Presenting a live 90-minute webinar with interactive Q&A

Lien Stripping in Chapter 11 Bankruptcy Cases:

Lessons for Secured Creditors
Guidance for Secured Creditors on Lien Ride-Throughs After In re N. New Eng. Tel. Operations

WEDNESDAY, JANUARY 27, 2016

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

Today’s faculty features:

Marc E. Hirschfield, Partner, BakerHostetler, New York

Marc Skapof, Counsel, BakerHostetler, New York

George Klidonas, BakerHostetler, New York

The audio portion of the conference may be accessed via the telephone or by using your computer's
speakers. Please refer to the instructions emailed to registrants for additional information. If you
have any questions, please contact Customer Service at 1-800-926-7926 ext. 10.
Tips for Optimal Quality FOR LIVE EVENT ONLY

Sound Quality
If you are listening via your computer speakers, please note that the quality
of your sound will vary depending on the speed and quality of your internet
connection.

If the sound quality is not satisfactory, you may listen via the phone: dial
1-866-873-1442 and enter your PIN when prompted. Otherwise, please
send us a chat or e-mail [email protected] immediately so we can
address the problem.

If you dialed in and have any difficulties during the call, press *0 for assistance.

Viewing Quality
To maximize your screen, press the F11 key on your keyboard. To exit full screen,
press the F11 key again.
Continuing Education Credits FOR LIVE EVENT ONLY

In order for us to process your continuing education credit, you must confirm your
participation in this webinar by completing and submitting the Attendance
Affirmation/Evaluation after the webinar.

A link to the Attendance Affirmation/Evaluation will be in the thank you email

that you will receive immediately following the program.

For additional information about continuing education, call us at 1-800-926-7926

ext. 35.
Program Materials FOR LIVE EVENT ONLY

If you have not printed the conference materials for this program, please
complete the following steps:
• Click on the ^ symbol next to “Conference Materials” in the middle of the left-
hand column on your screen.
• Click on the tab labeled “Handouts” that appears, and there you will see a
PDF of the slides for today's program.
• Double click on the PDF and a separate page will open.
• Print the slides by clicking on the printer icon.
Lien Stripping in Bankruptcy
Cases
Lessons for Secured Creditors

By: Marc E. Hirschfield

Marc Skapof
George Klidonas
Four Overarching Topics:
• What are Liens and Security Interests?
• How are They Dealt with Under the
Bankruptcy Code?
• How the Second Circuit’s Decision in N. New
Eng. Tel. Operations Affects the Validity of
Liens Once a Chapter 11 Plan Goes
Effective
• The Post N. New England Tel. Operations
Impact on Secured Creditors if they Fail to
Participate in Bankruptcy Cases
• Lien-Stripping in General & Pass-Through

6
What is a Lien?
• A “lien” is defined as: “A legal right or interest that a creditor has in
another's property, lasting usually until a debt or duty that it secures is
satisfied.” LIEN, BLACK'S LAW DICTIONARY (10th ed. 2014).

• Typically, the creditor does not take possession of the property on which
the lien has been obtained.

• There are many types of liens that are dealt with in bankruptcy. Some
examples include:
• Voluntary
• Statutory
• Judgment

• The Fifth Amendment protects a secured creditor’s rights, but generally

only to the extent of the value of the property. In re Timbers of Inwood
Forest Associates, Ltd., 793 F.2d 1380, 1391 (5th Cir. 1986) (citing
Wright v. Union Central Life Ins. Co., 311 U.S. 273, 278 (1940)).

7
Voluntary Liens
• A voluntary lien is a lien created with the debtor’s consent. There
are two broad classes of voluntary liens:
• Purchase-Money Security Liens (“PMSI”): security interest that is
created when a purchaser uses the proceeds of a loan to purchase
property immediately and gives the lender security by using the
purchased property as collateral. UCC § 9-103
• Example: buyer purchases a home/boat/car by applying for a loan and
uses the proceeds of the loan to effectuate the purchase
• Non-Purchase-Money Security Liens (“Non-PMSI”): lien where
collateral supports an underlying obligation but not limited to purchase
of specified personal property
• Example: owner refinances a mortgage on property, or a loan is used to
pay for expenses collateralized by accounts receivable
• PMSI and Non-PMSI: borrower retains possession of property

8
Voluntary Liens (cont’d)
• A mortgage lien is very common in a bankruptcy case and is
typically defined as a lien on the mortgagor's real property securing
the mortgage.
• There can be a first lien, a second lien, and/or a priming lien:
• First lien: A lien that arises and attaches before or after another validly
recorded lien in such a way that the lien has equal or superior rights in
the same collateral.
• Second lien: A lien secured by the same collateral as the first lien but
subordinate in priority of payment to the existing first lien.
• Priming lien: A lien on collateral superior to all other liens that arises
after perfection of the pre-existing liens, e.g., Debtor-in-Possession
Financing
• Many of the cases and concepts herein will discuss first and second
liens.

9
Statutory Lien
• A statutory lien is defined as a lien arising solely by force of statute,
not by agreement of the parties. LIEN, BLACK'S LAW DICTIONARY
(10th ed. 2014).

• Two examples are a federal tax lien and a mechanic’s lien.

• Tax lien: a lien on property imposed by a government (local, state, or
federal) for unpaid taxes. The lien can arise from many instances
including real estate, utilities, estate tax, etc.
• Mechanic’s Lien: A statutory lien that secures payment for labor or
materials supplied in improving, repairing, or maintaining real or
personal property, such as a building, an automobile, or the like. Also
termed lien of the mechanic; artisan's lien; chattel lien (for personal
property); construction lien (for labor); garageman's lien (for repaired
vehicles); laborer's lien (for labor); materialman's lien (for materials). Id.

