To warrant ‘designation,’ a claim purchaser must have an ‘ulterior motive’ beyond self-interest.

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Case Type:
Case Status:
Reversed and Remanded
No. 16-35430 (9th Circuit, Jun 04,2018) Published
9th Cir. reversed district court (D. Or.), which had affirmed bankruptcy court ruling granting chapter 11 debtor's motion to designate claims for bad faith and preclude the claims from being voted against plan of reorganization. Panel held that bankruptcy court could not designate claims for bad faith simply because (1) creditor offers to purchase only enough claims to block plan of reorganization, and/or (2) blocking the plan will adversely affect the other creditors. At a minimum, there must be evidence that the creditor is seeking to secure an untoward advantage over other creditors.
Procedural context:
Bankruptcy court granted chapter 11 debtor's motion to designate claims as bad faith and preclude creditor from voting on plan. Creditor appealed to district court, which affirmed. Creditor appealed to 9th Circuit.
Debtor owned real property worth approximately $6 million. Creditor "Pacific" held senior secured claim in excess of $3.95 million. Debtor filed chapter 11 plan seeking to cram down Pacific's secured claim by obtaining approval of impaired general unsecured class. To block debtor's plan, Pacific acquired just enough general unsecured claims for the express purpose of blocking confirmation because Pacific did not deem the plan to be in Pacific's best interest. Pacific acquired more than half of the general unsecured claims by number, but only approximately ten percent by value (approx. $13k). Because Pacific held more than half of the general unsecured claims, it was able to vote against the plan and block confirmation. Debtor filed motion to designate Pacific's claims for bad faith under 11 USC 1126. Bankruptcy court ruled that because Pacific sought only to benefit itself, and to the detriment of the other creditors whose claims Pacific did not buy, it acted in bad faith and prejudiced the other creditors.
Smith, Christen, Hurwitz

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