Federal Deposit Insurance v. Union Entities

In re: Be-Mac Transport Company, Inc.,
Debtor.
_____________
No. 95-3249
_____________
Federal Deposit Insurance *
Corporation, *
*
Appellee, *
*
v. *
*
Union Entities, *
*
Appellant. *
_____________
No. 95-3251
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Federal Deposit Insurance * Appeals from the United States
Corporation, * District Court for the
* Eastern District of Missouri.
Appellee, *
*
v. *
*
Be-Mac Transport Company, Inc., *
and the Plan Committee, *
*
Appellants. *
_____________
No. 95-3252
_____________
Federal Deposit Insurance *
Corporation, *
*
Appellee, *
*
v. *
*
Union Entities, *
*
Appellant. *
2
_____________
No. 95-3253
_____________
Federal Deposit Insurance *
Corporation, *
*
Appellee, *
*
v. *
*
Be-Mac Transport Company, Inc. *
*
Appellant. *
__________
Submitted: April 8, 1996
Filed: May 16, 1996
__________
Before BOWMAN, BEAM, and MURPHY, Circuit Judges.
__________
MURPHY, Circuit Judge.
Appellants claim that the district court1 erroneously reversed the
bankruptcy court's decisions denying appellee, the Federal Deposit
Insurance Corporation (FDIC), leave to file a second amended proof of claim
and confirming a reorganization plan. The appellants are Be-Mac Transport
Company, Inc. (Be-Mac), the debtor; the Plan Committee, supervisor of Be-
Mac's activities; and the Union Entities, a creditor consisting of several
unions and trust funds that represent many of Be-Mac's current employees
and over 700 former employees. The FDIC is a Be-Mac creditor. We affirm
the district court.
1
The Honorable George F. Gunn, Jr., United States District
Judge for the Eastern District of Missouri.
3
I.
In June 1989, Be-Mac received a series of loans from Metro North
which were reflected in various Uniform Commercial Code (UCC) filings and
loan documents. About a year later, in March 1990, Be-Mac received some
secured loans from Congress Financial Corporation (CFC). Metro North
participated in about $1.8 million of CFC's loan, and also subordinated to
CFC about $1.8 million of its 1989 loans to Be-Mac. After Metro North
became insolvent in November 1992, the FDIC was appointed receiver.
Be-Mac subsequently filed for Chapter 11 bankruptcy in January 1993.
In its bankruptcy schedule, Be-Mac initially listed the FDIC as having an
undisputed, secured, and unliquidated claim of $614,947.78. Be-Mac later
amended its schedule to reflect that it disputed the FDIC's secured claim.
The bankruptcy court set the claims bar date for August 10, 1993.
On June 18, 1993, the FDIC filed a timely initial proof of claim for
a secured amount of $1,793,280.22 and an unsecured amount of $623,533.08.
Attached to this claim were some fourteen documents, including those
underlying the 1989 Metro North loans and the 1990 agreements between Metro
North and CFC. In November 1993, CFC paid the FDIC approximately $1.8
million using some of the liquidation proceeds paid to it by Be-Mac. The
FDIC then discovered that its original claim had incorrectly included an
unsecured portion and that it should have listed its entire claim as
secured.
Because of this discovery, the FDIC filed an amended proof of claim
on November 22, 1993. On the claim form, the FDIC noted the $1,793,280.22
payment it had received from CFC, but stated that it was still owed
$1,103,040.14 in principal and interest. In response to paragraph 4, which
requested attachment of the writing on which the claim was founded, the
FDIC wrote "See Attached." The
4
FDIC attached a copy of the first page of the original claim form and a
letter to the bankruptcy clerk requesting that the amended claim be filed.
Paragraph 9 of the claim form stated that
No security interest is held for this claim except
[If security interest in the property of the debtor is claimed] The
undersigned claims the security interest under the writing referred
to in paragraph 4 hereof . . . .
