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Circus & Eldorado Joint Venture: Court Rules on “Bad Faith” for Vote Designation

The right of an impaired creditor to vote to accept or reject a plan of reorganization is one of the most “sacred entitlements that a creditor has in a chapter 11 case.” The Bankruptcy Code, however, balances that vital right by granting a court with authority to strip that creditor of its vote (i.e., designate the vote) as a consequence of certain actions taken by, or behavior exhibited by, that creditor. Given the severe implications of such extraordinary relief, courts have almost universally recognized that depriving these creditors of the right to vote on a plan is a drastic remedy.

A recent ruling by the United States Bankruptcy Court for the District of Nevada in the chapter 11 cases of Circus & Eldorado Joint Venture, is just the latest in a series of decisions in which a court found that, given the facts and circumstances it was confronted with, designation was nevertheless warranted. As the Circus and Eldorado decision illustrates, the key question for the court remains relatively simple: are a creditor’s actions sufficiently “ulterior” and/or inequitable enough to be deemed one of the so-called “badges of bad faith.”

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