Acceptance Loan Co. v. S. White Transportation, Inc. (In Re S. White Transportation, Inc.) , 725 F.3d 494 ( 2013 )

Case: 12-60648 Document: 00512331827 Page: 1 Date Filed: 08/05/2013
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
August 5, 2013
No. 12-60648 Lyle W. Cayce
Clerk
In the Matter of: S. WHITE TRANSPORTATION, INCORPORATED,
Debtor
ACCEPTANCE LOAN COMPANY, INCORPORATED,
Appellee
v.
S. WHITE TRANSPORTATION, INCORPORATED,
Appellant
Appeal from the United States District Court
for the Southern District of Mississippi
Before DENNIS, CLEMENT, and SOUTHWICK, Circuit Judges.
EDITH BROWN CLEMENT, Circuit Judge:
S. White Transportation, Inc. (“SWT”) appeals the district court’s holding
that a lien on its principal asset held by Acceptance Loan Co. (“Acceptance”)
survived confirmation of a Chapter 11 bankruptcy reorganization plan. We
AFFIRM.
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No. 12-60648
FACTS AND PROCEEDINGS
In 2004, Acceptance perfected a security interest in SWT’s principal
asset, an office building in Saucier, Mississippi. SWT contested the validity of
this claimed lien on various grounds, resulting in years of litigation in
Mississippi state courts that remains unresolved. After Acceptance’s perfection
of its putative interest, three other entities perfected security interests in the
same building.
SWT filed a voluntary Chapter 11 bankruptcy petition on May 17, 2010.
In its accompanying Schedule D list of secured creditors, SWT acknowledged
the three later security interests but only listed Acceptance’s lien as “disputed.”
Acceptance received effective notice of the pendency of SWT’s bankruptcy on
at least several occasions. However, Acceptance never filed a proof-of-claim in
the bankruptcy court and otherwise did not involve itself in any way with the
ongoing bankruptcy. On September 14, SWT submitted a reorganization plan
(the “Plan”) to the bankruptcy court. The Plan noted that Acceptance had
never filed a proof-of-claim and that SWT contested the validity of Acceptance’s
lien. It provided for no recovery for Acceptance. The bankruptcy court
confirmed the Plan on December 21.
On January 4, 2011, Acceptance moved the bankruptcy court for a
declaratory judgment that its lien had survived the Plan’s confirmation or,
alternatively, for the bankruptcy court to amend its confirmation order to
provide for Acceptance’s lien. The bankruptcy court denied Acceptance’s
motion. It held that the Plan’s confirmation voided any lien that Acceptance
held and refused to modify the confirmation order. It based its decision on 11
U.S.C. § 1141(c), which provides that property dealt with by a confirmation
plan is held “free and clear of all claims and interests.” Although this court has
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held that § 1141(c) only voids liens held by a “lien holder [who] participate[s]
in the reorganization,” Elixir Indus., Inc. v. City Bank & Trust Co. (In re Ahern
Enters., Inc.), 507 F.3d 817, 822 (5th Cir. 2007), the bankruptcy court held that
Acceptance had “participated” within the meaning of this standard by having
received notice of the bankruptcy.
Acceptance appealed the bankruptcy court’s order to the district court,
and the district court reversed, holding that mere notice does not constitute
participation within the meaning of In re Ahern Enterprises. SWT appeals.
STANDARD OF REVIEW
When reviewing appeals taken from a district court’s review of an appeal
from a bankruptcy court, “we perform the identical task as the district court,
reviewing the bankruptcy court’s findings of fact under the clearly erroneous
standard and its conclusions of law de novo.” U.S. Abatement Corp. v. Mobil
Exploration & Producing U.S. Inc. (In re U.S. Abatement Corp.), 79 F.3d 393,
397 (5th Cir. 1996) (footnote omitted).
DISCUSSION
It is a longstanding rule in bankruptcy that “[a] secured creditor ‘with a
loan secured by a lien on the assets of a debtor who becomes bankrupt before
the loan is repaid may ignore the bankruptcy proceeding and look to the lien
for satisfaction of the debt.’” Sun Fin. Co. v. Howard (In re Howard), 972 F.2d
639, 641 (5th Cir. 1992) (quoting Simmons v. J.T. Savell (In re Simmons), 765
F.2d 547, 556 (5th Cir. 1985)). However, this default rule only applies so long
as the lien is not “invalidated by some provision of the Code.” In re Simmons,
765 F.2d at 556.
11 U.S.C. § 1141(c) provides that: “[A]fter confirmation of a plan, the
property dealt with by the plan is free and clear of all claims and interests of
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creditors, equity security holders, and of general partners in the debtor.” In In
re Ahern Enterprises, we held that:
Four conditions must . . . be met for a lien to be voided under
section 1141(c): (1) the plan must be confirmed; (2) the property
that is 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.