The FDIC left this paragraph blank.
Following the filing of this amended proof of claim, the FDIC spoke
on various occasions with Be-Mac about the nature of its claim. In
December 1993, a FDIC credit specialist, Edward Campbell, explained to
counsel for Be-Mac, Robert Sass, that the original claim form should have
listed its entire claim as secured, and that the amended proof of claim
represented the correct amount of its secured claim. Sass asked for
supporting documentation. In February 1994, an FDIC attorney, Michael
Kalkowski, called Sass and discussed the possibility of stipulating as to
the correct amount of the FDIC's secured claim. Sass again asked for
documentation, which was supplied sometime thereafter. Some two months
later, in April, Sass called Kalkowski and stated that he would send him
a letter with an offer to settle the claim. The promised letter arrived
in June, stating that Sass had received the requested documents and
proposing an offer of settlement. Sass and Kalkowski discussed the offer
a few days later, but could not reach an agreement.
On June 30, 1994, Be-Mac and a committee of unsecured creditors filed
a disclosure statement and joint plan of reorganization. The disclosure
statement stated that
The Class 3.3 Secured Claim of the FDIC arises from the transactions
among Be-Mac, Metro North, and Allen Musgrove described in Article
II above, "History."
5
Although the FDIC originally filed a Proof of Claim in this Case with
both secured and unsecured components, it subsequently filed an
Amended Claim containing only an unsecured component. However, the
FDIC has not released its lien on the Assets by terminating its UCC
filings. Therefore, the Plan provides that Confirmation of the Plan
constitutes a release of any lien in favor of the FDIC and a
termination of any related UCC filings.
Accompanying this statement, the plan provided that "Class 3.3 shall
consist of any Secured Claim of the FDIC" and that it would be treated as
an unsecured claim, consistent with its amended proof of claim. The plan
further stated that
All liens not expressly preserved by the terms of this Plan shall be
deemed voided by the entry of the order confirming the Plan and all
filing relating to said liens deemed released. All Creditors are
precluded from asserting lien rights against the Assets, either in
this case or in any other proceeding.
On November 7, 1994, the bankruptcy court approved an amended version of
the plan and disclosure statement, which did not affect the provisions
regarding the FDIC's claim, and scheduled a hearing for confirmation of the
plan for December 12.
Shortly after the FDIC received a copy of the November plan and
disclosure statement, it filed on November 25, 1994, a Motion for Leave to
File Amended Proof of Claim, along with a second amended proof of claim.
In its motion, the FDIC asserted that it had a $2,878,220.22 secured claim
which represented the approximately $1.8 million of Metro North's
participation in CFC's 1990 loan to Be-Mac, and the remaining $1 million
which CFC had not yet repaid under the 1990 subordination agreement between
CFC and Metro North. The purpose of the motion was to clarify the FDIC's
status as a secured creditor for purposes of voting and distribution in the
reorganization proceedings.
The bankruptcy court held a hearing on the FDIC's motion to
6
file a second amended proof of claim on December 5, 1994. Counsel for FDIC
explained that its motion was for an amendment to the amount of its secured
claim, not a change from an unsecured to a secured claim. The appellants
disagreed, arguing that the FDIC's first amended claim, filed in November
1993, only stated an unsecured claim, and that they had detrimentally
relied on this status in drafting the reorganization plan. They urged the
court to disallow the FDIC's untimely amendment. The bankruptcy court
agreed, stating that "the FDIC waited just too long" to file its claim
clarifying its secured status. The court entered a written order denying
the FDIC's motion on December 8, 1994, stating that the FDIC's November
1993 amended claim was "allowed as a general unsecured claim in the amount
of $1,080,940.78." The FDIC immediately filed a motion for
reconsideration.
