In re Ahern Enterprises, Inc.

• Decision Date: 06 November 2007
• Docket Number: No. 06-30986.,06-30986.
• Citation: 507 F.3d 817
• Parties: In the Matter of: AHERN ENTERPRISES, INC., Debtor. Elixir Industries, Inc., Appellant, v. City Bank & Trust Co., Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

507 F.3d 817

In the Matter of: AHERN ENTERPRISES, INC., Debtor.

Elixir Industries, Inc., Appellant, v. City Bank & Trust Co., Appellee.

No. 06-30986.

United States Court of Appeals, Fifth Circuit.

November 6, 2007.

Michael Allyn Stroud (argued), R. Joseph Naus, Amanda Elyce Waddell, Wiener, Weiss & Madison, Shreveport. LA, for Appellant.

Mark A. Begnaud (argued), McCoy, Roberts & Begnaud, Natchitoches, LA, for Appellee.

Appeal from the United States District Court for the Western District of Louisiana.

Before GARWOOD, JOLLY and STEWART, Circuit Judges.

E. GRADY JOLLY, Circuit Judge:

In this bankruptcy case, Elixir Industries, Inc. ("Elixir") appeals the district court's judgment in favor of mortgage-holder City Bank & Trust Co. ("City Bank"), which held that Elixir's judgment lien was voided during the bankruptcy proceeding. We hold that upon confirmation of the reorganization plan, the lien was voided under 11 U.S.C. § 1141(c), and thus AFFIRM the judgment of the district court.

I.

In May 1996 Elixir properly filed and recorded a judgment lien in the mortgage records of Natchitoches Parish, Louisiana, in the amount of $40,961.53 (plus costs and interest) on property owned by the bankrupt, Ahern Enterprises, Inc. ("Ahern"). The property subject to the lien included Ahern's manufacturing facility in Campti, Louisiana. The manufacturing facility property was subject to a prior recorded mortgage held by City Bank that exceeded the value of the property.

On July 31, 1996, Ahern filed for Chapter 11 protection. On November 21, 1996, Elixir filed a proof of claim in the amount of $53,406.02 as an unsecured priority claim. Ahern, as debtor in possession, objected to the proof of claim and argued that Elixir only had a general unsecured debt because there was no unencumbered property to which the lien could attach. A hearing was held on April 7, 1998, after which the bankruptcy court entered an order sustaining Ahern's objection because Elixir's lien was junior to that of City Bank. The bankruptcy court reduced Elixir's claim to a general unsecured claim in the amount of $40,961.53, the principal amount of Elixir's judgment.

On September 26, 1997, City Bank filed a motion for Authority to Execute Dation En Paiement and to Cancel Indebtedness, which sought to cancel all judgment liens on two parcels of Ahern property that were pledged to the bank as collateral. The motion, however, did not include the manufacturing facility property. The bankruptcy court granted the motion on October 22 and issued an order requiring the Natchitoches Parish clerk to cancel all judgments affecting these two parcels. No order was issued concerning the manufacturing facility property.

Ahern's Chapter 11 plan was confirmed by the bankruptcy court on May 30, 1997.

On November 10, 1997, Ahern voluntarily converted its Chapter 11 plan into a request for relief under Chapter 7. In February 1998, City Bank and the Chapter 7 trustee filed a joint motion requesting court approval to sell the manufacturing facility property to the bank, as senior lien holder, in satisfaction of a portion of Ahern's debts. The bankruptcy court approved the sale on March 12 and credited $693,000 against City Bank's claim, leaving it with an unsecured claim of $471,366.58. The Trustee transferred the deed for the property to City Bank on March 22.

City Bank sold the manufacturing facility property to a third party on March 30. No title check was performed to discover that Elixir's judgment lien, as well as three additional liens, remained on the property. The third party later defaulted, and City Bank foreclosed on the property.

In 2005, as it contemplated selling the property again, City Bank determined that Elixir's lien (as well as the three others) had not been cancelled. On April 29, City Bank filed a complaint for declaratory relief in bankruptcy court, seeking a ruling that the liens had been voided during Ahern's bankruptcy case. Elixir counterclaimed, requesting a declaration that the lien was still valid. After cross-motions for summary judgment, the bankruptcy court found in favor of City Bank. The court concluded that its April 1998 order sustaining Ahern's objection to Elixir's proof of claim had extinguished the lien.

