In so holding, the Court sanctioned the lender’s motive of purchasing claims to block the plan for the purpose of protecting its own existing claim. The Court held that the relevant bad faith inquiry under 11 USC § 1126(e) requires a motive which is ulterior to the purpose of protecting a creditor’s economic interest in a bankruptcy proceeding.

Background

The lender held a senior lien fully secured by the debtor’s real property. The debtor’s proposed “cramdown” plan sought to extend and modify the terms of the mortgage without the lender’s consent.

Lest you thought you had heard the end of the Stern v. Marshall debate, two recent circuit court decisions remind us that Stern is alive and influential. In October, the Sixth Circuit weighed in on a bankruptcy court’s constitutional authority where it discharged certain fraudulent debts and awarded damages. In early December, the Ninth Circuit performed a similar constitutional analysis where the bankruptcy court decided a fraudulent transfer action against a noncreditor of the bankruptcy estate.

The US Court of Appeals for the Ninth Circuit recently held that a creditor of a bankrupt corporation may assert alter ego claims against the corporation’s sole shareholders. The California Court of Appeals for the Second Appellate District not only supports the Ninth Circuit’s decision but has recently taken it one step further, holding that alter ego allegations are not even subject to the automatic bankruptcy stay.