliness of the Appeal ...................................................................... 1 

D. The Orders Appealed are Final ............................................................ 2 

E. The Appeal is Not Equitably Moot ...................................................... 2 

II. ISSUES PRESENTED AND APPLICABLE STANDARD OF 

REVIEW ......................................................................................................... 5 

III. STATEMENT OF THE CASE ...................................................................... 9 

A. Debtor-Appellee’s Bankruptcy Filing and Initial Plans of 

Reorganization ...................................................................................... 9 

B. Lender-Appellants’ Purchase of General Unsecured Claims ............ 10 

C. Debtor-Appellee’s Second Amended Plan and Balloting .................. 12 

D. Debtor-Appellee’s Motion to Designate and the Initial Hearing 

on Plan Confirmation ......................................................................... 13 

E. Debtor-Appellee’s Third Amended Plan ........................................... 14 

F. The Continued Confirmation Hearing ............................................... 14 

G. The Bankruptcy Court’s Ruling ......................................................... 17 

H. Entry of the Final Orders .................................................................... 21 

IV. SUMMARY OF THE ARGUMENT ........................................................... 21 

V. ARGUMENT ................................................................................................ 22 

A. The Bankruptcy Court Erred When it Permitted DebtorAppellee to Gerrymander and Reclassify the Unsecured Claims 

Purchased by Lender-Appellants ....................................................... 22 

1. Substantially similar claims must be classified together ......... 22 

2. Claims cannot be gerrymandered into different classes 

just to obtain consent to a chapter 11 plan ............................... 24 
TABLE OF CONTENTS

(continued) 

Page

 -ii3. The authority cited by Debtor-Appellee did not support 

reclassification and gerrymandering ........................................ 25 

B. The Bankruptcy Court Erred in Designating and Disqualifying 

Lender-Appellants Votes Against the Plan ........................................ 27 

1. The legal parameters for determining good faith .................... 28 

2. The Bankruptcy Court’s decision was induced by an 

erroneous view of the law ........................................................ 29 

3. There is no legal requirement that Lender-Appellants 

offer to purchase all of the claims ............................................ 30 

4. There is no legal requirement that a creditor purchasing 

claims act to avoid harm to other creditors .............................. 33 

5. The record contains no evidentiary support to justify a 

finding that Lender-Appellants did not act in good faith ........ 34 

a. Lender-Appellants were not competitors seeking 

an unfair advantage over the Debtor-Appellee’s 

business .......................................................................... 34 

b. Lender-Appellants were not a proponent of an 

alternate plan .................................................................. 35 

c. Lender-Appellants were not seeking to harm other 

creditors ......................................................................... 35 

d. There was no legal or factual basis for the 

Bankruptcy Court to conclude that if the plan were 

not confirmed, the unsecured creditors would be 

unfairly prejudiced ......................................................... 36 

VI. CONCLUSION ............................................................................................. 38 
 -iTABLE OF AUTHORITIES 

Cases 

255 Park Plaza Assocs. Ltd. P’ship v. v. Connecticut Gen. Life Ins. Co. 

(In re 255 Park Plaza Associates Ltd. P’Ship), 

100 F.3d 1214 (6th Cir. 1996) ............................................................................ 31 

Anderson v. City of Bessemer City, North Carolina, 

470 U.S. 564, 105 S.Ct. 1504 (1985) .................................................................... 7 

Barakat v. Life Ins. Co. of Va. (In re Barakat), 

99 F.3d 1520 (9th Cir. 1996) .............................................................. 6, 23, 25, 26 

Bullard v. Blue Hills Bank, 

___ U.S. ___, 135 S.Ct. 1686 (2015) .................................................................. 37 

Century Glove, Inc. v. First Am. Bank of New York, 

860 F.2d 94 (3d Cir. 1988) ................................................................................... 2 

CW Capital Asset Mgmt., LLC v. Burcam Capital II, LLC, 

2014 WL 2864678 (E.D.N.C. June 24, 2014) 

 ................................................................................................................. 25, 26, 27 

Dish Network Corp v. DBSD North Am., Inc. (In re DBSD North Am., Inc.), 

634 F.3d 79 (2d Cir. 2011) ................................................................................... 2 

Drummond v. Welsh (In re Welsh), 

711 F.3d 1120 (9th Cir. 2013) .............................................................................. 8 

Figter Ltd. v. Teachers Ins. & Annuity Assoc. of Am. (In re Figter Ltd.), 

118 F.3d 635 (9th Cir. 1997) ......................... 8, 15, 27, 28, 29, 30, 31, 32, 33, 34 

Goeb v. Heid (In re Goeb), 

675 F.2d 1386 (9th Cir. 1982) .................................................................. 8, 29, 30 

Grasslawn Lodging, LLC v. Transwest Resort Props. Inc. 

(In re Transwest Resort Props., Inc.), 

801 F.3d 1161 (9th Cir. 2015) .......................................................................... 3, 4 

Hedlund v. Educ. Res. Inst. Inc., 

718 F.3d 848 (9th Cir. 2013) .............................................................. 9, 27, 28, 30 
 -iiIn re Loop 76, LLC, 

465 B.R. 525 (9th Cir. B.A.P. 2012) ............................................................ 25, 26 

In re Marin Town Center, 

142 B.R. 374 (Bankr. N.D. Cal. 1992) ............................................................... 32 

Meyer v. Lepe (In re Lepe), 

470 B.R. 851 (9th Cir. B.A.P. 2012) .................................................................... 8 

In re Monticello Realty Investments, LLC, 

526 B.R. 902 (Bankr. M.D. Fla. 2015) ............................................................... 33 

Pizza of Hawaii, Inc. v. Shakey’s Inc. (In re Pizza of Hawaii), 

761 F.2d 1374 (9th Cir. 1985) .............................................................................. 2 

In re Pleasant Hill Partners, L.P., 

163 B.R. 388 (Bankr. N.D. Ga. 1994) .................................................... 31, 36, 37 

Principal Mut. Life Ins. Co. v. Lakeside Assocs. (In re DeLuca), 

194 B.R. 797 (Bankr. E.D. Va. 1996) ................................................................. 31 

Slottow v. American Cas. Co. of Reading, Pennsylvania, 

10 F.3d 1355 (9th Cir. 1993) ................................................................................ 7 

Steelcase Inc. v. Johnston (In re Johnston), 

21 F.3d 3232 (9th Cir. 1994) .............................................................................. 23 

Wall Street Plaza, LLC v. JSJF Corp. (In re JSJF Corp.), 

344 B.R. 94 (9th Cir. B.A.P. 2006), aff’d 277 Fed. Appx. 718 

(9th Cir. 2008) .................................................................................................. 7, 29 

Statutes 

11 U.S.C. § 363(c)(2)(A) ........................................................................................... 4 

11 U.S.C. § 507(a)(8) ............................................................................................... 12 

11 U.S.C. § 1126 ........................................................................................................ 1 

11 U.S.C. §1126(c) .................................................................................................... 9 

11 U.S.C. § 1129 ........................................................................................................ 1 
 -iii11 U.S.C. § 1129(a)(10) ............................................................................................. 9 

11 U.S.C. § 1129(b)(2)(A) ....................................................................................... 24 

28 U.S.C. §157(a) ...................................................................................................... 1 

28 U.S.C. § 157(b)(2)................................................................................................. 1 

28 U.S.C. § 158(a)(1) ................................................................................................. 1 

28 U.S.C. § 1334 ........................................................................................................ 1 

Other Authorities 

Fed. R. Bankr. P. 8002(a) .......................................................................................... 1 
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I. STATEMENT OF BASIS FOR SUBJECT MATTER AND 

APPELLATE JURISDICTION 

A. Bankruptcy Court Jurisdiction. 

The Bankruptcy Court for the District of Oregon (the “Bankruptcy 

Court”) had jurisdiction over this matter pursuant to 28 U.S.C. §§157(a) and 1334. 

The matters in controversy arose under 11 U.S.C. §§ 1126 and 1129 and are core 

proceedings as defined in 28 U.S.C. § 157(b)(2). 

