Lichtin/Wade, LLC

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NORTH CAROLINA
RALEIGH DIVISION
IN RE:
LICHTIN/WADE, LLC,
DEBTOR
CHAPTER 11
CASE NO. 12-00845-8-RDD
ORDER DENYING DEBTOR’S
MOTION TO DESIGNATE THE VOTES OF ERGS II, L.L.C.
AS SUBMITTED IN BAD FAITH PURSUANT TO 11 U.S.C. § 1126(e)
Pending before the Court is the Motion to Designate the Votes of ERGS II, L.L.C. as
Submitted in Bad Faith Pursuant to 11 U.S.C. § 1126(e) (the “Motion”) filed by Lichtin/Wade, LLC
(the “Debtor”) on August 10, 2012 and the Objection of ERGS II, L.L.C. to Debtor’s Motion to
Designate the Votes of ERGS II, L.L.C as Submitted in Bad Faith Pursuant to 11 U.S.C. § 1126(e)
(the “Objection”) filed by ERGS II, L.L.C. (“ERGS”) on September 4, 2012. The Court conducted
a hearing on this matter on October 31, November 7, and November 15, 2012 in Wilson, North
Carolina.
BACKGROUND
The Debtor filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code on
February 2, 2012. The Debtor owns two office buildings located in Raleigh, North Carolina and
operates as a debtor-in-possession. First Amended Disclosure Statement at 7, In re Lichtin/Wade,
SO ORDERED.
SIGNED this 17 day of December, 2012.
________________________________________
Randy D. Doub
United States Bankruptcy Judge
____________________________________________________________
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LLC, No. 12-00845-8-RDD (Bankr. E.D.N.C. July 19, 2012). The two office buildings are Class A
office buildings. Id. “Each building has approximately 100,000 square feet of rentable space. Each
building is approximately 90% leased.” Id. In addition, the Debtor owns vacant land consisting of
approximately twelve acres which is approved for three additional office buildings. Id. Prior to the
date of filing, the Debtor and Branch Banking and Trust Company (“BB&T”) entered into four
promissory notes (the “Secured Notes”), 1 secured by all of the Debtor’s real property, assignment
of rents, and certain of the Debtor’s personal property. 	The four Secured Notes matured on
December 15, 2011.
On March 27, 2012, BB&T entered into an agreement with ERGS, whereby ERGS
purchased from BB&T all of its rights, title, and interests in and to the Secured Notes. On May 2,
2012, ERGS filed Proof of Claim No.10 in the secured amount of $39,236,631.03 representing
principal, interest, and fees. On May 29, 2012, the Debtor filed the Objection to Claim, objecting
to ERGS’s Proof of Claim. On August 8, 2012, the Court entered an order determining that ERGS’s
claim was to be treated as a secured claim in the amount of $38,390,000.00, and an unsecured claim
in the amount of $673,661.91.
1
Dated 	Original Principal Amount
Note 2 	May 3, 2007 	$15,035,000.00
Note 3 	August 31, 2007 	$5,665,512.00
Note 4 	August 31, 2007 	$16,800,000.00
Note 7 	September 13, 2011 	$1,950,000.00
2
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On April 24, 2012, the Debtor and ERGS entered into a stipulation agreement agreeing and
stipulating that the real property owned by the Debtor securing ERGS’s claim shall be valued at
$38,390,000.00.
On March 26, 2012, the Debtor filed the Plan of Reorganization and Disclosure Statement.
On April 11, 2012, the Debtor withdrew the Plan of Reorganization and Disclosure Statement and
re-filed the Plan of Reorganization and the Disclosure Statement. 	On July 19, 2012, The Debtor
filed the First Amended Plan and First Amended Disclosure Statement. On October 15, 2012 the
Debtor filed the Second Amended Chapter 11 Plan and the Supplement to the First Amended
Disclosure Statement. ERGS filed an objection to confirmation of the Debtor’s Second Amended
Plan of Reorganization on October 22, 2012.
On May 29, 2012, ERGS filed notices as to the transfer of the Class 11 claims of Tri
Properties, Inc. and MCC Realty Group, Inc., two of the four claims in Class 11 - Tenant Broker
Claims.
