What Must a Secured Creditor Do to Get Its Due?

by Mintz Levin
Contact

Last month, the Fifth Circuit Court of Appeals ruled that a secured creditor’s claim survives bankruptcy where the secured creditor received notice of the case and was found to have not actively participated in it. Acceptance Loan Co. v. S. White Transp., Inc. (In re S. White Transp., Inc.), 2013 U.S. App. LEXIS 16181 (5th Cir. Aug. 5, 2013).

It is well-known that under most circumstances, liens pass through bankruptcy unaffected — that is, a secured claim survives the bankruptcy process and continues to exist. An exception to this rule is created by Bankruptcy Rule § 1141(c), which provides that under certain circumstances, after confirmation of a plan, property can become “free and clear” of all liens. For such treatment to take place, four conditions must be met: (1) a plan must be confirmed; (2) the property that is subject to the lien must be dealt with by the plan; (3) the lien holder must participate in the reorganization, and (4) the plan must not preserve the lien. See In re Ahern Enterprises, 507 F.3d 817, 822 (5th Cir. 2007). In In re S. White Transp., the debtor stated in its plan that it disputed the secured creditor’s claim and would not make any distribution to that creditor. The debtor relied on § 1141(c) to strip the lien from the debtor’s assets upon confirmation. The secured creditor sought a post-confirmation ruling from the bankruptcy court that its lien had survived the plan. The bankruptcy court upheld the lien stripping plan. On appeal the District Court reversed and the Court of Appeals upheld that reversal.

Courts have struggled with the third condition noted above — the participation of the lien holder in the reorganization. How much participation is enough to rid the property of the lien encumbering it? While the trend in courts is that a creditor need only receive notice of the plan and an opportunity to object, see, e.g., In re Reg’l Bldg. Sys., Inc., 251 B.R. 274, 287 (Bankr. D. Md. 2000), others require some level of active participation, see, e.g., In re Penrod, 50 F.3d 459, 462 (7th Cir. 1995). In In re S. White Transp., the court held that “the word ‘participation’ connotes activity, and not mere nonfeasance,” at *5, therefore mere receipt of effective notice is not sufficient to remove a lien in the Fifth Circuit, but rather, more participation is required — though how much more, exactly, remains undefined.

While the In re S. White Transp. decision is favorable for secured creditors, it is limited to those courts within the Fifth Circuit and secured creditors should rely on the decision (whether as precedential or persuasive authority) at their peril. In order to avoid the risk that other courts will not follow the Fifth Circuit’s “participation” ruling or set a very low threshold for what level of participation is sufficient to permit a debtor to use §1141(c) to strip the lien, a secured creditor should be sure to review any plan of reorganization that affects its claim and be prepared to lodge an objection if the plan purports to strip the creditor’s lien.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Mintz Levin | Attorney Advertising

Written by:

Mintz Levin
Contact
more
less

Mintz Levin on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.
Feedback? Tell us what you think of the new jdsupra.com!