B. District Court Jurisdiction. 

This Court has jurisdiction pursuant to 28 U.S.C. § 158(a)(1). 

C. Timeliness of the Appeal. 

The Bankruptcy Court entered its Order Granting Motion to Designate 

Votes (the “Designation Order”) on September 9, 2015, and it entered its Order 

Confirming Fourth Amended Plan of Reorganization (the “Confirmation Order”), 

on September 14, 2015. Excerpt, pp. 498-536. Pacific Western Bank and 

Coastline RE Holdings Corp. (“Lender-Appellants”) filed their Notice of Appeal 

on September 22, 2015, which was within 14 days of the date of entry of the 

Designation Order and the Confirmation Order, as required by Fed. R. Bankr. P. 

8002(a). Excerpt, pp. 537-80. 
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D. The Orders Appealed Are Final. 

The Confirmation Order is a final order. An order confirming a 

chapter 11 plan is a final appealable order. Pizza of Hawaii, Inc. v. Shakey’s Inc. 

(In re Pizza of Hawaii), 761 F.2d 1374, 1378 (9th Cir. 1985). 

The Designation Order is a final appealable order because voting has 

occurred and the bankruptcy plan filed by Fagerdala USA - Lompoc, Inc. 

(“Debtor-Appellee”) was confirmed in the Confirmation Order based on the 

holding in the Designation Order. Compare Century Glove, Inc. v. First Am. Bank 

of New York, 860 F.2d 94, 99 (3d Cir. 1988) (holding order of designation not 

reviewable prior to classification and voting by creditors) with Dish Network 

Corp v. DBSD North Am., Inc. (In re DBSD North Am., Inc.), 634 F.3d 79, 101-06 

(2d Cir. 2011) (reviewing order designating votes after plan confirmed by 

bankruptcy court); Excerpt, p. 477. 

E. The Appeal is Not Equitably Moot. 

The Ninth Circuit Court of Appeals applies the following test to 

determine whether an appeal is equitably moot: 

We will look first at whether a stay was sought, for absent that a party 

has not fully pursued its rights. If a stay was sought and not gained, 

we then will look to whether substantial consummation of the plan has 

occurred. Next, we will look to the effect a remedy may have on third 

parties not before the court. Finally, we will look at whether the 

bankruptcy court can fashion effective and equitable relief without 

completely knocking the props out from under the plan and thereby 

creating an uncontrollable situation for the bankruptcy court. 
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JPMCC 2007-1 Grasslawn Lodging, LLC v. Transwest Resort Props. Inc. (In re 

Transwest Resort Props., Inc.), 801 F.3d 1161, 1167-68 (9th Cir. 2015), quoting 

Motor Vehicle Cas. Co. v. Thorpe Insulation Co. (In re Thorpe Insulation Co.), 

677 F.3d 869, 881 (9th Cir. 2012). This appeal is not equitably moot because 

Lender-Appellants have diligently pursued their rights, and this Court can fashion 

effective and equitable relief without effect on third parties. 

The first factor, whether the appellant sought a stay pending appeal, is 

particularly important. An appellant’s diligence in seeking a stay “cuts strongly in 

favor of appellate review” of an appellant’s claims. Transwest, 801 F.3d at 1168. 

After filing the notice of appeal in this case, Lender-Appellants promptly filed their 

motion for stay pending appeal with the Bankruptcy Court. Excerpt, pp. 581-95. 

The Bankruptcy Court denied that motion. Excerpt, pp. 596-97, 611-12. LenderAppellants then promptly filed a motion for stay pending appeal with this Court. 

Excerpt, pp. 598-610. That motion was also denied. Excerpt, pp. 620. 

With respect to the second factor, Lender-Appellants acknowledge 

that the plan has been substantially consummated. However, this single factor is 

not dispositive, and the Court must consider the other factors. Transwest, 801 F.3d 

at 1168. 

Consideration of this appeal will not “unduly bear on innocent third 

parties.” Transwest, 801 F.3d at 1169. To start with, there are not very many third 
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parties involved in this case. As set forth in more detail in the factual section 

below, Lender-Appellants bought and currently own most of the unsecured claims. 

Lender-Appellants attempted to buy another six claims, collectively totaling the de 

minimis amount of $1,398.07, from other creditors who either did not respond or 

refused to sell their claims. Beyond that, there were only three other third-party 

creditors (a collection agency called The Credit Bureau of San Luis Obispo and 

Santa Barbara Counties (the “Credit Bureau”), the California Franchise Tax Board, 

and Lee & Associates).1

 

Since plan confirmation, Debtor-Appellee has paid all of the general 

unsecured and priority claims of non-insiders, including the few claims not held by 

Lender-Appellants, in full. Although those claims were paid from LenderAppellants’ cash collateral, in the event this Court reverses the Bankruptcy Court, 

Lender-Appellants agree that they will not seek disgorgement of those funds from 

the non-insider unsecured and priority creditors.2

Under these facts, it is entirely possible for the bankruptcy court “to 

fashion equitable relief without completely undoing the plan.” Transwest, 

 

1 The remaining creditor, Maxwell Morgan, LLC, is an insider of the DebtorAppellee and was not entitled to vote on the plan. Excerpt, pp. 217, 296. 

Although there were a few other precautionary claims, they were owed no money. 

The Internal Revenue Service amended its claim to show that no money was owed. 

Excerpt, p. 85. 

2 Pursuant to 11 U.S.C. § 363(c)(2)(A), a debtor in possession can use cash 

collateral with the consent of its secured lender. 
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801 F.3d at 1171. Although confirmation of the existing confirmed plan itself 

would be reversed, the non-insider unsecured creditors would still keep the benefit 

of the payments in full they have received under that plan. The bankruptcy case 

would essentially become a two party dispute between Lender-Appellants, on one 

hand, and Debtor-Appellee and its insider Maxwell Morgan, LLC, on the other 

hand. The remaining two-party issues would not create an uncontrollable situation 

for the Bankruptcy Court. 

II. ISSUES PRESENTED AND APPLICABLE STANDARD OF REVIEW 

In this case, Debtor-Appellee initially proposed a plan of 

reorganization that classified all of its general unsecured claims into a single class. 

Lender-Appellants purchased 11 general unsecured claims and voted those claims 

against the Debtor-Appellee’s proposed plan. Only two general unsecured 

creditors voted for Debtor-Appellee’s plan. 

After the balloting was complete, Debtor-Appellee filed an amended 

plan that reclassified the 11 claims voting against the plan into a new class, leaving 

the two creditors voting for the plan and the non-voting creditors in the original 

class. The amended plan treated the new class of claims identically to the original 

class of claims. Debtor-Appellee also filed a motion to designate (i.e. disqualify) 

the votes of Lender-Appellants as not having been made in good faith. 
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The Bankruptcy Court entered the Designation Order, designating and 

disregarding the votes on the general unsecured claims that Lender-Appellants 

purchased. The Bankruptcy Court also entered the Confirmation Order, 

confirming the amended plan that separately classified the general unsecured 

claims owned by Lender-Appellants from the other general unsecured claims. 

This appeal presents the following issues: 

(1) Did the Bankruptcy Court err when it permitted the DebtorAppellee to gerrymander and reclassify the claims that LenderAppellants purchased? 

(2) Did the Bankruptcy Court err when it designated the votes on 

claims Lender-Appellants purchased? 

With respect to the first issue, a “bankruptcy court’s finding that a 

claim is or is not substantially similar to other claims, constitutes a finding of fact 

reviewable under the clearly erroneous standard.” Barakat v. Life Ins. Co. of Va. 

(In re Barakat), 99 F.3d 1520, 1523 (9th Cir. 1996), citing Steelcase Inc. v. 