Elixir appealed to the district court, which affirmed, asserting multiple reasons. The court held that: 1) the bankruptcy court's April 1998 order sustaining Ahern's objection voided Elixir's lien; 2) the bankruptcy court's confirmation and the substantial consummation of Ahern's Chapter 11 plan was sufficient to void Elixir's lien; and 3) conversion to Chapter 7 did not reinstate Elixir's lien.

Elixir subsequently filed this appeal.

II.

On appeal, Elixir argues that the bankruptcy court's order sustaining Ahern's objection to its proof of claim did not void its lien on the manufacturing facility property. Although the bankruptcy court reduced Elixir's claim to a general, non-priority claim, Elixir contends that the court merely reclassified its claim for the purposes of distribution in the bankruptcy proceedings, which did not affect its judgment lien. City Bank counters that, because the court found Elixir's claim to be an allowed unsecured claim, it was not an "allowed secured claim" under 11 U.S.C. § 506(d),¹ and the lien was therefore voided.

Elixir also contests the district court's holding that its lien was voided by the confirmation of the Chapter 11 plan. Elixir contends that, because the plan had not reached the "consummation date" necessary for its provisions to take effect, the plan's lien-stripping language did not take effect, leaving its lien on the manufacturing property. City Bank argues that 11 U.S.C. § 1141(c) operated to void Elixir's lien. City Bank contends that the plan took effect on "substantial consummation" as defined by 11 U.S.C. § 1101.

III.

A.

In reviewing cases originating in bankruptcy, we perform the same function as the district court: the bankruptcy court's findings of fact are reviewed for clear error, and issues of law are reviewed de novo. In re Soileau, 488 F.3d 302, 305 (5th Cir.2007).

We do not address the district court's holding that Elixir's lien was voided by the bankruptcy court's April 1998 order reducing Elixir's claim and classifying it as a general unsecured creditor.² We conclude instead that the provisions of 11 U.S.C. § 1141(c) decide this case. In reaching this decision, we hold first that, under section 1141(c), the confirmation of a Chapter 11 plan voids liens on property dealt with by the plan unless they are specifically preserved, if the lien holder participates in the reorganization. Elixir's judgment lien was voided because Ahern's Chapter 11 plan was confirmed without Elixir's objection; because the property subject to Elixir's lien was dealt with by the plan; because Elixir participated in the reorganization proceedings; and finally because the plan did not preserve Elixir's lien.

B.

Title 11 U.S.C. § 1141(c) provides, with immaterial exceptions, that "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."

Other circuits who have considered § 1141(c) in the context of facts similar to those presented here have found that the section operates to extinguish liens that are not preserved in a confirmed Chapter 11 plan. The first court to state this default rule was the Seventh Circuit. In re Penrod, 50 F.3d 459 (7th Cir.1995). In Penrod, the debtor's Chapter 11 plan made provision for payment of a creditor's claim, which was secured by a lien on the debtor's hogs. Id. at 461. Neither the plan nor the order confirming it provided whether the lien would be extinguished. Id. The Seventh Circuit acknowledged the "old saw" that liens pass through bankruptcy unaffected. Id. It reasoned, however, that "when lienholders participate in a bankruptcy proceeding, and especially in a reorganization, they know that their liens are likely to be affected, and indeed altered." Id. at 462. The court held that liens are "interests" covered by section 1141(c) and that "unless the plan of reorganization, or the order confirming the plan says that a lien is preserved, it is extinguished by the confirmation . . . provided, we emphasize, that the holder of the lien participated in the reorganization." Id. at 463. The court found that its interpretation of section 1141(c) would lower the transaction costs of dealing with a reorganized debtor by allowing prospective creditors or investors to determine from the plan of reorganization itself whether liens of creditors whose interests are defined in the plan survive. Id.

The Eighth Circuit acknowledged Penrod's rationale when it considered the Federal Deposit Insurance Corporation's appeal of an order confirming a Chapter 11 plan. FDIC v. Union Entities (In re Be-Mac Transport Co., Inc.), 83 F.3d 1020 (8th Cir.1996). The court noted the rule that "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." Id. at 1025. The Be-Mac court found, however, that the FDIC's lien was not voided by the confirmed Chapter 11 plan because the bankruptcy court erroneously disallowed its claim, on account of the FDIC's untimely filed proof of claim. Id. at 1027. Had its claim been classified properly as a secured claim, the FDIC would have been entitled to vote and receive distributions as a secured creditor. The court held, citing Penrod, that because the FDIC was denied that right, it did not participate in the reorganization sufficiently to allow its lien to be extinguished. Id. The court stated that "[the FDIC]'s lien was never brought into the bankruptcy proceedings and could therefore not be extinguished by confirmation of...