The Debtor filed the Motion on August 10, 2012 and ERGS filed the Objection on September
4, 2012. For purposes of the Motion and the Objection the Court will analyze the Second Amended
Chapter 11 Plan and the First Amended Disclosure Statement and the Supplement to the First
Amended Disclosure statement for purposes of the Motion and the Objection.2
On July 17, 2012, ERGS filed its Motion to Terminate Exclusivity, seeking termination of
the exclusive periods relating to both filing a plan and soliciting a plan, which motion attached a
draft of ERGS’s proposed creditor’s plan. On July 25, 2012, the Debtor filed a motion to extend
2Section 1127 of the Bankruptcy Code provides a plan proponent may modify a plan any
time before confirmation. The modified plan then becomes the plan and is to be treated as the
original plan.
3
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exclusivity, but only with respect to extending its exclusivity for soliciting votes with respect to the
Amended Plan. On July 26, 2012, ERGS filed a disclosure statement with respect to its proposed
draft creditor’s plan. ERGS subsequently filed the Creditor’s Plan of Reorganization for
Lichtin/Wade, LLC Pursuant to Chapter 11 of the Bankruptcy Code (“ERGS Plan”) and the
Disclosure Statement for Creditor’s Plan of Reorganization for Lichtin/Wade, LLC Pursuant to
Chapter 11 of the Bankruptcy Code (“ERGS Disclosure Statement”) on July 27, 2012. The Court
conducted a hearing on the Motion to Terminate and the motion to extend exclusivity and later
entered a scheduling order extending the Debtor’s exclusive period to solicit votes with respect to
the Amended Plan. On September 4, 2012, ERGS withdrew the ERGS Plan and the ERGS
Disclosure Statement.
As to ERGS, the Second Amended Chapter 11 Plan (the “Plan”) provides ERGS shall be
allowed a secured claim of $38,390,000.00. The Plan proposes to amortize ERGS’s claim over
thirty (30) years with interest at 5%. The Plan provides the note will mature in five (5) years. 3
The Debtor moves the Court to “designate” all votes cast by ERGS in this case as submitted
in bad faith, and disallow such votes pursuant to Section 1126(e). The Debtor contends that ERGS
is acting not as a creditor in this case, but instead is acting for its own ulterior motive of obtaining
control of the Debtor’s business operations. The Debtor argues that subsequent to ERGS purchasing
the Debtor’s loans from BB&T, it has engaged in conduct that shows it is attempting to obtain
3The First Amended Plan filed on July 19, 2012 provided ERGS shall be allowed a
secured claim of $38,390,000.00. The Plan proposed to provide for monthly payments of
interest in the amount of $159,958.33 with interest at 4.75%. Additionally, the Debtor was to pay
the sum of $10,000.00 per month, which shall be credited against the principal balance and on or
before January 30 th of each year, pay to ERGS the sum equal to 25% of the Net Cash Flow from
the preceding year. The Plan provides the note will mature in five (5) years
4
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control of the Debtor’s buildings, instead of acting as a creditor in this case. This conduct, the
Debtor contends, warrants the extraordinary remedy of disqualifying the votes of ERGS.
In response, ERGS contends that the right of a creditor to vote on a plan of reorganization
is a sacred right and a party seeking to revoke that right faces a heavy burden. ERGS argues that
under the Debtor’s Plan, ERGS would be forced to hold a restructured note inconsistent with current
market terms and that as the largest creditor in this case, it has the greatest economic stake and risk.
ERGS asserts that it has the right to exercise its own business judgment to protect its own economic
interest and the Debtor has not met its heavy burden of showing its votes were not cast in good faith.
DISCUSSION
For a debtor to obtain confirmation of a plan, Chapter 11 generally requires a vote of all
holders of claims and interests impaired by the plan. DISH Network Corp. v DBSD North America,
Inc., et al (In re DBSD North America, Inc.), 634 F.3d 79, 101 (2nd Cir. 2011) (citing 11 U.S.C. §§
1126, 1129(a)(8)). An exception to this requirement is 11 U.S.C. § 1126(e). Section 1126(e) of the
Bankruptcy Code provides, “[o]n request of a party in interest, and after notice and a hearing, the
court may designate any entity whose acceptance or rejection of such plan was not in good faith, or
was not solicited or procured in good faith or in accordance with the provisions of this title.” 11
U.S.C. § 1126(e).
