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Second Circuit Rules That Lien Is Extinguished Under Chapter 11 Only if Secured Creditor Participates in Case
A hornbook principle of U.S. bankruptcy jurisprudence is that valid liens pass through bankruptcy unaffected. This longstanding tenet, however, is at odds with section 1141(c) of the Bankruptcy Code, which provides that, under certain circumstances, “the property dealt with by [a Chapter 11] plan is free and clear of all claims and interests of creditors,” except as otherwise provided in the plan or the order confirming the plan. Several courts have attempted to reconcile the pass-through principle with the statute by requiring that the creditor “participate in the reorganization” as a prerequisite to the application of section 1141(c).
This judicial gloss clouds the question of whether the terms of a Chapter 11 plan providing for the treatment of secured creditor claims are binding on non-participating secured creditors. The U.S. Court of Appeals for the Second Circuit recently weighed in on this issue as a matter of first impression. In City of Concord, N.H. v. Northern New England Telephone Operations LLC (In re Northern New England Telephone Operations LLC), 2015 BL 248853 (2d Cir. Aug. 4, 2015), the court ruled that a lien is extinguished by a Chapter 11 plan if: 1) the text of the plan does not preserve the lien; 2) the plan is confirmed; 3) the property encumbered by the lien is “dealt with” by the plan; and 4) the secured creditor participated in the bankruptcy case.
Section 1141(c)
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