A Lien Can Survive Even If Secured Creditor Does Not Participate In Bankruptcy Proceedings

A Lien Can Survive Even If Secured Creditor Does Not Participate In Bankruptcy Proceedings

by Onyinyechi Muilenburg

Recent case of interest regarding a court holding that a lien can survive even if secured creditor does not participate in bankruptcy proceeding.

The Fifth Circuit Court of Appeals recently ruled that a security interest of a Lender evidenced by a lien, survived the bankruptcy proceeding where a secured creditor that received notice of a debtor’s Chapter 11 bankruptcy proceeding, did not file a proof of claim or otherwise “participate” in the bankruptcy proceeding.  In re S. White Transp., ____ F.3d ____, 2013 WL 3983343, (5th Cir. Aug. 5, 2013) (slip. op.).  The court held that the receipt by Lender of notice of the bankruptcy filing did not constitute “participation” on behalf of Lender.  The court held that mere passive receipt of notice was insufficient to void a lien under 11 U.S.C. § 1141(c).

The court further supported its holdings in prior cases that 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)).

The court also noted that at least two other circuit courts addressing similar issues have required more than notice of a bankruptcy in order to void a lien.  The Seventh Circuit in In re Penrod, 50 F.3d 459, 461 (7th Cir. 1995), and the Eighth Circuit in In re Be-Mac Transp., 83 F.3d 1020, 1023 (8th Cir. 1996).

No information in this article is intended to constitute legal advice. For specific legal advice, please contact an attorney.

If you have any questions or would like more information about the effect of bankruptcy on a perfected lien, please contact Pat Huttenbach at 713.220.9184 or phuttenbach@hirschwest.com.