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Claim Buyers Beware: Timing Is Critical

Nov 30, 2012

(originally published in the American Bankruptcy Institute Journal, October 2012)

By Johnathan C. Bolton

In Beal Bank USA v. Windmill Durango Office LLC (In re Windmill Durango Office LLC),1 the Bankruptcy Appellate Panel (BAP) for the Ninth Circuit upheld a decision by Hon. Linda B. Riegle that “cause” under Federal Bankruptcy Rule 3018(a) requires something more than “a mere change of heart” and that withdrawing a previously cast vote for the purpose of strategy (i.e., for the purpose of blocking plan confirmation) did not constitute “cause” under Federal Bankruptcy Rule 3018(a).

In Windmill Durango Office, the debtor filed a single-asset real estate case in the U.S. Bankruptcy Court for the District of Nevada, scheduling Beal Bank as its only secured creditor along with a few unsecured creditors.2 The debtor’s plan proposed stretching out Beal Bank’s secured claim over time with a balloon payment due at the end of the tenth year while paying 100 percent of allowed unsecured claims without interest 90 days after confirmation.3 Beal Bank argued, among other things, that the debtor purposely impaired the unsecured creditor class so as to force the plan on Beal Bank, the only truly impaired creditor.4 A total of three creditors filed ballots in connection with the plan.5 Beal Bank voted to reject the plan, and two unsecured creditors voted to accept the plan.6

A week before the balloting deadline, Beal Bank filed an “Unconditional Transfer and Assignment of Claim after Proof of Claim Filed” and disclosed that it was buying the claim of one of the unsecured creditors who had voted to accept the plan.7 Three days later, Beal Bank filed a motion seeking permission, under Rule 3018(a), to withdraw the affirmative ballot filed by the assignor-creditor and to substitute it with a ballot rejecting the plan.8 Beal Bank admitted in its motion that it purchased the unsecured claim in order to block plan confirmation, as the debtor was seeking cramdown of the plan under § 1129(b)(2)(B) and the debtor would be unable to meet the numerosity requirement of § 1126(c) if the creditor’s affirmative vote was withdrawn.9 Beal Bank alleged that its purchase of an unsecured claim to block confirmation did not constitute bad faith and asserted that it had no improper motivation in withdrawing the vote to accept the plan, but rather wanted to protect its own claim.10 Beal Bank also pointed out that it was acting to withdraw the previously filed ballot and change the vote before the ballot deadline expired.11

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