Johnston (In re Johnston), 21 F.3d 3232, 327 (9th Cir. 1994). However, 

determination of the legal limitations on classification of claims is reviewed de 

novo. Barakat, 99 F.3d at 1523. As a matter of law, similar claims cannot be 

classified differently in order to gerrymander an affirmative vote on a 

reorganization plan, nor can similar claims be classified separately absent a 

legitimate business or economic reason. Barakat, 99 F.3d at 1525-26. 
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In reviewing a finding of fact for clear error, an appellate court may 

reverse if it is “left with the definite and firm conviction that a mistake has been 

committed.” Anderson v. City of Bessemer City, North Carolina, 470 U.S. 564, 

573, 105 S.Ct. 1504, 1511 (1985), quoting United States v. United States Gypsum 

Co., 333 U.S. 364, 395, 68 S.Ct. 525, 542 (1948). An appellate court “may regard 

a finding of fact as clearly erroneous not only if it is without adequate evidentiary 

support, but also if it was induced by an erroneous view of the law.” Wall Street 

Plaza, LLC v. JSJF Corp. (In re JSJF Corp.), 344 B.R. 94, 99 (9th Cir. B.A.P. 

2006), aff’d 277 Fed. Appx. 718 (9th Cir. 2008), quoting Power v. Union Pac. R.R. 

Co., 655 F.2d 1380, 1382-83 (9th Cir. 1981) (citations omitted); see Slottow v. 

American Cas. Co. of Reading, Pennsylvania, 10 F.3d 1355, 1359 (9th Cir. 1993) 

(applying this standard to a district court’s ruling as to good faith). 

With respect to the second issue, this Court must review the 

Bankruptcy Court’s decision to designate for clear error. The Ninth Circuit Court 

of Appeals has set forth the following standard of review on appeal: 

“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. But, a 

determination of good faith can partake of both, and we often review 

mixed questions of law and fact de novo. Nevertheless, a decision 

that someone did or did not act in good faith is one where the 

determination is ‘an essentially factual inquiry’ and is driven by the 

‘data of practical human experience.’ For that reason, we have, in 

various contexts, declared that we will review good faith 
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determinations for clear error. Therefore, we will review the 

bankruptcy court’s ultimate good faith determination for clear error.” 

Figter Ltd. v. Teachers Ins. & Annuity Assoc. of Am. (In re Figter Ltd.), 118 F.3d 

635, 638 (9th Cir. 1997). 

A finding of good faith requires the bankruptcy court to consider “all 

of the militating factors” and to conduct a “quite broad” inquiry. Goeb v. Heid (In 

re Goeb), 675 F.2d 1386, 1390 (9th Cir. 1982) (superseded by statute on other 

grounds); Drummond v. Welsh (In re Welsh), 711 F.3d 1120, 1127-32 (9th Cir. 

2013) (recognizing continued vitality of Goeb, except where Congress has enacted 

specific limitations on good faith inquiry). No single factor can be dispositive of 

the ultimate result, nor may the court consider only a single set of factors. Figter, 

118 F.3d at 639-40. A bankruptcy court commits clear error when, instead of 

conducting a broad-ranging inquiry, the bankruptcy court relies exclusively on one 

or two factors to find bad faith. Goeb, 675 F.2d at 1391; Meyer v. Lepe (In re 

Lepe), 470 B.R. 851, 856-57 (9th Cir. B.A.P. 2012) (“In short, Goeb established 

that, in this circuit, a good faith determination in connection with chapter 13 plan 

confirmation cannot be based on any single factor or feature of a proposed plan, to 

the exclusion of review of all other relevant information. Importantly, it is of no 

moment that a single factor may be indicative of bad faith, . . . . Factors indicating 

good and bad faith may not be considered in isolation, but must always be weighed 

against the totality of the circumstances in each case.”) 
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This court is not precluded from reviewing errors of law that arise in a 

good faith analysis. If a bankruptcy court fails to consider all the factors relevant 

to good faith, that is an issue of law that must be reviewed de novo. Hedlund v. 

Educ. Res. Inst. Inc., 718 F.3d 848, 854 (9th Cir. 2013). 

III. STATEMENT OF THE CASE 

A. Debtor-Appellee’s Bankruptcy Filing and Initial Plans of Reorganization 

On August 14, 2014, Debtor filed a voluntary petition under Chapter 

11. Excerpt, pp. 1-11. Lender-Appellants are the primary secured creditor in the 

Debtor-Appellee’s bankruptcy case. Lender-Appellants hold a secured claim in 

excess of $4 million. 

On November 14, 2014, Debtor-Appellee filed a plan of 

reorganization, and on April 27, 2015, Debtor-Appellee filed a first amended plan 

of reorganization. Excerpt, pp. 52-84, 88-122. Both the original and the first 

amended plan provided for separate classes of creditors. The Lender-Appellants’ 

secured claim was in one class, Class 1. All of the general unsecured creditors 

were classified together into another class, Class 4. Excerpt, pp. 62, 99. To 

confirm the plan under the Bankruptcy Code, the Debtor-Appellee needed at least 

one impaired class to approve the plan. 11 U.S.C. § 1129(a)(10). Plan approval by 

a class requires a favorable vote by one-half of the number, and two thirds of the 

dollar amount, of the creditor claims voting in that class. 11 U.S.C. §1126(c). 
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B. Lender-Appellants’ Purchase of General Unsecured Claims. 

The Lender-Appellants did not agree with the Debtor-Appellee’s 

proposed treatment of their claim under the Plan and intended to vote their secured 

claim against the Plan. In order to advance their own economic interests, the 

Lender-Appellants also purchased a number of general unsecured claims. The 

evidence is undisputed that the purpose of the purchases was for LenderAppellants to vote the purchased general unsecured claims against the Plan and 

protect their secured claim. Excerpt, pp. 454-55, 460. 

Lender-Appellants gave their lawyer a budget to purchase claims. 

However, the budget was insufficient to purchase all of the claims. Excerpt, 

pp. 428, 439, 444. 

Lender-Appellants purchased claims from Atlas Waste Management, 

Inc., Skov Auto Parts, Inc., DHL Express (USA), Inc., Elias Enterprises, Inc., 

O’Connor & Sons, Inc., MSC Industrial Direct Co., Inc., J.B. Dixon Engineering & 

Surveying, Inc., Kurtz North America, Inc., James Larry Good, Zalco 

Laboratories, Inc., and the claim of Culligan San Paso Co. controlled by the Credit 

Bureau. Excerpt, pp. 201-11. The purchased claims are more than one-half in 

number of the claims in the unsecured creditor class. 

Lender-Appellants did not purchase claims from Den Mat Holdings, 

LLC, Southern California Gas Co., and MarksNelson CPA because those creditors 
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actually had no claims to sell. The Debtor owed these three claimants no money. 

Excerpt, pp. 29-33, 438, 440-41, 443. 

Lender-Appellants attempted to purchase claims from CT Corporation 

(which refused to sell), Federal Express (which had two claims and refused to sell 

both), McMaster-Carr Supply Co. (which stated that it had sold its claim to a 

collection agency but would not disclose the name of the agency), Santa Barbara 

Public Works (which refused to sell), and Secretary of State-VN (who LenderAppellants tried diligently to reach but either received no response or the creditor 

refused to sell). Excerpt, pp. 438-43. Collectively, these claims that LenderAppellants attempted, but was unable, to purchase totaled $1,398.07. Excerpt, 

pp. 11-18, 29-33. 

Ultimately, there were only three claims in the general unsecured 

creditors’ class that Lender-Appellants did not attempt to purchase. LenderAppellants did not attempt to purchase the claim of Lee & Associates, because of 

concerns about a close relationship between the Debtor-Appellee and Lee & 

Associates and because the claim exceeded the budget. Excerpt, pp. 428, 439-40. 

Lender-Appellants also did not attempt to purchase two claims from the City of 

Lompoc controlled by Credit Bureau, both because those claims exceeded the 
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budget and because the Debtor had indicated that it had an objection to the larger 

of the two claims.3

 Excerpt, pp. 134, 443-52. 