“Bankruptcy courts should employ § 1126(e) designation sparingly, as ‘the exception, not
the rule.’” DBSD North America, Inc. 634 F.3d at 101 (citing In re Adelphia Commc’ns Corp., 359
B.R. 54, 61 (Bankr. S.D.N.Y. 2006)). The party seeking to designate a vote as submitted in bad faith
has a heavy burden of proof. 	In re Adelphia Communications Corp., 359 B.R. 54, 61 (Bankr.
S.D.N.Y. 2006). Creditor’s have a fundamental right to vote on a debtor’s Chapter 11 plan and
5
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designation of a creditor’s vote is a drastic remedy. 	Id. 	Purchasing claims “for the purpose of
securing the approval or rejection of a plan does not of itself amount to ‘bad faith.’” DBSD North
America, Inc., 634 F.3d at 102 (citing In re P-R Holding Corp., 147 F.2d 895, 897 (2d Cir. 1945);
In re 255 Park Plaza Assocs. Ltd. P’ship, 100 F.3d 1214, 1219 (6th Cir. 1996)). Mere selfishness or
protecting one’s own self interest does not give rise to bad faith. Id. at 102. Section 1126(e) applies
to creditors who are attempting to obtain a benefit to which they are not entitled. Id. (citing In re
Figter, 118 F.3d 635, 638 (9th Cir. 1997)).
The Bankruptcy Code does not define “good faith.” Section 1126(e)’s “‘good faith’ test
effectively delegates to the courts the task of deciding when a party steps over the boundary.” Id.
at 101 (citation omitted). Supreme Court and Circuit Court precedents on the “good faith” voting
requirement are sparse. Id. Courts make the “good faith” determination on a case-by-case basis. Id.
The test is “whether a creditor has cast his vote with an ‘ulterior purpose’ aimed at gaining
some advantage to which he would not otherwise be entitled in his position.” In re Gilbert, 104 B.R.
206, 216 (Bankr. W.D. Mo. 1989) (citing In re A.D.W., Inc., 90 B.R. 645, 649 (Bankr. D.N.J. 1988);
In re MacLeod Co., Inc., 63 B.R. 654, 655 (Bankr. S.D. Ohio 1986)). However, not just any “ulterior
motive” will be considered an improper motive for purposes of finding bad faith under § 1126(e).
DBSD North America, Inc., 634 F.3d at 102 “[M]ost creditors have interests beyond their claim
against a particular debtor, and those other interests will inevitably affect how they vote the claim.”
Id.
Here, the Court must determine whether ERGS voted with an ulterior motive aimed at
gaining an advantage to which it would not have otherwise been entitled. The ulterior motive which
11 U.S.C. § 1126(e) was intended to target is illustrated in the case Texas Hotel Sec. Corp. v. Waco
6
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Dev. Co., 87 F.2d 395 (5th Cir. 1936), cert. denied sub nom., Waco Dev. Co. v. Rupe, 300 U.S. 679
(1937). Id. The statute which ultimately became §1126(e) was enacted in response to the Waco
decision. There, Conrad Hilton purchased claims to block confirmation of a plan of reorganization.
Texas Hotel Sec. Corp., 87 F.2d at 397-99. The plan proposed to give a lease on the debtor’s
property, which was once held by Mr. Hilton, to a third party. Id. at 397. Mr. Hilton’s purpose for
buying the claim was to “force [a plan] that would give them again the operation of the hotel or other
wise reestablish an interest that they felt they justly had in the property.” Id. at 398. Ultimately, the
Fifth Circuit allowed Hilton’s vote as it found no authority in the then existing Bankruptcy Act to
disallow the votes. Id. at 400. Two years later, Congress enacted the good faith standard for voting.
DBSD North America, Inc., 634 F.3d at 103.
Subsequent to the decision in Texas Hotel Securities Corp., other courts have commented
on what constitutes a lack of good faith in the context of 11 U.S.C. § 1126(e). The Ninth Circuit in
Fighter recognized that in the context of § 1126(e), “[i]f a person seeks to secure some untoward
advantage over other creditors for some ulterior motive, that will indicate bad faith.” Figter Ltd. v.
