Low Threshold Adopted for Participation Sufficient to Bind a Creditor to a Chapter 11 Plan

By: Jonathan Weiss

St. John’s Law Student

American Bankruptcy Institute Law Review Staff 

In S. White Transportation, Inc.,[1]the Bankruptcy Court for the Southern District of Mississippi held that secured creditor had “participated” in the chapter 11 case and was bound by a plan voiding its lien because it received notice, even though it had not appeared or taken any action in the case.[2] The debtor, S. White Transportation, Inc. (“SWT”), had challenged the validity of a Deed of Trust with the creditor, Acceptance Loan Company, Inc. (“Acceptance”) in state court on the basis that the individuals who had signed the Deed of Trust on behalf of SWT did not have the authority to do so.[3]  Consistent with its claims in state court, SWT’s proposed chapter 11 plan classified Acceptance’s lien as a disputed claim on which no payment would be made.[4] Two weeks after SWT’s chapter 11 plan was confirmed, Acceptance objected to the plan, requesting that the court find that its lien survived the confirmation unaffected.[5] The court held that the plan voided the lien and denied motions for relief and modification of the plan, and reaffirmed the old adage that litigants must not “sleep on their rights”.[6]

The court relied on In re Ahern Enterprises., Inc. in denying Acceptance’s objection.[7] In that case, the Fifth Circuit heldthat four conditions must be met for a lien to be voided pursuant to section 1141(c): (1) the plan must be confirmed; (2) the property 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.[8]  The third factor’s “participation” requirement, which was at the center of the dispute in this case, is meant to ensure that creditor’s due process rights are protected.[9]  The court in S. White Transportation determined that because Acceptance had received notice of the plan and the confirmation hearing, Acceptance had sufficiently “participated” within the meaning of section 1141(c), even though Acceptance had failed to take any affirmative action until after the plan was confirmed.[10] 

Under the standard established by S. White Transportation, a debtor may void a lien held by secured creditor through a provision in its plan of reorganization even if that creditor fails to participate in the bankruptcy proceedings at all.[11]  The court held that this was not “at odds with the principle” that liens pass through bankruptcy unaffected unless dealt with in bankruptcy proceedings.[12]  Accordingly, the debtor need only demonstrate that the creditor received notice of the plan and confirmation hearing in order to prove that it participated in the bankruptcy proceedings.[13]  This interpretation of section 1141(c) should eliminate the temptation for a creditor to ignore chapter 11 proceedings.[14]  If this were not the case, a creditor could petition a court for dual declaratory judgments stating the validity and priority of the lien and that the lien was unaffected by the chapter 11 plan, which Acceptance attempted to do in this case.[15]  This case demonstrates that, should a lien holder fail to act upon receipt of notice and hearing of a chapter 11 plan, its secured lien may be summarily voided.

 

 

 

 

 

 


[1] In re S. White Transp., Inc.,  No. 10-51137-KMS, 2011 WL 2292317 (Bankr. S.D. Miss. June 7, 2011). 

[2]Id. at *7.

[3] Id. at *1.

[4] Id. at *1.

[5] Id. at *2.

[6] Id. at *9.

[7] Elixir Indus., Inc. v. City Bank & Trust Co.(In re Ahern Enters., Inc.)507 F.3d 817 (5th Cir. 2007).

[8] Id. at 822.

[9] Id. at 823; see also Universal Suppliers, Inc. v. Reg’l Bldg. Sys., Inc.(In re Reg’l Bldg. Sys. Inc.), 254 F.3d 528 (4th Cir. 2001).

[10] In re S. White Transp., Inc., at *7.

[11] Id. at *7.

[12] In re Reg’l Bldg Sys., Inc.,251 B.R. 274, 286–287 (Bankr. D. Md. 2000).

[13] In re S. White Transp., Inc., at *7.

[14] Id. at *10.

[15]Id. at *2.