Pacific Western Bank v. Fagerdala USA-Lompoc, Inc. (In re Fagerdala USA-Lompoc, Inc.)

Fagerdala USA-Lompoc, Inc. (Fagerdala) (debtor) filed for chapter 11 bankruptcy. Fagerdala’s proposed reorganization plan placed a senior secured claim held by Pacific Western Bank (Pacific Western) (creditor) in Class 1 and general unsecured claims in Class 4. Because all the creditors’ claims were deemed impaired, Fagerdala needed at least one class of claims to accept the plan for the plan to be approved. Pacific Western purchased over half of Fagerdala’s general unsecured claims to try to ensure that Class 4 could not accept Fagerdala’s proposed plan. Pacific Western’s counsel asserted that Pacific Western purchased the claims because establishing a blocking position in Class 4 was in Pacific Western’s best interest economically. Pacific Western did not purchase all the claims in Class 4 because some claims were too expensive and some creditors rejected Pacific Western’s purchase offer, among other reasons. Pacific Western subsequently voted against Fagerdala’s proposed plan with its secured claim and the purchased unsecured claims. The votes were sufficient to block the plan. Fagerdala moved to designate (i.e., throw out) the votes of the purchased unsecured claims under 11 U.S.C. § 1126(e), arguing that Pacific Western had not purchased the claims in good faith. At a hearing on Fagerdala’s motion, the bankruptcy court expressed concern that (1) Pacific Western had not offered to purchase all the claims in Class 4 and (2) allowing the votes of the purchased claims would unfairly advantage Pacific Western. The court refused to consider Pacific Western’s motives or rationale for purchasing the claims. The court ultimately granted Fagerdala’s motion to designate the purchased claims’ votes. The district court affirmed, and Pacific Western appealed.