City of Concord v. N. New Eng. Tel. Operations LLC (In re N. New Eng. Tel. Operations LLC)

• Decision Date: 04 August 2015
• Docket Number: Docket No. 14–3381–bk.
• Citation: 795 F.3d 343
• Parties: In re NORTHERN NEW ENGLAND TELEPHONE OPERATIONS LLC, Debtor, City of Concord, N.H., Appellant, v. Northern New England Telephone Operations LLC, Debtor–Appellee.
• Court: U.S. Court of Appeals — Second Circuit

795 F.3d 343

In re NORTHERN NEW ENGLAND TELEPHONE OPERATIONS LLC, DebtorCity of Concord, N.H., Appellant

v.Northern New England Telephone Operations LLC, Debtor–Appellee.

Docket No. 14–3381–bk.

United States Court of Appeals, Second Circuit.

Argued: June 16, 2015.

Decided: Aug. 4, 2015.

James W. Kennedy, City Solicitor, Concord, NH, for Appellant.

James T. Grogan, Paul Hastings LLP, Houston, TX, for Debtor–Appellee.

Before: NEWMAN, JACOBS, and RAGGI, Circuit Judges.

Opinion

DENNIS JACOBS, Circuit Judge:

The City of Concord filed timely proofs of claim for property taxes owed by a Chapter 11 debtor with respect to quarters of the 2009 tax year that had been billed pre-petition, but did not file proofs of claim with respect to property tax bills for later quarters that were billed during the bankruptcy proceedings. A single lien secured payment of the entire tax burden—both taxes that were the subject of claims and those that were not. Upon the City's Motion for Allowance and Payment of Tax Claims that were not filed, the United States Bankruptcy Court for the Southern District of New York (Morris, C.J. ) ruled that the now-confirmed plan extinguished the lien, reasoning that the plan declared “all property” of Northern New England Telephone Operations LLC (“NNETO”) to be free and clear of liens, including the City's lien, because the City had asserted the tax liabilities for the earlier quarters but not for the later quarters.

Before the enactment of the U.S. Bankruptcy Code, 11 U.S.C. § 101 et seq., the rule governing extinguishment of liens was simple: “liens pass through bankruptcy unaffected.” Dewsnup v. Timm, 502 U.S. 410, 417, 112 S.Ct. 773, 116 L.Ed.2d 903 (1992) ; see Long v. Bullard, 117 U.S. 617, 6 S.Ct. 917, 29 L.Ed. 1004 (1886). The Code preserves that background rule, see 11 U.S.C. § 506(d), with a caveat: liens are extinguished if the underlying property was “dealt with” by a confirmed plan, unless the plan or the order of confirmation provides otherwise. Id. § 1141(c).

Applying § 1141(c), the bankruptcy court held that the reorganization plan of debtor NNETO extinguished a tax lien held by the City of Concord. The bankruptcy court therefore denied the City's Motion for Allowance and Payment of Tax Claims, filed more than two years after confirmation. The United States District Court for the Southern District of New York (Sweet, J. ) affirmed. On appeal, the City argues in the alternative as to why its lien survived the bankruptcy proceedings, including: (1) that a plan extinguishes a lien under § 1141(c) only if the plan's text “dealt with” the property subject to the lien, and that the text of NNETO's plan did not deal with the relevant property; (2) that a plan extinguishes a lien under § 1141(c) only if the lienholder participated in the bankruptcy proceedings, and that the City's participation was insufficient to support extinguishment; (3) that § 506(d)(2) preserves the lien because the plan was confirmed without any proof of claim having been filed for those tax bills the City now asserts; (4) that, even if § 1141(c) applies and the City's lien was extinguished by the plan, equitable principles should prompt this Court to recognize the City's lien; and (5) that the doctrine of excusable neglect required the bankruptcy court to accept the City's untimely assertion of the lien. Each of these arguments fails.

We have not previously considered the circumstances under which a reorganization plan extinguishes a lien. We now hold that a lien is extinguished by a Chapter 11 plan if: (1) the text of the plan does not preserve the lien; (2) the plan is confirmed; (3) the property subject to the lien is “dealt with” by the terms of the plan; and (4) the lienholder participated in the bankruptcy proceedings. As they apply to the facts of this case, all four requirements are satisfied. We conclude that the plan extinguished the City's lien, and we therefore affirm.

BACKGROUND

On October 26, 2009, NNETO, along with its parent corporation FairPoint Communications, Inc., filed petitions for relief under Chapter 11 of the U.S. Bankruptcy Code in the Southern District of New York. On January 13, 2011, the bankruptcy court confirmed the operative reorganization plan (i.e., the Third Amended Joint Plan of Reorganization Under Chapter 11).