On December 14, 1994, the bankruptcy court held a hearing on the
FDIC's motion for reconsideration and its objection to the plan. In the
hearing on the reconsideration motion, the court told the FDIC counsel that
it had denied leave to file a second amended claim because "you didn't seem
to have a good reason to wait so long." Edward Campbell and Michael
Kalkowski, the FDIC representatives who had worked on the case, then
explained that they had discussed the FDIC's secured status with Be-Mac's
counsel throughout the proceedings. The court recognized that the plan and
disclosure statement unequivocally indicated that Be-Mac knew the FDIC was
asserting a secured claim. It concluded, however, that both parties could
have better clarified their positions throughout the proceeding. The court
therefore denied the FDIC's motion for reconsideration. The FDIC then
filed a notice of appeal in the district court from the orders denying its
motion to file a second amended claim and denying its motion for
reconsideration.
In the hearing on the confirmation of the plan that same day, the
bankruptcy court stated that the FDIC's ballot as a secured creditor would
be disregarded, and that only its ballot filed as an
7
unsecured creditor would be counted for purposes of accepting or rejecting
the plan. The FDIC's negative vote as an unsecured creditor was not enough
to defeat the plan.2 The FDIC objected to the plan on the basis that its
secured claim was improperly disallowed as untimely. The court overruled
the objection and indicated its approval of the plan. It then issued an
order confirming the plan on January 13, 1995, which stated that all the
bankruptcy code requirements under 11 U.S.C. § 1129(a) had been satisfied.
The FDIC timely filed a notice of appeal in the district court from the
order confirming the plan.
The district court consolidated the FDIC's appeals, and reversed the
bankruptcy court decisions on June 27, 1995. Citing 11 U.S.C. § 506(d) and
Matter of Tarnow, 749 F.2d 464 (7th Cir. 1984), the court held that a lien
interest could not be extinguished solely on the basis of an untimely filed
proof of claim. On July 7, 1995, the district court stayed its judgment
pending appeal to this court. On July 26, 1995, Be-Mac and the Plan
Committee together filed a joint notice of appeal from the district court's
judgment, and Union Entities filed a separate joint notice of appeal the
same day.
II.
Appellants argue that the district court erroneously concluded
2
Be-Mac and the unsecured creditors' committee initially
filed a ballot report indicating that the FDIC's negative vote
had overwhelmed the class of unsecured creditors. The plan
proponents then argued that the plan could be confirmed under the
cram down provision of 11 U.S.C. § 1129(b), which permits
confirmation where the plan is fair and equitable with respect to
each class of impaired claims that has not accepted the plan. At
the end of the confirmation hearing, Be-Mac discovered that an
error had been made in the ballot tabulation and that a
sufficient number of unsecured creditors had actually accepted
the plan. A cram down was therefore unnecessary, and the
bankruptcy court's written order reflected that cram down was
not required for confirmation of the plan.
8
that "the bankruptcy court committed reversible error when it extinguished
the FDIC's lien for failure to file a timely proof of its claim." They
contend that the FDIC's lien was not extinguished by its failure to file
a timely proof of claim, but rather by confirmation of the reorganization
plan. The only effect of denying the FDIC leave to file a second amended
claim, they assert, was to prohibit the FDIC from participating in the
reorganization as a secured creditor for purposes of voting and
distribution. Moreover, they argue that the plan complied in all respects
with the technical requirements for confirmation provided under 11 U.S.C.
§ 1129(a). Since the FDIC's lien was not specifically preserved by the
plan, appellants claim the confirmation of the plan extinguished any lien
the FDIC purportedly had pursuant to 11 U.S.C. § 1141(c). The reason for
the district court's erroneous legal conclusion, they suggest, followed
from improper consolidation of the two appeals.
