Jenner & Block

"Secured Creditor’s Lien May Not Be Extinguished If Creditor Does Not Participate In The Bankruptcy," Jenner & Block Spotlight Newsletter

By: Andrew J. Olejnik and Abraham M. Salander

In Acceptance Loan Co., Inc. v. S. White Transportation, Inc. (In re S. White Transportation, Inc.), 725 F.3d 494 (5th Cir. 2013) (No. 12-60648), the Fifth Circuit reversed confirmation of the debtor’s plan of reorganization, which sought to extinguish a secured creditor’s lien on an office building.  In confirming the plan, the bankruptcy court relied on Section 1141(c) of the Bankruptcy Code, which provides that, “after confirmation of a plan, the property dealt with by the plan is free and clear of all claims and interests of creditors.”  Prior Fifth Circuit precedent had held 1141(c) only voids liens held by a creditor that participates in the case.  The bankruptcy court reasoned that the lien holder had sufficiently participated in the reorganization because the lien holder had received notice of the bankruptcy case.  The Fifth Circuit rejected the bankruptcy court’s analysis, explaining that a lien holder’s participation must be active and cannot be “mere nonfeasance.”  Because the lien holder did not file a proof of claim, appear in the case, or object to confirmation, the Fifth Circuit held that the plan could not extinguish the lien.