There were no other claims in the general unsecured creditors class 

entitled to vote.4

 

C. Debtor-Appellee’s Second Amended Plan and Balloting 

On June 2, 2015, Debtor-Appellee filed a second amended plan of 

reorganization. Excerpt, pp. 286-319. As in the original plan and the first 

amended plan, the Lender-Appellants’ secured claim was in one class (Class 1), 

and all of the general unsecured creditors were classified together into another 

class (Class 4). Excerpt, pp. 294-96. 

Lender-Appellants voted their secured claim—and all 11 of the 

unsecured claims they purchased—against the plan. The Debtor-Appellee filed its 

Summary of Acceptances and Rejections on June 5, 2015. The summary showed 

that, after balloting, no impaired consenting class approved the plan. Excerpt, 

 

3 Debtor-Appellee did object to the City of Lompoc’s large claim on May 7, 2015. 

The Debtor-Appellee and the City of Lompoc settled that objection on August 31, 

2015. Excerpt, pp. 199-200, 462-64. 

4 Lender-Appellants did not attempt to purchase the claims of parties in other 

classes who were not entitled to vote. The claim of Maxwell Morgan, LLC, was 

separately classified (Class 3). As an insider, Maxwell Morgan, LLC, was not 

entitled to vote. Excerpt, pp. 98. The Franchise Tax Board and the Internal 

Revenue Service each filed proofs of claim asserting priority under 11 U.S.C. § 

507(a)(8). Priority tax claims were unclassified under the plan and were not 

entitled to vote. Excerpt, pp. 19-21, 48-51, 95-96. The Internal Revenue Service 

later amended its claim to show no money was owed to it. Excerpt, pp. 85-87.
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pp. 320-22. Other than Lender-Appellants, only two creditors voted. Excerpt, 

pp. 320-22, 429-30. 

D. Debtor-Appellee’s Motion to Designate and the Initial Hearing on Plan Confirmation 

On June 9, 2015, the Debtor-Appellee filed Debtor’s Motion to 

Designate Votes, attempting to disqualify the votes submitted by LenderAppellants in the general unsecured creditors’ class. Excerpt, pp. 323-33. 

The confirmation hearing commenced on June 10, 2015. At that 

hearing, the Bankruptcy Court denied confirmation of the first amended plan. 

Excerpt, pp. 334-35, 337. The Bankruptcy Court, the Debtor-Appellee, and 

Lender-Appellants agreed that it was unnecessary to solicit additional votes on the 

second amended plan because the only change was a “slight improvement to the 

payment timing” for the general unsecured creditors in Class 4, and that 

“essentially it’s the same plan.” Excerpt, pp. 338-39. 

Although some evidence on confirmation was taken at the hearing on 

June 10, 2015, the confirmation hearing was continued to August 25, 2015. The 

Bankruptcy Court also continued the hearing on Debtor-Appellee’s Motion to 

Designate Votes to August 25, 2015. 

Lender-Appellants opposed the motion to designate their votes. 

Excerpt, pp. 341-59. Lender Appellants also opposed confirmation of the plan. 

Excerpt, pp. 360-70, 374-90. 
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E. Debtor-Appellee’s Third Amended Plan 

On August 20, 2015, five days before the continued confirmation 

hearing was to proceed, Debtor-Appellee filed its Third Amended Plan of 

Reorganization. Excerpt, pp. 391-424. The third amended plan gerrymandered the 

unsecured creditors class into two different classes: those claims that LenderAppellants voted against the plan were moved into a new class (Class 1B), and the 

two unsecured claims that voted for the plan remained in the existing class of 

unsecured creditors (Class 4), along with other claims that did not vote. Excerpt, 

pp. 400-02. 

No new balloting took place after the unsecured creditors’ class was 

gerrymandered. However, in apparent anticipation of filing the third amended 

plan, Debtor-Appellee filed an Amended Summary of Acceptances and Rejections 

on August 14, 2015. Excerpt, pp. 371-73. This amended ballot summary showed 

that Lender-Appellants’ claims in Class 1B voted against the plan, and the only 

two remaining voting creditors in Class 4 voted for the plan. 

F. The Continued Confirmation Hearing 

At the outset of the hearing on August 25, 2015, the Bankruptcy Judge 

started out by addressing the motion to designate: 

THE COURT: But I will say that one question that I want answered 

either by you or by Mr. Eldan is whether or not the bank offered to 

buy all the claims, or did they just buy a few. Did they just offer to 

buy a few? And I think Mr. Monson’s client could also respond to 

that. Mr. Monson represents one of the creditors in the case. So you 
15 

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don’t have to answer now, Mr. Eldan, but that is going to be a 

question that I want answered. 

MR. ELDAN: I’ll be happy to answer it now, Your Honor. I did not 

attempt to buy every claim in the case. I attempted to buy most of 

them. With 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 

such as it was scheduled by the debtor at zero or the debtor itself had 

suggested that the claim was invalid and had been scheduled 

mistakenly. And in the case of Lee & Associates, which is the largest 

unsecured creditor for $50,000, first of all, that I thought that there 

was a possibility that it had business ties with the debtor as its broker, 

but, more importantly, the claim was far too large for the bank to be 

willing to go and -- and buy it as it bought the other claims. 

Excerpt, pp. 427-28. 

After hearing some argument from Lender-Appellants’ counsel 

regarding the motion to designate, the Bankruptcy Judge indicated that she thought 

the decision on designation was a matter of law and that it was determinative that 

Lender-Appellants did not offer to buy every unsecured claim: 

THE COURT: And in those cases [Figter and Pleasant Hill], because 

I studied those cases, the unsec- -- the secured creditor offered to buy 

every claim. And in one of the cases, one creditor didn’t -- for $24.00 

didn’t consent. And in the other case, maybe there was a couple who 

didn’t consent. But it was every creditor. Every unsecured creditor 

was offered the same deal by the secured creditor. 

And that’s not what happened here. So I’m not going to consider -- 

I’m not considering that. I’m going to have the motion to designate. 

I’m not considering it as a matter of law. 

If you had offered to buy -- if your client had offered to buy every 

claim including Mr. Monson’s and including Mr. Lee and including 

the bigger ones, that would be different. But that’s not what 

happened. 
16 

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Excerpt, p. 429. The Bankruptcy Judge later continued: 

THE COURT: . . . So that’s my preliminary look at it which is -- you 

didn’t offer -- you didn’t put yourself in the same situation that the 

creditors did in those -- in those two cases. So I’m -- I’m not 

considering it as a matter of law. 

Excerpt, p. 432. The Bankruptcy Judge stated that was a “huge factor” that 

Lender-Appellants did not offer to buy all of the unsecured claims. Excerpt, 

p. 433. 

In deciding the motion to designate, the Bankruptcy Judge treated the 

question as a legal issue, not a factual issue. When Lender-Appellants offered to 

put on testimony regarding their purchase of claims, the Bankruptcy Judge stated 

that she did not think testimony was necessary: 

MR. ELDAN: As I said, I’m happy to testify about the purchase of 

claims and my rationale for each and every one of them. 

THE COURT: I -- I really don’t think that’s necessary. I think the 

division is there was a huge number that weren’t purchased, a huge -- 

a huge number in amount. 

MR. ELDAN: Uh-huh. 

THE COURT: I mean, not even counting – I didn’t even think about 

the -- the insider claims. I’m just talking about the noninsider claims. 

The amount the bank purchased and offered to purchase given the 

amount of noninsider claims, that difference is so huge that that is 

what is -- I’m keying in on. 

Excerpt, pp. 434-35. 
17 

70068416.2 

Although ultimately the Bankruptcy Court allowed Lender-Appellants 

to make their factual record, the Bankruptcy Judge stated that she did not think the 

circumstances regarding the purchase of the claims mattered: 

MR. HERCHER: Your Honor, our -- if I -- our next witness would be 

Mr. Eldan to offer evidence regarding the circumstances regarding the 

claim purchases, the issue that was addressed at the outset of the 

hearing today. 

THE COURT: Well, really? My question had to do with did he offer 

to purchase all of them, and the answer was no. And if you want to 

get him on the stand to tell me that, I’m happy to do that. 