The FDIC responds that an untimely proof of its secured claim could
not extinguish the claim. Before a lien may be extinguished, it argues,
the lien's validity must be determined by the bankruptcy court. No such
determination was ever made in this case. Rather, the bankruptcy court
disallowed its secured claim for being untimely when it denied its motion
to file a second amended proof of claim. It then overruled the FDIC's
objection to the plan, which provided for termination of the FDIC's lien
upon the plan's confirmation, and confirmed the plan. The denial of its
second amended claim led to the plan's confirmation, which erroneously
voided its lien without a proper determination of the lien's validity. The
FDIC argues that the district court properly consolidated the appeals from
the bankruptcy court orders because they involved the same parties and
facts.
On appeal, we review conclusions of law de novo and factual findings
for clear error. In re Mathiason, 16 F.3d 234, 235 (8th Cir. 1994). A
district court's decision to consolidate actions may
9
be reversed only for abuse of discretion. Enterprise Bank v. Saettele, 21
F.3d 233, 235 (8th Cir. 1994).
A well-established principle of bankruptcy law is that liens pass
through bankruptcy proceedings unaffected. Dewsnup v. Timm, 502 U.S. 410,
417 (1992); Long v. Bullard, 117 U.S. 617, 620-21 (1886). This means that
a secured creditor need not file a claim in a bankruptcy proceeding to
preserve its lien. See Tarnow, 749 F.2d at 465-66. Rather, a creditor
with a loan secured by a lien on a debtor's assets may ignore the
bankruptcy proceeding and look to the lien for the satisfaction of the
debt. Id. at 465.
Congress codified this principle in 1984 "to make clear that the
failure of the secured creditor to file a proof of claim is not a basis for
avoiding the lien of the secured creditor." S.Rep. No. 65, 98th Cong., 1st
Sess. 79 (1983). 11 U.S.C. § 506, entitled "Determination of secured
status," provides that
(d) To the extent that a lien secures a claim against the debtor that
is not an allowed secured claim such lien is void, unless -
(2) such claim is not an allowed secured claim due only to the
failure of any entity to file a proof of such claim under section 501
of this title.
Similarly, a secured creditor does not typically surrender its lien
even if it chooses to file a claim against the bankruptcy estate. See
Matter of Penrod, 50 F.3d 459, 462 (7th Cir. 1995). Once a proof of claim
is filed, the claim is deemed allowed and the proof constitutes prima facie
evidence of the claim's validity and amount. 11 U.S.C. § 502(a); Fed. R.
Bankr. P. 3001(f). In order to disallow the claim, the debtor or another
party in interest must object and request a determination of the lien's
validity.3 11
3
This burden shifting process has been succinctly described
by one bankruptcy court in the following manner:
A properly executed proof of claim constitutes prima
facie evidence of its validity, and parties objecting
to a claim bear the burden of going forward to "meet,
10
U.S.C. §§ 502(a)(b). The court must then notify the parties and hold a
hearing to determine in what amount the contested claim should be allowed.
11 U.S.C. § 502(b). If the court determines the lien is invalid and denies
the claim, the creditor will lose the lien by operation of the doctrine of
collateral estoppel. Tarnow, 749 F.2d at 465.
A secured creditor who participates in the reorganization may also
lose its lien by confirmation of a reorganization plan which does not
expressly preserve the lien. Penrod, 50 F.3d at 463. Under 11 U.S.C.
§ 1141(c), "except as provided in the plan or in the order confirming 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 of general partners in the debtor." Since a lien constitutes
an interest in property, 11 U.S.C. § 101(37), a lien not preserved by the
plan may be extinguished by the plan's confirmation pursuant to § 1141(c).
Penrod, 50 F.3d at 462-63. This is only true, however, if the lien holder
participated in the reorganization; otherwise, its lien would not be
"property dealt with by the plan." Id. at 463.
In this case, the FDIC timely filed an initial claim for a secured
and unsecured amount. It then filed an amended claim to state the correct
amount of its secured claim. Once the FDIC filed its original secured
claim and the amended claim, the secured claim should have been deemed
allowed and the proofs should have
overcome, or, at minimum, equalize the valid
claim." . . . Once an objection is made and the burden
of overcoming the claim is met, the ultimate burden of
persuasion always rests on the claimant . . . .