507 F.3d at 822 (emphasis added). The parties agree that the first, second, and
fourth conditions of the In re Ahern Enterprises test are met by the facts of this
case; they only dispute whether Acceptance’s passive receipt of notice
constitutes participation within the meaning of this test. We hold that it does
not.
The In re Ahern Enterprises court avoided answering the question of what
constitutes participation for these purposes. After noting that “the
requirement that a secured creditor participate in the reorganization
proceeding is a judicial gloss on section 1141(c),” it stated that “participation
ensures that the secured creditor has notice of the plan and its potential effect
on the creditor’s lien.” Id. at 823. It then explained that courts were split on
whether active participation was required, see id. (citing In re Penrod, 50 F.3d
459, 462 (7th Cir. 1995)), or whether “the only participation necessary is that
the creditor receive notice of the plan and an opportunity to object,” see id.(citing In re Reg’l Bldg. Sys., Inc., 251 B.R. 274, 287 (Bankr. D. Md. 2000)),
before holding that “[i]n the instant case, it is a sufficient level of participation
that [the creditor] filed a proof of claim as an unsecured priority creditor,” id.At the outset of our analysis, we note that the word “participation”
connotes activity, and not mere nonfeasance. See BLACK’S LAW DICTIONARY
1229 (9th ed. 2009) (“The act of taking part in something, such as a partnership,
a crime, or a trial.” (emphasis added)); see also Nat’l Fed’n of Indep. Bus. v.
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Sebelius, 132 S. Ct. 2566, 2587 (2012) (distinguishing between “activity” and a
“deci[sion] not to do something” or a “fail[ure] to do it”).
We further note that at least two circuit courts addressing similar issues
have required more than notice. In In re Penrod, the Seventh Circuit stated
that a secured creditor seeking to retain the value of a security interest has two
options: he “can bypass his debtor’s bankruptcy proceeding and enforce his lien
in the usual way” outside of bankruptcy, or he can “decide to collect his debt in
the bankruptcy proceeding, and to this end may file a proof of claim in that
proceeding.” 50 F.3d at 461. It further noted that a secured creditor
“participat[es] in the bankruptcy proceeding through filing a claim.” Id. at 462.
In In re Be-Mac Transportation Co., the Eighth Circuit found a lien not
voided by a plan confirmation in the face of far more active involvement in a
bankruptcy by a secured creditor. In that case, the FDIC had filed a proof of
secured claim and litigated that claim extensively before the bankruptcy court
prior to plan confirmation. FDIC v. Union Entities (In re Be-Mac Transp. Co.),
83 F.3d 1020, 1023 (8th Cir. 1996). However, the bankruptcy court denied the
FDIC’s secured claim as untimely and allowed the FDIC to proceed only as an
unsecured creditor. Id. at 1023-24. The Eighth Circuit held that, despite the
FDIC’s receiving effective notice and its engagement throughout the
bankruptcy process, that “the FDIC was not permitted to participate as a
secured creditor [because of its own untimely filing meant that] its lien was
never brought into the bankruptcy proceedings and could therefore not be
extinguished by confirmation of the plan.” Id. at 1027.
Furthermore, although we acknowledge that, contrarily, a Maryland
bankruptcy court did state that notice alone satisfies the participation
requirement for the extinguishment of liens under § 1141(c), see In re Reg’l
Bldg. Sys., Inc., 251 B.R. at 286-87, the opinion of the Fourth Circuit affirming
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that case makes clear that at issue was a secured creditor that had involved
itself extensively in the bankruptcy proceedings, filing a proof of claim, serving
on an unsecured creditors’ committee, and discussing its putative secured
claim with that committee’s counsel. See Universal Suppliers v. Reg’l Bldg.
Sys., Inc. (In re Reg’l Bldg. Sys., Inc.), 254 F.3d 528, 530 (4th Cir. 2001). We
have been unable to find any case voiding a lien in the face of no involvement by
a secured creditor other than the passive receipt of notice.1
In light of our interpretation of the definition of the word “participate”
and in accordance with the above-cited persuasive authority from our sister
circuits, we hold that meeting the participation requirement in In re Ahern
Enterprises requires more than mere passive receipt of effective notice.
CONCLUSION
For the foregoing reasons, we AFFIRM the judgment of the district court.
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SWT argues that the Supreme Court’s decision in United Student Aid Funds, Inc. v.
Espinosa, 559 U.S. 260 (2010), militates in favor of notice alone being sufficient. Espinosa dealt
with a Rule 60(b) motion for relief from a final judgment. Id. at 271-72. The Court held that a
mere procedural flaw was not a ground to void a judgment under Rule 60(b)’s high bar, which
requires there to have been either a jurisdictional defect or due process violation underlying the
judgment. Id. at 272. The Court found no due process violation because effective notice had been
given to the moving party at the time of the proceedings. Id. This case does not implicate due
process under Rule 60(b), and Espinosa is therefore wholly inapposite.
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