I don’t really care the circumstances by which he chose some and not 

others. What -- what I know is he purchased some -- the bank 

purchased some and not others, and to me that is the difference. I 

don’t care why he chose what he chose. If you want -- if you think 

that it matters, put him on the stand, but you need to realize for me 

that’s not a deciding factor. 

Excerpt, p. 436. 

At the end of the Lender-Appellants’ direct testimony, the Bankruptcy 

Judge again reiterated that her key issue was that the Lender-Appellants did not 

offer to purchase all the claims: 

THE COURT: And you had some creditors who said no. Fine. But 

you also had creditors that you chose not to offer it to. And so for me 

that’s an issue about whether or not I’m going to designate the claims. 

Excerpt, pp. 457-58. 

G. The Bankruptcy Court’s Ruling 

On September 1, 2015, the Bankruptcy Court heard closing arguments 

on the motion to designate votes and confirmation of the plan, and announced its 
18 

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ruling from the bench. With respect to the Motion to Designate, the Bankruptcy 

Court ruled as follows: 

THE COURT: . . . So, first, I am going to deal with the designation. 

Coastline purchased certain unsecured Class 4 claims and voted all of 

those claims against confirmation. If those votes are counted, debtor 

will not be able to main -- to obtain an accepting impaired class as 

required by Section 1129(a)(10). 

Debtor requests that the votes of the purchased claims be designated 

pursuant to 11 USC Section 1126(e). For reasons that follow, I will 

grant debtor’s motion to designate which should not come as any 

surprise to anyone after last Tuesday’s hearing. 

Coastline’s attorney David Eldan testified that he arranged for 

Coastline to purchase 11 Class 4 claims for the purpose of blocking 

confirmation of debtor’s plan. The claims purchased by Coastline 

total approximately $13,000. 

Now, my calculation was 13,287.02. If I subtract the debtor’s -- the 

creditor’s previous claim from the most current claim, it’s 12,553.46. 

And I think the difference between those two numbers is I was using 

the proof of claim amount and Mr. Eldan’s change in the claim was 

the amount they paid which wasn’t a hundred cents on the dollar for 

the biggest two claims that they bought. So for purposes of this 

discussion, I’m going to use the 13,000. 

And that was about 10 percent of the unsecured debt in the case after 

claims were purchased and is now about 13 percent of the allowed 

claims if I take into account the fact that the -- the City of Lompoc’s 

claim of 54,000 has been agreed to be reduced to 35,000. 

Coastline did not offer to purchase all of the Class 4 claims. In 

particular, Coastline did not offer to purchase the claims held by Lee 

& Associate [sic] in the amount of 50,000 and the City of Lompoc 

utilities in the approximate amount of 54,700 which has been 

compromised and agreed by both parties to be 35,000. 

Mr. Eldan testified that he did not purchase those two claims because 

each exceeded the budget allowed by his client. He also testified that 
19 

70068416.2 

he was not sure of the nature of the relationship between Lee & 

Associates, and he did not want to tip off -- tip off debtor to 

Coastline’s plan to acquire a blocking position. 

And with respect to the City of Lompoc, he did say that there was at 

least some discussion about that claim not being an allowed claim. 

So Section 1126(e) allows the court to, quote, designate any entity 

whose acceptance or rejection of such plan was not in good faith. In 

this context, “designate” means to disqualify from voting. In re 

Figter, 118 F3d 635 at page 638, Ninth Circuit, 1997. 

Courts should employ 1126(e) sparingly and the parties seeking such 

designation bears the burden of proof. In re DBSNNM [sic], Inc., 634 

F3d 79 at pages 101 to 102, Second Circuit, 2011. 

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 Coastline forecloses. 

I conclude that designation is appropriate in this case because 

Coastline 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 case in terms of amount. 

In making a good faith determination under Section 1126(e), the 

Ninth Circuit instructed in Figter that the concept of good faith is a 

fluid one and that, although prior cases can offer guidance, a 

bankruptcy court must ultimately make each good faith determination 

with an understanding derived from its informed practical experience 

in dealing with debtors and creditors. Figter 118 F3d at 639 to 40. 

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 Section 1129 -- 1126(e). 

However, a creditor’s conduct in further of its own interest should not 

result in an unfair disadvantage to other creditors. In re Pleasant Hill 

Partners, LP, 136 BR 388, 395, Bankruptcy Northern District of 

Georgia, 1994. 
20 

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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 In re 

DeLuca, 194 BR 797, Bankruptcy Eastern District of Virginia, 1996. 

In re 255 Park Plaza Associate Limited Partnership, 100 F3d 1214, 

Sixth Circuit, 1996. 

Allowing Coastline 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. 

Excerpt, pp. 469-73. 

With respect to reclassification, the Bankruptcy Court ruled that the 

11 claims that Lender-Appellants purchased could be removed from Class 4 and 

put into a new Class 1B: 

THE COURT: . . .Class 1A -- so now I am going to look a little bit to 

your third amended plan because in that you -- so I assume you would 

move for the amendments contained in your third amended plan. And 

you’re affirmatively nodding, yes, Mr. Pahl – 

MR. PAHL: Yes, Your Honor. 

THE COURT: -- because the record will not reflect that. So Class 1A 

consists of Pacific’s allowed secured claim and -- and Class 1B 

consisting of the claims purchased by -- I’m not sure if it’s Coastline 

or Pacific, but I’ll treat them as the same. And you wanted to put 

them there because they were secured. I don’t think that’s the fact. I 

think the claims are as the claims were when the case was filed. They 

remain unsecured claims. But putting them in Class 1A and 1B is fine 

with me so that -- because Class 1B is treated as -- the same as the 

unsecured Class 4; right? 

MR. PAHL: Yep. 
21 

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Excerpt, pp. 474-75. The Bankruptcy Court then held that, because the unsecured 

claims purchased by Lender-Appellants were designated and reclassified into Class 

1B, Class 4 was an impaired consenting class that approved the plan. Excerpt, 

pp. 477, 487-88. 

The Bankruptcy Court stated that it would confirm the plan, subject to 

amendments that are not at issue in this appeal. Excerpt, p. 492. 

At the hearing on September 1, 2015, both before and after the 

Bankruptcy Court’s ruling, counsel for Lender-Appellants asked the Bankruptcy 

Court to make findings of fact on the issue of good faith and on reclassification of 

the general unsecured claims into the new gerrymandered classes, but the 

Bankruptcy Court refused. Excerpt, pp. 467-68, 493-95. 

H. Entry of the Final Orders. 

The Debtor-Appellee submitted the order confirming the plan, along 

with a fourth amended plan including the amendments required by the Bankruptcy 

Court. The Bankruptcy Court entered the Designation Order on September 9, 

2015, and the Confirmation Order on September 14, 2015. The fourth amended 

plan attached to the Confirmation Order plainly contains the two gerrymandered 

classes. Excerpt, pp. 514-15. 

IV. SUMMARY OF THE ARGUMENT 

When the Bankruptcy Court entered the Confirmation Order, it 

approved the gerrymandering of the claims owned by Lender-Appellants into 
22 

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Class 1B, separate from the other similar general unsecured claims in Class 4. 

Doing that was contrary to binding authority in the Ninth Circuit, which prohibits 

gerrymandering of claims for the sole purpose of obtaining consent to a chapter 11 

plan. It was also clear error, because the record did not contain adequate 

evidentiary support to classify claims in Class 1B separately from claims in 

Class 4, and the Bankruptcy Court made no findings of fact to support separate 

classification. 

The Bankruptcy Court also committed clear error when it entered the 

Designation Order disqualifying the Lender-Appellants’ votes on the plan as not 

having been made in good faith. The Bankruptcy Court erroneously believed that 

good faith was a question of law. As a result, instead of conducting a broadranging inquiry into the facts, and making appropriate factual findings, the 

Bankruptcy Court erroneously fixated on only one factor—that Lender-Appellants 

did not attempt to purchase claims from two claimants—and relied on that factor to 

the exclusion of all else in determining good faith. 