In re Gridley, 149 B.R. 128, 132 (Bankr. D.S.D. 1992) (citations
omitted); see also Gran v. Internal Revenue Serv., 964 F.2d 822,
827 (8th Cir. 1992).
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constituted prima facie evidence of the claim's validity and amount. See
11 U.S.C. § 502(a); Fed. R. Bankr. P. 3001(f). The burden would have then
shifted to Be-Mac or another party in interest to object to the claim so
that a hearing could have been held to determine whether to allow the lien,
and if so, in what amount. See 11 U.S.C. § 502(b); Gran, 964 F.2d at 827.
This procedure for determining whether the FDIC had a valid lien was
never followed. Neither Be-Mac nor any other creditor ever objected to the
validity of the original or amended claim, or requested the court to
determine whether the FDIC had a valid lien. Instead, the appellants only
objected to the FDIC's motion to file a second amended secured claim on the
grounds that it was untimely, not because the FDIC did not have a valid
lien. At the December 5 hearing on the FDIC's motion, the appellants
alleged that the FDIC's first amended claim indicated payment of its
secured portion, leaving only an unsecured claim, and that the FDIC was now
trying to change its claim to be secured. Since the scheduled confirmation
hearing on the reorganization plan was only a few weeks away, the
appellants argued that the FDIC's secured claim should be disallowed for
untimeliness. The bankruptcy court agreed and denied the FDIC's secured
claim because of its late filing. It stated:
My normal inclination on this kind of case is to go ahead and grant
the motion, allow the late filing. And I do that basically because
I always think its -- you know, we really ought to look at the
reality of the facts and of the claim. The problem I have, though,
in this one is that I think that the FDIC waited just too long.
We're only a couple of weeks from confirmation. There's no doubt
that everybody in the case has relied on what they thought the FDIC
claim was and they pursued it in that fashion. I think it was
detrimental reliance. It certainly has a negative impact on the
creditors. And for those reasons . . . I'm going to go ahead and
deny the request to file or amend this claim . . . obviously both
sides are approaching this in good faith and it's just unfortunate
that if the FDIC had caught the problem earlier I think the result
would be different. But this late I think it's too late.
12
Similarly, at the December 14 hearing on the FDIC's motion for
reconsideration, counsel for Be-Mac emphasized that the issue was solely
one of timeliness, rather than the lien's validity: "[W]hat we're here on
at this moment is not whether there is a lien, it's whether the claim
should be allowed to be filed." The bankruptcy judge also reiterated that
his prior ruling turned on "the fact that [the FDIC] waited so long and
[it] didn't seem to have a good reason to wait so long." Although the FDIC
presented testimonial evidence to show that Be-Mac knew all along that the
FDIC was asserting a secured lien,4 the bankruptcy judge was not
sufficiently convinced that the original order denying the FDIC's motion
was wrong, and he therefore denied the motion for reconsideration.
At neither hearing did the bankruptcy court make factual findings or
legal conclusions to show that the FDIC's lien was invalid. It instead
denied the FDIC leave to file its proof of secured claim and allowed the
FDIC to have only an unsecured claim based solely on the untimeliness of
the filing. As the Tarnow court pointed out, "this ground of rejection
does not call into question the validity of the lien." 749 F.2d at 465.
The bankruptcy court therefore erred in disallowing the secured claim
without first determining that the lien was invalid. See 11 U.S.C.
§ 502(a)(b).
Although the bankruptcy court's denial of the FDIC's second
4
According to the unrefuted testimony from the FDIC
representatives assigned to the case, the FDIC told Be-Mac's
counsel in December 1993 that it had made an error on its
original claim because it should have filed its entire claim as
secured. Further discussions between Be-Mac's counsel and an
FDIC attorney took place over the next several months regarding
the possibility of stipulating to the correct amount of the
FDIC's secured claim. In a letter dated June 9, 1994, Be-Mac's
counsel proposed an offer of settlement, but the FDIC did not
accept it.
