## Facts

- Fagerdala USA–Lompoc, Inc. filed for Chapter 11 bankruptcy and proposed reorganization plans that classified Pacific Western Bank’s secured claim in Class 1 and general unsecured claims in Class 4; all claims were treated as impaired.
- Pacific Western Bank held a senior secured claim exceeding $3.95 million against Fagerdala’s real property (valued at about $6 million).
- To obtain a blocking position in the unsecured class, Pacific Western purchased some (but not all) Class 4 general unsecured claims; some claims were not purchased due to cost or creditors’ refusal to sell.
- Pacific Western voted against the plan using its secured claim and the purchased unsecured claims, and the Class 4 votes were sufficient to block confirmation.
- Fagerdala moved under 11 U.S.C. § 1126(e) to designate (disqualify) the purchased-claim votes, alleging Pacific Western acted in bad faith.
- The bankruptcy court granted the motion, emphasizing Pacific Western’s failure to offer to buy all Class 4 claims and the perceived unfair effect on remaining unsecured creditors, while declining to analyze whether Pacific Western acted with an ulterior motive beyond economic self-interest.
- The district court affirmed, and Pacific Western appealed.

## Issues

1. Whether a court may designate votes under 11 U.S.C. § 1126(e) as not cast in good faith solely because a creditor selectively purchases unsecured claims to block plan confirmation.
2. Whether adverse impact on other creditors, without evidence of an ulterior motive, is sufficient to support a finding of bad faith under § 1126(e).
3. Whether § 1126(e) requires an inquiry into whether the creditor sought an untoward advantage for an ulterior motive beyond ordinary economic self-interest.

## Decision

- The Ninth Circuit vacated the designation order and remanded.
- The court held that § 1126(e) does not permit vote designation merely because a creditor buys only some claims to block a plan and the blockage harms other creditors.
- The court ruled that “bad faith requires more” than self-interested vote-blocking; there must be at least some evidence the creditor sought an untoward advantage for an ulterior motive.
- Because the bankruptcy court refused to analyze whether Pacific Western acted with an ulterior motive, it applied an incorrect legal standard.

## Legal Principles

- A creditor may generally vote claims consistent with its economic self-interest, including to block confirmation of a plan it views as unfavorable.
- Under 11 U.S.C. § 1126(e), designation for lack of good faith is a limited remedy and requires more than showing a creditor opposed the plan or traded claims to increase leverage.
- At minimum, bad faith requires evidence that the creditor sought an untoward advantage over other creditors for an ulterior motive unrelated to its legitimate interests as a creditor.
- A creditor’s failure to purchase all claims in a class is not, by itself, evidence of bad faith under § 1126(e).

## Conclusion

The Ninth Circuit held that selective unsecured-claim purchases and plan-blocking, even if harmful to other creditors, do not alone establish bad faith under § 1126(e); courts must look for evidence of an ulterior motive seeking an untoward advantage beyond ordinary creditor self-interest.


Pac. W. Bank v. Fagerdala USA-Lompoc, Inc. (In re Fagerdala USA-Lompoc, Inc.), 891 F.3d 848 (9th Cir. 2018)