V. ARGUMENT 

A. The Bankruptcy Court Erred When it Permitted Debtor-Appellee 

to Gerrymander and Reclassify the Unsecured Claims Purchased 

by Lender-Appellants. 

1. Substantially similar claims must be classified together. 

The Ninth Circuit Court of Appeals has held that, when reviewing a 

decision on classification, the proper inquiry is “are the claims substantially 
23 

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similar?” Johnston, 21 F.3d at 327. To resolve the question, bankruptcy court 

judges must evaluate the specific nature of each claim as a factual matter. Id. As a 

matter of law, there are limits on classification of claims. It is impermissible to 

separately classify general unsecured claims without a legitimate business or 

economic justification. Barakat, 99 F.3d at 1526. 

Here, the Bankruptcy Court erred, because it made no findings of fact 

regarding the nature of the claims that were reclassified into Class 1B compared to 

the claims that remained in Class 4 of the plan. The Bankruptcy Court did not find 

substantive differences between the claims, because there was no evidence of any 

substantive difference between the claims. Without a legitimate business reason or 

economic justification supported by facts to separately classify these claims, the 

separate classification was improper. 

In this case, there was no appropriate factual basis for the Bankruptcy 

Court to separately classify the general unsecured claims that Lender-Appellants 

purchased from the other general unsecured claims. First, all of the claims in 

Class 1B and Class 4 were general unsecured claims. Although Debtor-Appellee 

contended that the claims in Class 1B should be treated as secured claims, the 

Bankruptcy Court properly rejected that contention. Excerpt, pp. 474-75, 493. 

Second, the Debtor-Appellee’s own decisions show that the claims are 

similar and should be classified together. The Debtor-Appellee’s original plan, 
24 

70068416.2 

first amended plan, and second amended plan classified all the general unsecured 

claims together in Class 4. 

Third, under the confirmed plan, all of the claims in Class 1B and 

Class 4 received exactly identical treatment. The plan provided that each claimant 

in Class 1B and Class 4 would receive payment, in cash, in the amount of their 

claim, plus three percent, within 60 days after the effective date of the plan. 

Excerpt, pp. 514-15. If there had been a legitimate business reason or economic 

justification to classify the claims separately, one would expect the different 

classes to receive different treatment. 5

The Bankruptcy Court erred when it articulated no reason at all for 

allowing the separate classification. The Bankruptcy Court’s only comment on 

reason for separate classification was that it was “fine” because Class 1B would 

receive the same treatment as Class 4. 

2. Claims cannot be gerrymandered into different classes just to 

obtain consent to a chapter 11 plan. 

Binding authority establishes that separate classification of similar 

claims, where the sole purpose of separate classification is to obtain acceptance of 

 

5 Even though the Debtor-Appellee contended that the claims that LenderAppellants purchased were secured claims, Debtor-Appellee made no effort to treat 

those claims as secured claims. No version of the plan ever provided for LenderAppellants to retain any lien on account of these claims, for Debtor-Appellee to 

sell the collateral supporting these claims, or to provide Lender-Appellants the 

indubitable equivalent of these claims, as required by 11 U.S.C. § 1129(b)(2)(A). 
25 

70068416.2 

a chapter 11 plan, is prohibited. Barakat, 99 F.3d at 1526. Here, the only purpose 

of separate classification was to obtain a consenting class to support DebtorAppellee’s plan. 

Debtor-Appellee’s original plan, first amended plan, and second 

amended plan each classified all of the non-insider, general unsecured claims in 

Class 4. It was not until after all the votes were submitted, no class had accepted 

the Debtor-Appellee’s plan, and the confirmation hearing commenced that the 

Debtor-Appellee filed its third amended plan to gerrymander the votes and move 

the claims purchased by Lender-Appellants into a new Class 1B. Debtor-Appellee 

provided no evidence of any other purpose for the separate classification. 

3. The authority cited by Debtor-Appellee did not support 

reclassification and gerrymandering. 

 Debtor-Appellee cited two cases to the Bankruptcy Court to support 

its post-balloting reclassification of the unsecured claims. In re Loop 76, LLC, 

465 B.R. 525 (9th Cir. B.A.P. 2012); CW Capital Asset Mgmt., LLC v. Burcam 

Capital II, LLC, 2014 WL 2864678 (E.D.N.C. June 24, 2014). Neither of these 

cases supports reclassification and gerrymandering of the general unsecured claims 

in this case. 

In Loop 76, the Ninth Circuit Bankruptcy Appellate Panel held that a 

bankruptcy court can separately classify claims that are not “substantially similar.” 

Loop 76, 465 B.R. at 536. However, in Loop 76, unlike in this case, there was a 
26 

70068416.2 

factual difference between the separately classified claims—the lender’s unsecured 

deficiency claim in Loop 76 differed from the claims of other general unsecured 

creditors because there was a third party who was also obligated to pay the 

deficiency claim. Loop 76, 465 B.R. at 541. Here, there are no facts in the record 

to distinguish the claims that Lender-Appellants purchased from the claims that 

remained in Class 4. 

Loop 76 also does not support Debtor-Appellee’s gerrymandering. 

Indeed, in Loop 76, the Bankruptcy Appellate Panel specifically recognized the 

holding in Barakat that “a court may not approve a plan placing similar claims 

differently solely to gerrymander an affirmative vote on the reorganization plan” 

—precisely what Debtor-Appellee did in this case. Loop 76, 465 B.R. at 537, 

citing Barakat, 99 F.3d at 1525. 

CW Capital also supports Lender-Appellants’ argument. In CW 

Capital, the District Court in North Carolina held that separate classification “may 

only be undertaken for reasons independent of the debtor’s motivation to secure 

the vote of an impaired, assenting class of claims,” and “classification [that] is 

clearly for the purpose of manipulating voting . . . may not stand.” CW Capital, 

2014 WL 2864678 at *2, quoting Travelers Ins. Co. v. Bryson Props. XVIII (In re 

Bryson Props. XVIII), 961 F.2d 496, 502 (4th Cir. 1992) (internal citations 

omitted). A plan modification to “segregate all the ‘no votes’ into a single class, 
27 

70068416.2 

allowing for ultimate confirmation . . . is obvious gerrymandering.” CW Capital, 

2014 WL 2864678 at *4. 

B. The Bankruptcy Court Erred in Designating and Disqualifying 

Lender-Appellants Votes Against the Plan. 

In a bankruptcy case, the law allows a creditor to act in its own 

enlightened economic self-interest in voting its claims. Figter, 118 F.3d at 639. 

Here, the evidence was undisputed that Lender-Appellants acquired unsecured 

claims and voted those claims to protect Lender-Appellants’ secured claim—and 

for no other purpose. As such, Lender-Appellants’ actions were in good faith. 

The Bankruptcy Court erred because it did not consider the facts and 

circumstances surrounding Lender-Appellants’ votes and whether LenderAppellants’ actually acted in good faith. Instead, the Bankruptcy Court fixated on 

one factor to the exclusion of all else: the assumed effect of Lender-Appellants’ 

vote on two unsecured creditors whose claims that Lender-Appellants did not (for 

good reasons) offer to purchase. 

The Bankruptcy Court’s decision was clear error, because the 

Bankruptcy Court did not engage in the wide-ranging inquiry into the facts 

required for a determination of good faith. Instead, the Bankruptcy Court 

impermissibly focused on one factor—an approach expressly rejected by the Ninth 

Circuit Court of Appeals. Under Hedlund, the Bankruptcy Court’s failure to 
28 

70068416.2 

consider all the factors relevant to good faith is an issue of law that must be 

reviewed de novo. Hedlund, 718 F.3d at 854. 

The Bankruptcy Court’s decision was also induced by an erroneous 

view of the law. The Bankruptcy Court’s ruling was tantamount to a decision that 

Lender-Appellants were acting in bad faith if they did not offer to purchase all the 

claims. The law does not require a creditor to offer to purchase all claims before 

its votes will count on any of the claims it purchases. 

