RELIHAN v. EXCHANGE BANK

ORDER

EDENFIELD, District Judge.

This case is before the Court on appeal from the United States Bankruptcy Court for the Southern District of Georgia, Judge Herman W. Coolidge, presiding. The issue is whether a secured creditor loses its lien as a result of its failure to file a proof of claim in a Chapter 11 bankruptcy proceeding.

I. Background

The following facts are not in dispute. The appellant, Randolph C. Relihan, Jr. (hereinafter the "Debtor"), filed a voluntary petition under Chapter 11 of the Bankruptcy Code on September 2, 1983. Subsequently, on September 20, 1983, Debtor filed his schedules and statement of affairs, listing appellee and cross-appellant, The Exchange Bank of Douglas (hereinafter the "Bank"), as a secured creditor. The Debtor listed the debt to the Bank as "DISPUTED AS TO AMOUNT."1 (R. 8).

On September 22, 1983, the Bankruptcy Court sent out a notice to all secured creditors, fixing the time for filing proofs of claim as February 1, 1984. The notice provided in pertinent part that:

(R. 18). There is no indication that the Bank failed to receive the notice. Yet, the Bank has never filed a proof of claim with the Bankruptcy Court.

On February 22, 1984, Debtor filed his first proposed plan of reorganization which provided, with respect to the Bank, that it would receive a new note secured by a deed to secure debt on the same property which secured the pre-petition debt. The new note was to be in the full amount of the Bank's "claim," which was defined in the plan as "a duly listed or timely filed claim which is allowed and ordered paid by the Court." (R. 27, 30). The new note to the Bank under the plan was to have different and more favorable terms to the Debtor than those provided under the Bank's pre-petition note.2 (R. 30). When the Bank failed to prove the amount of its claim, and when it became necessary for the Debtor to fix an amount for the new note to the Bank prior to the confirmation of the plan, Debtor submitted a first modified plan of reorganization to provide that the new note would be in the amount of $61,500. (R. 59). With the Bank still having failed to prove the amount of principal or interest owed to it, Debtor filed a second modified plan of reorganization on January 2, 1985, providing for a new note in the amount of $43,200.3

On January 4, 1985, the Bankruptcy Court issued an Order confirming the Debtor's plan of reorganization as modified. The Bankruptcy Court reasoned that although the Bank could not be treated as a creditor with respect to voting or distribution since it did not file a proof of claim,4 its inaction did not extinguish the Bank's valid pre-petition lien, citing § 506(d)(1)5 of the Bankruptcy Code.6 The Bankruptcy Court construed this section to provide "that a valid pre-petition lien remains valid during and after a bankruptcy action unless a party in interest takes affirmative steps to avoid the lien." (R. 68). The Bankruptcy Court went on to confirm the Debtor's modified plan under § 1129 of the Bankruptcy Code, making the following express provision for the Bank's pre-petition lien:

(R. 71).

The Debtor then moved for reconsideration of the Order confirming the plan on January 14, 1985, with the Bankruptcy Court denying same on January 18, 1985. Notice of Appeal from the Bankruptcy Court's Order of January 18, 1985, was filed by the Debtor on February 15, 1985, and later amended on February 25, 1985, to include Debtor's desire to appeal the Bankruptcy Court's Order of January 4, 1985. (R. 92, 95). The Bank filed its Notice of Cross-Appeal on February 22, 1985. (R. 93). This Court has jurisdiction of this appeal pursuant to 28 U.S.C. §§ 158 & 1334.

II. Law and Analysis

A. Standard of Review

The applicable standard of review of decisions of the Bankruptcy Court is found in Bankruptcy Rule 8013. It states in pertinent part: "Findings of fact shall not be set aside unless clearly erroneous. . . ." Rule 8013 does not, however, prevent this Court from reviewing the legal conclusions of the Bankruptcy Court. This Court must independently determine the accuracy of the legal conclusions made below on the basis of the facts shown. In re Pickus, 26 B.R. 171, 173 (D.Conn.1982).

B. Discussion

This appeal raises the question as to the status of a lien creditor who fails to file a proof of claim. The answer is found in the interaction of two provisions of the Bankruptcy Code: § 506(d)(1) and § 1141. The Bankruptcy Court found that the two sections were not in conflict, and that its treatment of the Debtor gave full effect to the requirements of both sections. (R. 87). This Court agrees and affirms.

Sections 501 and 1111 of the Code govern the filing of proofs of claims. In a Chapter 11 proceeding, only creditors whose claims are listed by the debtor as "disputed, contingent, or unliquidated" are required to file proofs of claim.7 Bankruptcy Rule 3003(c)(2) directs that a creditor so listed must file, and that one who fails to do so will not be treated as a creditor "with respect to such claim for the purposes of voting and distribution."8 This rule does not, however, extinguish a creditor's lien as a penalty for failure to file a proof of claim. In fact, the legislative history of § 501(a) indicates that it is "permissive only, and that no creditor is required to file a proof of claim." 3 Collier on Bankruptcy ¶ 501.01 (15th ed. 1985). However, "the filing of a proof of claim is a prerequisite to the allowance of unsecured claims, including the unsecured portion of a secured claim,9 and priority claims." Id. Furthermore, "[f]iling a proof of claim may be unnecessary . . . in situations in which the creditor is secured and has not asserted a claim against the estate, and no determination under section 506(d) has been requested." Id.