13
amended claim did not by itself extinguish the FDIC's lien, it had that
practical effect. Once the claim was disallowed, the FDIC was effectively
treated as if it had not filed proof of a secured claim. It therefore
could not participate as a secured creditor in the reorganization for
purposes of voting and distribution. See Fed. R. Bankr. P. 3003(c)(2), 11
U.S.C.; In re Claremont Towers, 175 B.R. 157 (Bankr. D.N.J. 1994).
At the confirmation hearing, the bankruptcy court disregarded a
ballot cast by the FDIC as a secured creditor and counted only its ballot
as an unsecured creditor in tallying up the votes for acceptance or
rejection of the plan. The FDIC's negative vote as an unsecured creditor
was not enough to defeat the plan, and the bankruptcy court consequently
confirmed the plan, thereby extinguishing any lien the FDIC may have had
and terminating its UCC filings.
Under 11 U.S.C. § 506(d)(2), a lien is preserved if it "is not an
allowed secured claim due only to the failure of any entity to file a proof
of such claim. . . ." Although the FDIC filed an initial secured claim
with supporting documentation, and discussed the secured nature of its
amended claim with Be-Mac counsel during the following months, the
bankruptcy court held that the amended claim only asserted an unsecured
claim and denied the second amended secured claim for untimeliness. The
reason the FDIC did not have an allowed secured claim was because the
bankruptcy court denied its proof of claim. Section 506(d)(2) specifically
prevents the avoidance of liens based solely on the absence of a proof of
a secured claim. See S.Rep. No. 65, 98th Cong., 1st Sess. 79 (1983). The
district court therefore properly concluded that the bankruptcy court was
wrong in disallowing and extinguishing the FDIC's lien because of the
untimely filing.
Moreover, confirmation of the reorganization plan could not
extinguish any lien the FDIC may have in this case. Where a plan
14
does not expressly preserve a lien, a lienholder may lose it after
confirmation of the plan, provided that the lienholder participated in the
reorganization and its property was dealt with by the plan. See 11 U.S.C.
§ 1141(c); Penrod, 50 F.3d at 463. Here, the FDIC was not permitted to
participate as a secured creditor in the reorganization for purposes of
voting and distribution because its second amended proof of claim had been
denied, and its amended proof of claim was treated as an unsecured claim.
Since the FDIC could only vote on the plan and receive distributions as an
unsecured creditor, its lien was never brought into the bankruptcy
proceedings and could therefore not be extinguished by confirmation of the
plan. See id.
Any lien held by the FDIC should have survived the bankruptcy
proceedings in this case because the bankruptcy court did not determine the
lien's validity before disallowing the claim and it improperly confirmed
a plan extinguishing the FDIC's lien without permitting the FDIC to
participate in the reorganization as a secured creditor. See 11 U.S.C.
§§ 502(a)(b), 506(d) and 1141(c); Tarnow, 749 F.2d at 465; Penrod, 50 F.3d
at 463; Claremont Towers Co., 175 B.R. at 163. It was error to extinguish
the FDIC's lien by confirming the reorganization plan. The validity of the
FDIC's lien has yet to be determined, of course, and on remand Be-Mac or
any other interested party may object to it.
Finally, since the same facts and parties underlay each of the
bankruptcy court's orders, the district court did not abuse its discretion
in consolidating the FDIC's appeals. See Enterprise Bank v. Saettele, 21
F.3d 233, 235 (8th Cir. 1994) (district court has broad discretion in
consolidating actions involving a common question of law or fact).
For these reasons the judgment of the district court is affirmed, and
the cases are remanded for further proceedings consistent with this
opinion.
15
A true copy.
Attest:
CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.
16