1. The legal parameters for determining good faith. 

Whether a party has acted in good faith is ultimately a question of 

fact. Figter, 118 F.3d at 638. However, prior binding authority has established 

certain legal parameters and conduct that are acceptable behavior and are 

consistent with acting in good faith. In Figter, the Ninth Circuit Court of Appeals 

specifically addressed the whether a creditor acquires and votes claims in good 

faith. In that case, the Court of Appeals carefully distinguished between a creditor 

acting with “mere enlightened self-interest,” which is done in good faith, and a 

creditor acting with an “ulterior motive,” which could constitute lack of good faith. 

Figter, 118 F.3d at 639. 

A lack of good faith is not shown when a creditor chooses to benefit 

its interest as a creditor as opposed to some unrelated interest. Figter, 118 F.3d 

at 639. “‘As long as a creditor acts to preserve what he reasonably perceives as his 
29 

70068416.2 

fair share of the debtor’s estate, bad faith will not be attributed to his purchase of 

claims to control a class vote.’” Id., quoting In re Gilbert, 104 B.R. 206, 217 

(Bankr. W.D. Mo. 1989). 

Each of the cases cited in Figter by the Court of Appeals as examples 

of a creditor acting with an ulterior motive involve the acquisition of claims by one 

who was not previously a creditor of the debtor or the acquisition of claims for a 

purpose other than advancing the creditor’s perceived self-interest with respect to 

its claim. Figter, 118 F.3d at 639. 

2. The Bankruptcy Court’s decision was induced by an 

erroneous view of the law. 

A bankruptcy court commits clear error when its decision is induced 

by an erroneous view of the law. JSJF Corp., 344 B.R. at 99. 

Here, the Bankruptcy Court erroneously believed that the decision 

whether to designate Lender-Appellant’s votes was a question of law, not a 

question of fact. Excerpt, pp. 429, 432. As a result, the Bankruptcy Court did not 

conduct the required broad inquiry into the facts. Goeb, 675 F.2d at 1390. To the 

contrary—when Lender-Appellants offered to put on evidence about the purchase 

of claims and rationale for them, the Bankruptcy Judge said “I really don’t think 

that’s necessary” and “I don’t really care the circumstances by which he chose 

some and not others.” Excerpt, pp. 435-36. 
30 

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Although the Bankruptcy Court eventually allowed Lender-Appellants 

to make their record, the Bankruptcy Court did not weigh all the factors in making 

its decision. Instead, the Bankruptcy Court focused solely on only one factor: the 

Bankruptcy Court believed that if it did not confirm the plan, it would be 

prejudicial to the unsecured creditors holding claims that Lender-Appellants did 

not offer to purchase. Excerpt, pp. 472-73. This fixation on only one factor in 

determining good faith was erroneous.6

 Goeb, 675 F.2d at 1390; Figter, 118 F.3d 

at 639-40. 

The Lender-Appellants specifically asked the Bankruptcy Court to 

make findings of fact regarding good faith, but the Bankruptcy Court refused to do 

so. Excerpt, pp. 467-68, 493-95. Under these circumstances, this Court must 

reverse. 

3. There is no legal requirement that Lender-Appellants offer to 

purchase all of the claims. 

From the outset of the continued confirmation hearing, the 

Bankruptcy Court asserted that allowing the Lender-Appellants to vote the 

unsecured claims they purchased against the Plan would result in unfair 

disadvantage to other unsecured creditors. The Bankruptcy Court was troubled by 

the fact that the Lender-Appellants did not offer to buy all of the unsecured claims. 

 

6 Under Hedlund, this Court reviews the Bankruptcy Court’s failure to consider all 

the factors relevant to good faith de novo. Hedlund, 718 F.3d at 854.
31 

70068416.2 

The Bankruptcy Court did not like the fact that some of the original unsecured 

creditors received payment (i.e., the purchase price) from the Lender-Appellants, 

but that the other unsecured creditors whose claims Lender-Appellants did not 

offer to purchase would receive nothing if the Plan was not confirmed. Ultimately, 

that assumption was the sole basis for the Bankruptcy Court’s decision. That 

statement was tantamount to a holding that Lender-Appellants were required to 

offer to buy all of the unsecured claims in this case if they wanted their vote to 

count on behalf of any of the unsecured claims they had purchased. 

In the oral ruling granting the designation motion and confirming the 

plan, the Bankruptcy Court cited Figter and three other cases for the proposition 

that a creditor’s failure to offer to purchase all claims in a class means that the 

creditor’s vote of any purchased claims lacks good faith: the 1994 decision of the 

Northern District of Georgia Bankruptcy Court in In re Pleasant Hill Partners, 

L.P., 163 B.R. 388, 395 (Bankr. N.D. Ga. 1994), the 1996 decision of the Eastern 

District of Georgia Bankruptcy Court in Principal Mut. Life Ins. Co. v. Lakeside 

Assocs. (In re DeLuca), 194 B.R. 797 (Bankr. E.D. Va. 1996), and the 1996 

decision of the Sixth Circuit Court of Appeals in 255 Park Plaza Assocs. Ltd. 

P’ship v. v. Connecticut Gen. Life Ins. Co. (In re 255 Park Plaza Associates Ltd. 

P’Ship), 100 F.3d 1214 (6th Cir. 1996). 
32 

70068416.2 

The Bankruptcy Court erred because nothing in Figter, or any other 

binding authority, requires a creditor offer to buy all the unsecured claims before it 

can vote on behalf of any of them. It is true that, in Figter, the Court of Appeals 

mentions that the purchasing creditor in that case made the same offer to purchase 

to all creditors. Figter, 118 F.3d at 637. But that statement was dictum, and 

nowhere in Figter did the Court of Appeals assert that such an offer was required 

as a condition of good faith. 

Although the courts in the other three cases cited by the Bankruptcy 

Court also observed in dicta the fact that the creditor made offers to purchases all 

claims, none of those cases—or any other reported case of which LenderAppellants are aware—holds that a creditor’s offer to buy all claims is a legal 

prerequisite to establishing that the creditor voted its acquired claims in good faith. 

Other courts have found that creditors purchasing claims have acted in 

good faith, even in situations where they do not attempt to purchase all of the other 

claims. In a 1992 decision of the Northern District of California Bankruptcy Court 

cited by the Ninth Circuit in Figter, In re Marin Town Center, 142 B.R. 374, 377, 

380 (Bankr. N.D. Cal. 1992), the court rejected a designation motion after 

observing that the creditor had purchased “certain” unsecured claims in the case 

and without concerning itself with whether the creditor had offered to buy the 

remaining unsecured claims. 
33 

70068416.2 

Similarly, in a 2015 decision of the Middle District of Florida 

Bankruptcy Court in In re Monticello Realty Investments, LLC, 526 B.R. 902 

(Bankr. M.D. Fla. 2015), the court also rejected a designation motion filed against 

a secured creditor that had acquired a single, separately classified unsecured claim, 

and the court held that the debtor plan proponent had improperly classified the 

acquired unsecured claim separately from other non-acquired unsecured claims. 

The court expressed no concern regarding whether the creditor had offered to buy 

the non-acquired claims. 

Even Debtor-Appellee has conceded that there is no per se 

requirement for a purchasing creditor to make an offer to purchase all claims and 

that it is not necessarily bad faith for a creditor to purchase just enough claims to 

defeat a plan. Excerpt, pp. 615-16. 

4. There is no legal requirement that a creditor purchasing 

claims act to avoid harm to other creditors. 

There is no legal basis for the proposition that a purchaser of claims 

acts in bad faith if it has no intent to harm other creditors, but the result of its 

lawful actions to benefit its own claim result in no payment to those other 

creditors. The Ninth Circuit Court of Appeals has expressly recognized that in 

some circumstances, it is acceptable for a creditor acting to benefit its own claim to 

purchase additional claims for a blocking position, even if that blocking position 

could injure other creditors. Figter, 118 F.3d at 640. 
34 

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5. The record contains no evidentiary support to justify a finding 

that Lender-Appellants did not act in good faith. 