Teachers Ins. and Annuity Assoc. of Am. (In re Figter Ltd.), 118 F.3d 635, 639 (9th Cir. 1997). There,
the debtor asserted the creditor should be precluded from voting its purchased claims because they
were not purchased in good faith. Id. at 638. The Ninth Circuit noted:
If a selfish motive were sufficient to condemn reorganization policies of interested
parties, very few, if any, would pass muster. On the other hand, pure malice,
“strikes” and blackmail, and the purpose to destroy an enterprise in order to advance
the interests of a competing business, all plainly constituting bad faith, are motives
which may be accurately described as ulterior.
Id. at 638 (citing In re Pine Hill Collieries Co., 46 F.Supp. 669, 671 (E.D.Pa. 1942)). The Court
went on to acknowledge “the mere fact that a creditor has purchased additional claims for the
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purpose of protecting his own existing claim does not demonstrate bad faith or an ulterior motive.”
Id. at 639.
The Second Circuit in Dish Network Corp. v. DBSD North America, Inc. (In re DBSD North
America, Inc.), 634 F.3d 79, 101 (2nd Cir. 2011) upheld the bankruptcy court’s decision which
found that “DISH, as an indirect competitor of [the debtor] and part-owner of a direct competitor,
bought a blocking position in (and in fact the entirety of) a class of claims, after a plan had been
proposed, with the intention not to maximize its return on the debt but to enter a strategic transaction
with [the debtor] and ‘to use status as a creditor to provide advantages over proposing a plan as an
outsider, or making a traditional bid for the company or its assets.’” Id. at 104 (citations omitted).
There, the creditor DISH, purchased claims to pursue “its own strategic objective of acquiring [the
debtor’s] spectrum rights, not toward protecting its claim.” Id. The spectrum rights were critical to
DISH’s growth and the acquisition of the claims and “was not a purchase to make a profit on
increased recoveries under a reorganization plan.” In re DBSD North America, Inc., 421 B.R.
133,136 (Bankr. S.D.N.Y 2009). Instead, DISH “acted to advance strategic investment interests
wholly apart from maximizing recoveries on a long position in debt it [held].” Id. at 142.
The Bankruptcy Court for the Western District of Pennsylvania found bad faith when a
creditor purchased claims after the debtor’s disclosure statement was approved in order to block the
debtor’s plan for the purpose of taking over and controlling the debtor. In re Allegheny Intern., Inc.,
118 B.R. 282, 287 (Bankr. W.D. Pa. 1990). The bankruptcy court stated, “Japonica, like Hilton in
the Waco case, bought a blocking position after the debtor proposed its plan of reorganization. In
Waco, Hilton’s objective was to force Waco to reestablish Hilton’s interest in the hotel. In the instant
case, Japonica’s interest is to take over and control the debtor.” Id. at 289. In In re MacLeod Co.,
8
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Inc., the Bankruptcy Court for the Southern District of Ohio designated the creditor’s vote when the
ulterior motive was to “destroy[] or injur[e] [the] debtor in its business so that the interests of the
[creditor’s] competing business . . . could be furthered.” 63 B.R. 654, 655-56 (Bankr. S.D. Ohio
1986).
Here, the Debtor contends ERGS is acting in bad faith based on an improper ulterior motive
based on the following: (1) ERGS was not originally a creditor of the Debtor; (2) ERGS is a direct
or indirect competitor of the Debtor; (3) ERGS wants to obtain control of the Debtor’s business; (4)
ERGS bought claims after the plan was filed to obtain a blocking position on the Debtor’s plan; and
(5) ERGS filed a competing plan in violation of the exclusivity period, and sought permission to
terminate exclusivity to file a competing plan. The Debtor cites to four factors indicating bad faith,
including when votes are designed to “(1) assume control of the debtor, (2) put the debtor out of
business or otherwise gain a competitive advantage, (3) destroy the debtor out of pure malice, or (4)
obtain benefits available under a private agreement with a third party which depends on the debtor’s
failure to reorganize.” In re Dune Deck Owners, Corp., 175 B.R. 839, 844-45 (Bankr. S.D.N.Y.
1995) (internal citations omitted).
