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Aug. 6 — A lien is extinguished by a Chapter 11 reorganization plan if the text of the plan doesn't preserve the lien, the plan is confirmed, the property subject to the lien is “dealt with” by the plan, and the lienholder participated in the bankruptcy proceedings, the Second Circuit held.
Judge Dennis Jacobs of the U.S. Court of Appeals for the Second Circuit concluded on an issue of first impression that debtor Northern New England Telephone Operations LLC's Chapter 11 reorganization plan extinguished the City of Concord, N.H.'s tax lien.
The appeals court quoted the longstanding rule cited in Dewsnup v. Timm, 502 U.S. 410 (1992), that “liens pass through bankruptcy unaffected,” but noted that Bankruptcy Code Section 1141(c) contains a caveat that courts have uniformly used to hold that confirmation of a reorganization plan can act to extinguish liens.
Under Section 1141(c), a lien is extinguished if “(1) the plan is confirmed, (2) the property subject to the lien is ‘dealt with' by the plan, and (3) neither the plan nor the order of confirmation preserves it,” the court said. The court also added a fourth element based on sister circuits that a “reorganization plan extinguishes a lien only if the lienholder participated in the bankruptcy proceedings.”
The Second Circuit found that all of the elements were met in this case. According to the court, the reorganization plan doesn't have to list each specific property in order to have “dealt with” it. A plan may deal with broad strokes with property subject to liens, the court said. The court also found the city's filing of proof of claims for two quarterly tax bills to be participation in the proceedings.
According to the court, it was sufficient for the plan to say “all property” is free and clear of liens.
The court rejected the city's alternative argument that extinguishment of the lien is so inequitable a result that the lien should survive nonetheless.
The court said that it did not have to decide that question on appeal because the equities would not support an exception and favored neither side.
The debtor filed for Chapter 11 protection and the bankruptcy court confirmed its reorganization plan.
The City of Concord billed the debtor for property taxes on a quarterly basis. After the debtor filed for Chapter 11 protection, the city filed proofs of claim for first and second quarter property tax bills for 2009, but did not file them for the third and fourth quarter.
The bankruptcy court concluded that the debtor's Chapter 11 plan provision that “all property” is free and clear of creditors' interests to mean that the city's tax lien was extinguished.
The district court affirmed.
The city appealed, arguing that the plan did not sufficiently deal with the property subject to the lien, and that the city as lienholder did not sufficiently participate in the debtor's bankruptcy proceeding.
The Second Circuit found that a plain reading of Section 1141(c) settles the issue. According to the court, “all property” includes “each individual parcel and lot of the debtor's property, and therefore includes the six parcels of real property subject to the City's putative lien.”
Senior Judge Jon O. Newman and Judge Reena Raggi joined the opinion.
James W. Kennedy, City Solicitor, Concord, N.H., represented appellant City of Concord, N.H.; James T. Grogan of Paul Hastings LLP, Houston, represented debtor/appellee Northern New England Telephone Operations LLC.
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