Section 506(d)(1) is made applicable to Chapter 11 proceedings through § 103(a) of the Bankruptcy Code.10 The Bankruptcy Court construed § 506(d)(1) to mean that a "valid pre-petition lien remains valid during and after a bankruptcy action unless a party in interest takes affirmative steps to avoid the lien." (R. 68). Debtor attacks this holding, arguing that the two cases cited by the Bankruptcy Court11 in support of its holding were decided under Chapter 7, not Chapter 11, and that the different purposes of Chapter 7 (liquidation) and Chapter 11 (reorganization) demand that those decisions not control here. To apply rule of those cases, Debtor argues, would frustrate the terms of the reorganization plan and Congressional intent. To effectuate the purposes of Chapter 11, the Debtor contends that § 1141, not § 506(d)(1), should control. The Debtor argues that the two sections are in conflict, and that the specific provision (§ 1141) should prevail over the general one (§ 506(d)(1)). Debtor asserts that § 1141's confirmation provisions free all the debtor's property from any pre-petition liens notwithstanding § 506(d)(1),12 and vest all the debtor's property in him free and clear.13 Debtor argues that the Bankruptcy Court was without authority to undermine a confirmed plan that provided for specific treatment of the secured debt by allowing the survival of a conflicting pre-petition lien, and that it erred in protecting a creditor that never filed a proof of claim.

The Debtor is correct in his assertion that the two cases cited by the Bankruptcy Court were not Chapter 11 cases. However, except for his "policy" argument, the Debtor cannot cite any authority which prohibits application of the rule of § 506(d)(1) throughout all chapters of the Bankruptcy Code. Although there are few cases dealing with the interplay of § 506(d)(1) and Chapter 11, one recent decision in this area requires attention here. The case is Matter of Tarnow, 749 F.2d 464 (7th Cir.1984).

In Tarnow, the Commodity Credit Corporation, ("CCC") loaned a farmer named Tarnow money, secured by a lien on his crops and equipment. Tarnow subsequently filed a bankruptcy petition under Chapter 11. Id. CCC filed its proof of claim two months after the deadline for filing had passed, and the bankruptcy judge disallowed CCC's claim and declared its lien extinguished. On appeal, the Seventh Circuit, speaking through Judge Posner, held that a creditor with a loan secured by a lien on 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. Id. at 465. The court then turned to § 506(d) of the Bankruptcy Code and made some observations that are relevant here. First, the court stated that § 506(d)(1) of the 1978 Code simply codified the rule of Long v. Bullard, 117 U.S. 617, 6 S.Ct. 917, 29 L.Ed. 1004 (1886), a rule that permits liens to pass through bankruptcy unaffected. Id. at 466.

Second, the court noted that in 1984 Congress amended the ambiguous language of § 506(d)(1) to more clearly reflect its will. The Seventh Circuit stated:

Id. at 467.

The Bank was therefore within its rights in "ignoring" bankruptcy and looking to the lien for satisfaction of its debt. Since no party in interest took steps to avoid the Bank's lien, it must stand. The Debtor had the opportunity to contest the Bank's lien, but chose not to do so. Moreover, if the Debtor had wanted to protect his estate, he could have filed a proof of claim for the Bank under § 501(c)14 when the Bank failed to do it.

Furthermore, it is evident from reading §§ 506(d)(1) and 1141 that they do not conflict and can be harmoniously construed. Section 506(d)(1) deals with "liens." Section 1141(b) revests the property of the estate in the debtor,15 while 1141(c) makes all the property dealt with by the plan "free and clear of all claims and interests of creditors. . . ."16 Despite Debtor's citations to the contrary,17 § 1141 does not act to extinguish valid pre-petition liens.

Code § 1141(b) applies only to property of the Chapter 11 estate. Under Code § 541(a)(1), an estate becomes vested with an interest no greater than the debtor's — in the case of the thirty-eight acres in Douglas County — an interest subject to the Bank's lien. Upon confirmation of the plan, § 1141(b) revested in the Debtor the estate's interest in the property — again an interest subject to a lien.

Moreover, § 1141(c) does not free the revested property of liens. The language of § 1141(c) is "free and clear of any claim or interest." "Claim" is defined in Code § 101(4).18 A "claim" is distinct from a "lien," which is defined in Code § 101(31).19 The term "interest" is not defined in the Code, "but it would be odd if Congress had chosen that undefined term to mean `lien,' when they could have used the defined term `lien' and avoided uncertainty." In re Honaker, 4 B.R. 415, 417 (Bankr.E.D.Mich. 1980) (construing similar language in Code § 1327(c)). The excerpt from Collier on Bankruptcy in footnote 12, supra, is based on an incorrect reading of the statute. The editors of Collier fail to cite any authority for their assertion that creditors who fail to file proofs of claim have their liens extinguished. Since In re American Properties, Inc., cited in footnote 13, supra, relies on Collier for its holding, it is wrongly decided.

Finally, the Bankruptcy Court did not act outside of its authority in making express provision for the Bank's "conflicting" lien in the Order of confirmation. In several subsections of § 1141 appear the words: "Except as otherwise provided in the plan or the order confirming the plan. . . ."20 This terminology shows conclusively that the Bankruptcy Judge had the authority to include in the Order of confirmation a recognition of the continued existence of the lien, and the Bank's rights against the land in rem.

III. Conclusion

The Orders of the Bankruptcy Court are AFFIRMED.