The Second Circuit held that a confirmed Chapter 11 plan can extinguish a lien if "(1) the text of the plan does not preserve the lien; (2) the plan is confirmed; (3) the property subject to the lien is 'dealt with' by the terms of the plan; and (4) the lienholder participated in the bankruptcy proceedings." In re Northern New England Telephone Operations LLC, 795 F.3d 343, 345 (2d Cir. 2015).
To some, this holding may seem contrary to the general rule that "liens pass through bankruptcy unaffected." Dewsnup v. Timm, 502 U.S. 410, 417 (1992). However, the Court found a caveat to this general rule in 11 U.S.C. § 1141(c), which states: "[e]xcept as provided in subsections (d)(2) and (d)(3) of this section and except as otherwise provided in the plan or in the order confirming the plan, after confirmation of a plan, the property dealt with by the plan is free and clear of all claims and interests of creditors, equity security holders, and of general partners in the debtor."
In Northern, the Court found and the parties agreed that the first two elements were clearly satisfied. For the third requirement, the Court found that the following language was sufficient to "deal with" the property:
For the fourth and last requirement, the Court found that the lienholder sufficiently participated. The Debtors owned certain real property in the City of Concord, and the City had a single lien on the property to secure payment of tax bills. In October 2009, the Debtors filed a Chapter 11 petition. During the course of the bankruptcy, the City filed two proofs of claim for Q1 and Q2 of 2009, which were billed pre-petition and ultimately deemed allowed claims by the Court (after some reduction); the City failed to file proof of claims for Q3 and Q4. In 2013, two years after the Debtors' Chapter 11 plan was confirmed, the City moved the bankruptcy court to allow the City to file claims for the 2009 Q3 and Q4 tax bills and order the Debtors to pay those claims. The bankruptcy court denied the City's motion, holding that the Plan provided that the Debtors' property would be free and clear of creditors' interests and the district court affirmed. The Second Circuit ultimately found that by filing two proof of claims, the City sufficiently participated in the Chapter 11.
Based on the facts of Northern, it would seem that the requirement of "participation" has a very low threshold. Merely filing two proofs of claims seems to be sufficient participation.
This case raises a number of interesting issues: (1) exactly how low is the threshold for a Court to determine that a secured creditor "participated" in the Chapter 11? (2) although usually imprudent, is it better for a secured creditor to ignore a Chapter 11 so that its lien may be preserved? (3) should a secured creditor, assuming it's not getting paid in full, object to any Chapter 11 that doesn't explicitly preserve the secured creditor's lien? I guess we'll have to see how the lower Court's tackle these issues.
As of the Effective Date, all property of FairPoint and Reorganized FairPoint shall be free and clear of all Claims, Liens and interests, except as specifically provided in the Plan, the Confirmation Order, or the New Credit Agreement.