ERGS contends that it is owed approximately $39 million and is, by far, the largest secured
and unsecured creditor in this single asset real estate case. Because of that, ERGS argues that it was
permissible to use its own business judgment to determine that the plans proposed by the Debtor are
not in the best economic interests of ERGS. ERGS represents that all of its actions were motivated
based on what was in its best economic interest.
The Court holds that the Debtor has failed to carry its heavy burden with respect to whether
ERGS rejected and voted against the plan not in good faith.
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The Debtor contends that ERGS is a direct or indirect competitor of the Debtor. Specifically,
the Debtor argues that ERGS is an affiliate of Archon Group, L.P. (“Archon”) and that Archon acts
as the servicer for the Debtor’s loans. ERGS and Archon are operated out of the same location as
ERGS. The Debtor contends that Archon’s website states “Archon’s group of real estate
professionals oversees the management, leasing and disposition activities for all real estate assets.
. . . Archon builds value through the acquisition, development, management, financing and
disposition of real estate investments.” Based on this language, the Debtor contends that Archon
is in the same business as the Debtor. Furthermore, the Debtor contends ERGS owns an interest in
a direct competitor of the Debtor. The Debtor represents that ERGS is the managing member of
ERGS II REO Owner, L.L.C., and that in early 2012, ERGS II REO Owner, L.L.C. purchased six
(6) office buildings, all within approximately five miles of the Debtor’s buildings.4
In response, ERGS contends that the suggestion that Archon and the Debtor are in the same
business is not credible. Archon services the Debtor’s loans and there is no evidence suggesting that
4In addition, the Debtor argues that deposition testimony of Craig Boyd indicates that
ERGS was a competitor of the Debtor. The testimony is as follows:
Q. I think you said earlier that you would consider these blue properties competitors of
Lichtin/Wade, or would you?
A. There’s a lot of considerations going into whether something’s a competitor or not.
Q. Well, do you consider them competitors or not?
A. I would consider them competitors, sure.
(Deposition, Debtor’s Ex. 48, Page 200, Sept. 26, 2012.)
The next day counsel for ERGS questioned Mr. Boyd regarding his response to the above
deposition question. At the deposition, Mr. Boyd stated that he discussed this question with his
counsel after the deposition and he felt that the question was confusing and needed clarity. Mr.
Boyd went on to explain that he didn’t believe the buildings compete with one another. “They
may or may not – I don’t know – offer similar amenities, characteristics, space, but, you know,
that’s going to be up to the tenant, and it’s going to be a tenant-by-tenant decision.”
(Deposition, Debtor’s Ex. 48, Page 200, Sept. 26, 2012).
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the Debtor services real-estate based loans or that the Debtor makes real estate backed loans to third
parties. Here, ERGS contends, the Debtor has simply developed two office buildings, owns three
additional lots for future development, and uses a third-party affiliate/insider to manage and lease
those buildings. Thus, ERGS contends, the argument that Archon and the Debtor are in the same
business is not credible.
At the hearing, Craig Boyd, a Vice President with the Archon group, testified that ERGS
purchased the Secured Notes because it saw an opportunity for a good investment. Based on an
extensive underwriting process conducted by ERGS, it determined that by purchasing the Secured
Notes it could recover a profitable rate of return. Further, in Mr. Boyd’s declaration, he stated that
based on the Debtor’s proposed plan treatment, ERGS made the decision to purchase the claims of
the tenant brokers in Class 11, to protect its own economic interests. ERGS’s Objection, Declaration
of Craig Boyd Regarding Response to Debtor’s Motion to Designate Votes Case by ERGS II, L.L.C.
at 4. There were four claims total, but ERGS was only able to acquire two of the claims, which were
acquired for less than the par value of those entities filed proofs of claim. Id. Additionally, Mr. Boyd
states that had “ERGS’s only goal been to own the Debtor’s real property, it would have been easier
and less costly for ERGS to simply have filed a motion to lift stay and seek foreclosure. Instead,
ERGS spent significant sums preparing its creditor’s plan and the related disclosure statement,
which would have given unsecured creditors a real opportunity to get paid.” Id. at 6.