As of the petition date, NNETO owned several parcels of real property in Concord, New Hampshire. The City of Concord would bill NNETO for property taxes on a quarterly basis. The tax year begins each April 1, with quarterly tax bills issuing in July for Q1, October for Q2, January for Q3, and March for Q4. When NNETO filed its bankruptcy petition in October 2009, the City had already issued property tax bills for the first and second quarters of the 2009 tax year. The City filed several proofs of claim in NNETO's bankruptcy proceedings, including the Q1 and Q2 property tax bills for 2009. However, the City never filed proofs of claim for Q3 and Q4. Payment on those bills was due January 2, 2010, and March 31, 2010, and the City mailed both bills to NNETO on November 20, 2009. (All dates pertinent to the tax bills preceded the April 26, 2010 bar date—the deadline for governmental units to file proofs of claim against NNETO.)

Ultimately, the bankruptcy court allowed the City's claims for the Q1 and Q2 tax bills (after reducing some of the amounts). As to the Q3 and Q4 tax bills, the City moved the bankruptcy court on October 11, 2013 (i.e., after the January 13, 2011 confirmation) to formally allow those tax bills and order payment. The motion contended, inter alia, “that [ ] the Tax Claim is secured by a lien and that such lien was not discharged by the Plan.” (J.A. 367.) NNETO opposed the motion on the ground that the lien was extinguished on confirmation of the plan.

The bankruptcy court denied the City's motion, citing the plan provision that “all property” of NNETO be free and clear of creditors' interests, which the court interpreted to mean that the tax lien on NNETO's real property in Concord was extinguished. The district court affirmed. The City challenges that affirmance on further appeal to this Court.

DISCUSSION

When a bankruptcy appeal reaches us after district court review of the bankruptcy court order, our review of the bankruptcy court order is “plenary.” Momentum Mfg. Corp. v. Emp. Creditors Comm. (In re Momentum Mfg. Corp.), 25 F.3d 1132, 1136 (2d Cir.1994). In undertaking this plenary review, “we independently review the factual determinations and legal conclusions of the bankruptcy court,” evaluating the bankruptcy court's legal conclusions de novo and its factual findings for clear error. Id. (internal quotation marks omitted).

I

The longstanding background rule has been that “liens pass through bankruptcy unaffected.” Dewsnup v. Timm, 502 U.S. 410, 417, 112 S.Ct. 773, 116 L.Ed.2d 903 (1992) ; In re Penrod, 50 F.3d 459, 461 (7th Cir.1995). For the most part, the federal Bankruptcy Code, 11 U.S.C. § 101 et seq., (originally enacted as the Bankruptcy Reform Act of 1978, Pub.L. No. 95–598, 92 Stat. 2549 ), leaves that general principle intact. Dewsnup, 502 U.S. at 417, 112 S.Ct. 773 ; see 11 U.S.C. § 506(d). However, Chapter 11 of the Code contains a caveat:

Except as provided in subsections (d)(2) and (d)(3) of this section and except as otherwise 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.

11 U.S.C. § 1141(c). (The parties agree that the statutory exceptions, § 1141(d)(2) and § 1141(d)(3), have no application to this case.)

The phrase, “interests of creditors,” in § 1141(c) includes liens. Cf. id. § 101(37) (defining “lien” as “interest in property to secure payment of a debt or performance of an obligation”). Although “ § 1141(c) does not explicitly reference the extinguishment of liens, ... courts have uniformly held that confirmation of a reorganization can act to extinguish liens.” In re Chrysler LLC, 576 F.3d 108, 126 (2d Cir.) (citing cases), vacated as moot sub nom. Ind. State Police Pension Tr. v. Chrysler LLC, 558 U.S. 1087, 130 S.Ct. 1015, 175 L.Ed.2d 614 (2009).

Accordingly, whether a plan extinguishes a lien depends on the requirements embedded in § 1141(c). The express wording of § 1141(c) provides that a lien is extinguished if (1) the plan is confirmed, (2) the property subject to the lien is “dealt with” by the plan,¹ and (3) neither the plan nor the order of confirmation preserves it.

Our sister circuits and the lower courts of this Circuit have inferred a fourth consideration: that a reorganization plan extinguishes a lien only if the lienholder participated in the bankruptcy proceedings. The participation requirement was recognized as such in Penrod. See 50 F.3d at 462–63. The plan in that case provided for payment of a claim secured by a lien on several hogs, but was silent as to whether the lien was extinguished. Id. at 461. After the plan effective date but before the debtors were required to make payment, the debtors sold the hogs for slaughter and kept the proceeds. Id. The creditor believed it had maintained a lien on the hogs and therefore was owed the sale proceeds; but the court held that the lien was extinguished by the plan. As the court explained, since lienholders “know that their liens are likely to be affected, and indeed altered,” their participation in a reorganization qualifies the background rule that liens pass through bankruptcy unaffected. See id. at 462. Accordingly, the court held that a lien can be extinguished pursuant to § 1141(c) if the lienholder participated; and that if the lienholder did not participate, then “his lien would not be ‘property dealt with by the plan,’ and so the section would not apply.” Id. at 463 (quoting 11 U.S.C. § 1141(c) ).

Similarly, the secured creditor in FDIC v. Union Entities (In re Be–Mac Transp. Co....