Treatment Under A Plan Of Reorganization: What Does It Take To Discharge A Mortgage?

Acceptance Loan Co. v. S. White Transp., Inc. (In re S. White Transp., Inc.) , 473 B.R. 695 (S.D. Miss. 2012) –

In S. White Transportation, by remaining silent until after confirmation, a mortgagee managed to retain its lien notwithstanding the debtor's attempt to discharge it through a plan of reorganization.

Acceptance Loan Company, Inc. claimed that it had a lien on an office building owned by S. White Transportation, Inc. (SWT) to secure its loan to SWT. The parties ended up in state court litigating the validity of the lien. When SWT filed bankruptcy, it identified Acceptance's claim as a secured claim in its schedules but designated the claim as disputed. When SWT filed a plan of reorganization, it discussed the Acceptance claim in the disputed claims section, noting that no proof of claim was filed and that the time to file had expired. (The significance being that the claim should be disallowed since there was no timely proof of claim, and the fact that the claim was scheduled did not make any difference since it was identified as disputed.)

After the plan was confirmed, Acceptance asked the bankruptcy court to determine that it retained a first priority lien and that its lien was not affected by the plan confirmation. Alternatively it asked the bankruptcy court to amend its order to provide for resolution of the lien claim and to modify the automatic stay to allow the state court to determine the issue.

Section 1141(c) of the Bankruptcy Code provides:

Except as provided in subsections (d)(2) and (d)(3) of this section [dealing with exceptions from discharge] and except as otherwise provided in 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 the general partners in the debtor.

Consequently the bankruptcy court denied Acceptance's motion, finding that its lien was void as a result of confirmation of the Chapter 11 plan of reorganization.

On appeal, the district court began with the assertion that "the general rule has been that liens pass through bankruptcy unaffected." (However, recognize that this concept is not free from controversy. As noted in a prior blog, "Lien Stripping" Lives, many courts view this principle as limited to Chapter 7 liquidation cases and not applicable in Chapter 11 reorganization cases.) After noting Section 1141(c), the district court stated that the 5th Circuit has held that four conditions...