Fifth Circuit Rules That Passive Creditor’s Lien Passes Through Bankruptcy Unaffected

Summary:  On August 5, 2013, the United States Court of Appeals for the Fifth Circuit in Acceptance Loan Co., Inc. v. S. White Transportation, Inc. (In re S. White Transportation, Inc.), ____________ (5th Cir 2013), held that a secured creditor, with a lien on the debtor’s assets and notice of the bankruptcy case, that did not file a proof of claim or otherwise participate in a Chapter 11 case, was not bound by the provisions of the debtor’s Chapter 11 plan of reorganization that voided the creditor’s lien.  Citing authority from both the Seventh and Eight Circuits, the court held that although the secured creditor was given notice of the bankruptcy proceeding, it could elect to forego filing a claim and proceed to enforce its lien outside of the bankruptcy proceedings following confirmation of plan that purportedly avoided its lien.

Practice Tips:

  • If a debtor does nothing to involve a secured creditor in its bankruptcy case other than providing notice of the case, and the creditor does not file a claim or otherwise involve itself in the case, the debtor should file an adversary proceeding to avoid the creditor’s lien or risk the lien riding through bankruptcy unaffected
  • Even if the secured creditor files a claim and participates in claim objection proceedings, pursuant to which the claim is disallowed on procedural grounds, an adversary proceeding may still be necessary to avoid the creditor’s lien
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