Mr. Mark Holman, also a Vice President with the Archon group, testified that he was the lead
underwriter of the debt acquisition side of the Secured Notes. 	He testified that his ultimate
responsibility within Archon is to find investment opportunities. He testified that ERGS conducted
an extensive underwriting process prior to purchasing the Secured Notes. Based on the underwriting
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process it was determined that the best outcome for ERGS would be for it to foreclose upon the
Debtor’s property. Although this was the best scenario, Mr. Holman testified that ERGS considered
other possibilities that did not involve foreclosure, but those scenarios would not provide the most
return to ERGS. He testified that the intent was not to own and control the property, but that ERGS
wanted to maximize the return for their investors.
Mr. Timothy J. Dragelin is a Senior Managing Director in the Corporate Finance Practice
as well as a Senior Manager of the Real Estate and Structured Finance Group at FTI Consultant. His
firm was retained as counsel to ERGS. He was asked to evaluate the Debtor’s First Amended Plan
(the “Amended Plan”) and First Amended Disclosure Statement (the “Amended Disclosure
Statement”) filed by the Debtor as well as the Debtor’s real property. In his opinion the Amended
Plan was not fair and equitable, ERGS was not receiving the indubitable equivalent of its claim and
the Amended Plan was not feasible. Mr. Dragelin testified the Amended Plan was not fair and
equitable because all the risks involved were being borne by ERGS. The loan at issue is a100% loan
to value loan, which Mr. Dragelin testified would leave 98% of the debt outstanding at the end of
the plan period. Mr. Dragelin testified that the triangle real estate market has approximately 29
million square feet of rentable Class A office space. With the total rentable office space constituting
approximately 40-50 million square feet. 	Mr. Dragelin testified that the Debtor currently has
200,000 square feet of office space, 90% of which is already leased. Mr. Dragelin represented that
the Debtor’s total square footage represents 1% of the market.
Mr. Harold Lichtin testified on behalf of the Debtor. Mr. Lichtin testified as to the Debtor’s
real property. Mr. Lichtin testified that the Debtor itself does not have any employees and does not
have any contacts with the tenants in the Debtor’s buildings. He testified that Lichtin Corporation
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is the entity that makes contact with the tenants. Mr. Lichtin represented that each of the Debtor’s
buildings has approximately10,000 square feet of rentable office space available. He testified that
the vacant space is not desirable as it is not located in one single block of space. It is instead located
in various 1,000 square foot pockets around the building. Mr. Lichtin testified it is difficult to find
a tenant to lease these 1,000 square foot pockets because there is a problem of egress and ingress.
Based on the totality of the circumstances, the Court finds that ERGS purchased claims for
the purpose of maximizing its investment and advancing its own economic interest rather than for
the purpose of advancing a strategic competitive interest against the Debtor. Here, Mr. Boyd and Mr.
Holman testified that ERGS engaged in an extensive underwriting process to determine that
purchasing the Secured Notes would be in the best economic interest of ERGS. Unlike in DBSD
North America, Inc., the Debtor here does not have much rentable office space and the rentable
office space that is available is difficult to lease. See DBSD North America, Inc. 634 F.3d at 104.
The square footage is positioned in undesirable 1,000 square foot pockets placed in odd areas in the
building. This makes it unlikely that the Debtor is posing a direct or indirect competition to any
Class A office space owners. While it does appear that ERGS may have purchased claims to allow
it to control certain classes to maximize its return, this is not a motive that Court’s have found to
show a lack of good faith. The Court finds that the Debtor has failed to show that ERGS purchased
claims for the purpose of putting it in direct or indirect competition with the Debtor.
Next, the Debtor contends that even if ERGS was not a direct or indirect competitor of the
Debtor, it is attempting to take control of the Debtor and this evidences bad faith. Specifically, the
Debtor argues that ERGS filed its own plan which proposes that the Debtor’s buildings and vacant
land be transferred to ERGS, free and clear of all liens, allowing ERGS to take complete control of
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the Debtor’s business and everything necessary to continue to operate it going forward. In response,
ERGS contends that in its business judgment, it determined that confirmation of the Debtor’s Plan
would be a worst case scenario for ERGS. ERGS contends it was entitled to protect itself from that
outcome. ERGS represents this conclusion was based on the fact that the Debtor’s Plan of
Reorganization and Disclosure Statement and the Debtor’s First Amended Plan and First Amended
Disclosure Statement:
(i) are not economically feasible, (ii) are not fair and equitable to ERGS, (iii) are not
providing ERGS the indubitable equivalent of its claim, (iv) saddle ERGS with all
of the risk of performance/failure, (v) permit insiders to continue to extract
substantial cash from the Debtor through well-above-market management fees, (vi)
propose terms for a restructured note that are substantially below market, (vii)
provide no meaningful assurance as to the eventual repayment of unsecured claims
(the Amended Plan proposes to pay these out over ten years), (viii) violate the
absolute priority rule by impaired unsecured creditors while permitting the current
members to retain 100% of the equity, and (ix) would likely result in a default by the
Debtor at a maturity because the proposed loan structure would require no
meaningful principal reduction.