Second, there is no evidence in the record whatsoever to support a 

finding that Lender-Appellants acted for any purpose other than to protect their 

secured claim—a motive that the Ninth Circuit Court of appeals expressly 

recognize in Figter as permissible. 

a. Lender-Appellants were not competitors seeking an 

unfair advantage over the Debtor-Appellee’s business. 

Here, unchallenged testimony established that Lender-Appellants 

purchased unsecured claims for the purpose of protecting the secured claim. 

Excerpt, pp. 454-55, 460. It was undisputed that Lender-Appellants were a 

previous creditor of the Debtor-Appellee. 

Lender-Appellants were not seeking to obtain some improper 

competitive advantage in the marketplace by trying to destroy a competitor, but 

were merely seeking payment of their secured claim. Lender-Appellants are a 

bank and its wholly-owned subsidiary. Lender-Appellants are not competitors of 

Debtor-Appellee. Although Debtor-Appellee hinted in the Motion to Designate 

Votes that one of Lender-Appellants might be a competitor in the business of 

holding and selling real estate at a profit, Excerpt, p. 329, Debtor-Appellee 

conducted discovery on this issue and was unable to obtain any facts to support 

such an argument. As a result, Debtor-Appellee did not pursue that argument at 
35 

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the continued confirmation hearing on August 15, 2015, and offered no evidence 

on it. There is no evidence in the record that Lender-Appellants had any intent to 

harm any other creditors. The only evidence at trial was to the contrary—that the 

Lender-Appellants were not trying to cause harm to competition. Excerpt, 

pp. 455-56. 

b. Lender-Appellants were not a proponent of an alternate 

plan. 

There is no evidence in the record from which the Bankruptcy Court 

could find that Lender-Appellants were the proponent of an alternate plan. 

c. Lender-Appellants were not seeking to harm other 

creditors. 

There is no evidence in the record whatsoever that Lender-Appellants 

were seeking, or had any motive, harm any other creditors in the case. 

What the facts in this case do show is that Lender-Appellants had 

reasonable and appropriate reasons not to offer to purchase the claims of Lee & 

Associates and the City of Lompoc. Lender-Appellants did not seek to buy the 

claims of Lee & Associates was because of concerns about a close relationship 

between the Debtor-Appellee and Lee & Associates and because the claim 

exceeded the budget. Excerpt, pp. 428, 439-40. Lender-Appellants did not attempt 

to purchase two claims from the City of Lompoc controlled by Credit Bureau, both 

because those claims exceeded the budget and because the Debtor-Appellee had 
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indicated that it had an objection to the larger of the two claims. Excerpt, pp. 134, 

443-52. 

As this Court has recognized, a creditor does not lack good faith 

because it has a budget. Nor does a creditor lack good faith if it chooses not to 

offer to buy a claim of an entity with a close relationship to Debtor-Appellee. And, 

a creditor does not lack good faith by choosing not to offer to buy a disputed claim 

(particularly where, as here, the claim was later compromised for a much lower 

amount).7

 Excerpt, pp. 617-18. 

d. There was no legal or factual basis for the Bankruptcy 

Court to conclude that if the plan were not confirmed, the 

unsecured creditors would be unfairly prejudiced. 

In its decision, the Bankruptcy Court relied heavily on a statement of 

the Bankruptcy Court for the Northern District of Georgia in Pleasant Hill. In that 

case, the bankruptcy court said that “[t]he creditor’s conduct in furtherance of its 

own interest, however, should not result in unfair disadvantage to other creditors or 

the debtor.” Pleasant Hill, 163 B.R. at 395. The Pleasant Hill case is not binding 

authority in this jurisdiction. Also, Pleasant Hill is distinguishable and does not 

support a finding of lack of good faith under the law and facts of this case. In 

Pleasant Hill, there were no large unsecured creditors. The 18 unsecured claims in 

that case totaled “slightly more than $7,000.” 183 B.R. at 390. There is no 

 

7 If a creditor bought a disputed claim, and that claim was disallowed, the creditor 

would receive nothing.
37 

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indication in Pleasant Hill that any of these claims were disputed or were held by 

people close to the debtor. That scenario differs from this case, where LenderAppellants attempted to purchase all of the non-insider general unsecured claims, 

except for two large claims—one of which was disputed and the other was held by 

a creditor thought to be close to the debtor. 

There are no facts in the record of this case to support the Bankruptcy 

Court’s conclusion that the unsecured creditors would receive nothing if the 

Debtor-Appellee’s plan were not confirmed. The Bankruptcy Court had not 

ordered that the case would be dismissed or that relief from stay would be granted 

to Lender-Appellants if the plan were not confirmed. If relief from stay were 

granted, and if Lender-Appellants completed a foreclosure, it is possible that 

unsecured creditors ultimately would receive nothing. However, in this case, 

Lender-Appellants have never even filed a motion for relief from stay. 

As a matter of law, the result of a bankruptcy court’s decision not to 

confirm a plan is that the plan is not confirmed. The debtor remains free to 

propose another plan, just as the creditor is free to seek other remedies, such as 

relief from stay, a conversion, or dismissal of the case. But until a plan is 

confirmed or the case is dismissed, the parties’ “rights and obligations remain 

unsettled.” Bullard v. Blue Hills Bank, ___ U.S. ___, 135 S.Ct. 1686, 1692-93 

(2015) (chapter 13 case). 
38 

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If the Bankruptcy Court had denied confirmation of the DebtorAppellee’s plan, any number of things could have happened. For example, the 

Debtor might have filed a new plan proposing treatment that Lender-Appellants 

would have voted for and that would have provided for payment of general 

unsecured claims. There is no evidence in the record to the contrary. 

Even if the Bankruptcy Court had decided to dismiss the case or 

provide Lender-Appellants relief from stay if the plan failed, the result in the case 

would not be unfair or prejudicial to unsecured creditors. If the plan had not been 

confirmed, and if some future event made it so the unsecured claims that LenderAppellants’ purchased would receive nothing, then Lender-Appellants’ would also 

receive nothing on account of the claims Lender-Appellants purchased. Either 

way, all of those unsecured claims would receive identical treatment. There is 

nothing unfair about that outcome. 

VI. CONCLUSION 

For the reasons set forth above, the Bankruptcy Court committed clear 

error when it allowed the Debtor-Appellee to separately classify the claims 

purchased by Lender-Appellants to gerrymander a consenting class for DebtorAppellee’s plan. The Bankruptcy Court also committed clear error when it 

designated the votes of Lender-Appellants as not having been made in good faith. 

The Bankruptcy Court erroneously treated designation as a matter of law, and 
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instead of conducting a broad-ranging inquiry of fact, improperly fixated on one 

factor as determinative of good faith. 

This Court should reverse the decision of the Bankruptcy Court and 

remand for further proceedings. 

Dated this 28th day of December, 2015. 

 /s/ Teresa H. Pearson 

_________________________________ 

Teresa H. Pearson, OSB No. 953750 

 David W. Hercher, OSB No. 812639 

 Miller Nash Graham & Dunn LLP 

 David K. Eldan, Admitted Pro Hac Vice

 Parker, Milliken, Clark, O’Hara & 

 Samuelian 

 Attorneys for Appellants Pacific Western 

Bank and Coastline RE Holdings Corp.
1 

70068416.2 

CERTIFICATE OF COMPLIANCE WITH RULE 

8015(a)(7)(B) OR 8016(d)(2) 

This brief complies with the type-volume limitation of Rule 

8015(a)(7)(B) or 8016(d)(2) because: 

 this brief contains 9,378 words, excluding the parts of the brief 

exempted by Rule 8015(a)(7)(B)(iii) or 8016(d)(2)(D), or 

 this brief uses a monospaced typeface having no more than 101⁄2 

characters per inch and contains [state the number of] lines of 

text, excluding the parts of the brief exempted by Rule 

8015(a)(7)(B)(iii) or 8016(d)(2)(D). 

Dated this 28th day of December, 2015. 

 /s/ Teresa H. Pearson 

_________________________________ 

Teresa H. Pearson, OSB No. 953750