Chairman and CEO Andy Kassner and Philadelphia and Wilmington associate Joe Argentina authored an article in The Legal Intelligencer titled “Ninth Circuit Reviews Whether Claims Purchased in Good Faith to Block Chapter 11 Plan.” This article, a follow-up to their report on In Re: Rent-A-Wreck, reports on the details of In Re: Fagerdala, another case that addresses the contours of “good faith” in bankruptcy. While Rent-A-Wreck addressed bad faith in the context of filing for bankruptcy, Fagerdala involved a secured lender’s purchase of just enough unsecured claims to block confirmation of the Debtor’s Chapter 11 plan.
The Bankruptcy Court found the lender acted in bad faith, and “designated” the purchased claims. In doing so, the purchased claims were not counted for plan confirmation purposes. The lender appealed to the District Court and lost. On further appeal, the Ninth Circuit reversed the District Court’s order affirming a Bankruptcy Court decision, ruling that the purchase of bankruptcy claims for the sole purpose of blocking a Chapter 11 plan is not, in and of itself, sufficient to support a finding of bad faith. Rather, a bankruptcy court must also consider whether the purchaser sought to gain some untoward advantage and acted with an ulterior motive.
Both Rent-A-Wreck and Fagerdala illustrate how courts undertake a fact-intensive review when addressing the issue of good faith.