ERGS’s Objection at 14. 5
Based on the totality of the circumstances, the Court finds that ERGS was motivated
primarily to improve its plan treatment rather than to take complete control of the Debtor’s business.
Based on the testimony of Mr. Boyd, Mr. Holman and Mr. Dragelin, ERGS determined that the
Debtor’s proposed plan was worse for ERGS as the proposed treatment was not fair and equitable.
For this reason, Mr. Boyd testified, ERGS filed its own plan. The Court finds that the Debtor has
failed to meet the heavy burden of proving that ERGS acted in bad faith. In re Marin Town Center,
142 B.R. 374, 379 (N.D.Cal. Feb. 18, 1992) (noting that a “vote cannot be said to have been cast in
5ERGS has also raised questions regarding various prepetition transfers from the Debtor
to various insider entities.
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bad faith simply because it was voted for the purpose of blocking confirmation of a reorganization
plan. In fact, rejection of a plan by ‘a party, largely interested in the Debtor before his acquisition
of controlling rights, who withholds consent to a plan primarily because he believes its
consummation will be more injurious to his investment in the [d]ebtor than liquidation, meets the
standard of good faith’”(citation omitted)).
In addition, the Debtor asserts that ERGS purchased its claims after the Plan was filed to
obtain a blocking position on the Debtor’s Plan and this constitutes bad faith. ERGS responds that
based upon its belief that the Debtor improperly manipulated the classification of claims and
treatment of creditors in the original plan, it purchased claims of certain tenant brokers to protect
its economic interest. Accordingly, ERGS contends it attempted to acquire the claims of all the
tenant brokers owed money by the Debtor, although only two tenant brokers accepted offers from
ERGS. Here, based on the evidence and the testimony of Craig Boyd, ERGS’s motive in purchasing
claims was to protect its economic interest. The Court finds the mere fact that ERGS purchased
claims to protect its own interest does not demonstrate bad faith. See In re Figter, Ltd., 118 F.3d
at 639.
Further, the Debtor contends that because ERGS was not originally a creditor of the Debtor
and approximately fifty-three days into the case purchased the Debtor’s obligations from BB&T,
it cannot be seen to be voting against the Plan in order to protect its investment. The Debtor
contends, if ERGS is concerned with the return on its investment, it should not have purchased the
obligations of a Chapter 11 Debtor. In response, ERGS acknowledges that it had no pre-existing
interest in the Debtor or its case pre-petition, but that does not equate to bad faith. ERGS contends
that claims are bought and sold in bankruptcy cases on a daily basis throughout the country and for
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the Debtor to suggest that such a fact equates to bad faith ignores reality and case law. ERGS cites
to In re Marin Town Center, 142 B.R. 374, 379 (N.D. Cal. 1992) (holding that an investor that
purchased the claim of a secured creditor after the debtor filed for bankruptcy was not in bad faith.
Noting that ruling otherwise, would give investors little incentive to purchase claims from a creditor
in bankruptcy.)
The Court finds that even though ERGS had no pre-existing interest in the Debtor prior to
its purchase of the claims, ERGS is still entitled to protect its own self interest and this does not
show bad faith.
CONCLUSION
Based on the totality of the circumstances, the Court finds that Debtor has failed to carry its
heavy burden of proof to show that ERGS is an entity whose rejection of the Plan was not in good
faith. Therefore, ERGS shall not be designated as an entity not voting in good faith. The Motion is
DENIED.
SO ORDERED.
END OF DOCUMENT
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