10
Judicial Lien
• A judicial lien is imposed by a court and created when a creditor has
an interest in a debtor’s property after a judgment has been entered.
• Mechanically, if a debtor owes money to a creditor and the judgment
has not been satisfied, the creditor may request that the court
impose a lien on specific property owned and possessed by the
debtor.
• After the court imposes the lien, typically it issues a writ directing the
sheriff to seize the property, sell it, and turn over the proceeds to the
creditor.
• Judgment creditors can look to wages, bank accounts, or real or
personal property.
• Theoretically, a judgment creditor can foreclose on the property if it
is not paid by the judgment debtor.

11
Important Rule about Liens
• Liens, whether voluntary, judicial, or statutory in nature, are specific
to the state in which they arose, with the exception of some federal
liens such as those encumbering intellectual property.
• Thus, look to state law to determine how they arise and their effects.
• In some situations, liens arise automatically, while in others, a
creditor must take some action to “perfect” its liens.
• State law typically determines perfection.
• Without perfection, a creditor with an otherwise valid lien may be
subject to having it “stripped,” e.g., strong-arm provisions of the
Bankruptcy Code.

12
Perfection is Key
• Real Estate: file and record the mortgage in the land records in the
county where the property is located.
• Tangible and Intangible Property: file a financing statement in the
appropriate UCC filing offices. Article 9 of the UCC requires:
• The debtor’s and creditor’s names
• The debtor’s and creditor’s mailing addresses
• Whether the debtor is an organization or individual
• Type of organization and jurisdiction
• Description of the collateral
• Perfection by Possession, e.g., money, instruments, letters of credit,
certificated statements, and chattel paper may require perfection under
Art. 8 of the UCC.
• Perfection by Control, e.g., deposit accounts and investment property.
Liens may attach to the proceeds of collateral but not comingled cash
• Tax Lien: perfect in the manner above depending on asset
• Judicial Lien: record the Abstract of Judgment with the county recorder
or Secretary of State in the county or state where debtor owns property

13
General Rule for Treatment of Liens in Bankruptcy

• Liens Survive Bankruptcy

• Generally, liens survive a bankruptcy, meaning that a filing alone will not
extinguish a creditor’s lien.
• Thus, a lien will typically remain on the property while the unsecured
portion will be discharged in bankruptcy.

• Secured Creditor’s Rights

• A creditor has the right to foreclose on the collateral (subject to relief
from the automatic stay), or a right to the proceeds of a sale of the
collateral, or the right to credit bid.
• A secured creditor is also entitled to “adequate protection” if the debtor
uses its cash collateral and, in some cases, post-petition interest.

14
Specific Rules Discussed Herein Regarding
Chapter 11, 7, and 13
• Chapter 11: a lien will be extinguished if it is “dealt with” in a plan
under section 1141(c) of the Bankruptcy Code.

• Chapter 7: debtor cannot “strip down” creditors' lien on real property

to judicially determined value of collateral. Dewsnup v. Timm, 502
U.S. 410 (1992).

• Chapter 13: the Dewsnup rule does not apply in chapter 13 cases.
In a chapter 13 case the debtor cannot use section 506(a) to
bifurcate and “strip down” an undersecured home mortgage to the
residence's current fair market value, because such a procedure
would contravene section 1322(b)(2)'s prohibition against modifying
the rights of the holder of a security interest secured only by the
debtors' principal residence. Nobelman v. Am. Sav. Bank, 508 U.S.
324 (1993).

15
So if liens pass through
bankruptcy, what is there to worry
about for the secured creditor?

16
 Chapter 11: In re Northern New England Telephone Operations LLC

Full Citation: In re N. New Eng. Tel. Operations LLC, 795 F.3d 343 (2d
Cir. 2015) cert. denied sub nom. City of Concord, N.H. v. N. New Eng.
Tel. Operations LLC, 136 S. Ct. 564 (2015)

Facts:
• Debtor files for chapter 11 relief on October 26, 2009.
• The plan is confirmed on January 13, 2011.
• The plan provided that “all property” of the debtor would vest in the
recognized debtor free and clear of creditors’ interest.
• The City of Concord filed timely proofs of claim for property taxes
invoiced post-petition.
• The claims at issue involved two post-petition claims, whereby
proofs of claim were not filed and, instead, the municipality filed a
motion two years after confirmation.

17
Conclusion in In re Northern New England Telephone Operations LLC

Bankruptcy Court: The plan extinguished the City’s lien because it

clearly provided that all of the Debtor’s property was to vest in the
reorganized debtor free and clear of liens. The district court agreed.

Second Circuit Holding: The lien was extinguished because:

1. the plan was confirmed;
2. the property and lien was “dealt with” by the plan; and
3. neither the plan nor the confirmation order preserved the lien.

18
Statutory Reliance in In re Northern New England
Telephone Operations LLC
Section 1141(c) is used to determine whether a lien can be
extinguished under a plan:

(c) 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.

19
Reasoning of In re Northern New England Telephone Operations LLC

Reasoning: Section 1141(c) allows for a lien to be extinguished if it is

“dealt with” in a plan.

Judicial Gloss: the creditor must have participated in the case.

Participation Requirement: The Second Circuit added the

“participation” requirement for a debtor to extinguish a lien under a
chapter 11 plan, explaining that 1141(c) requires active lienholder
participation.

20
Why Add the Participation Requirement?
First, it ensures that the parties in interest are notified that property
subject to a lien may be dealt with by the plan.

Second, because the participation requirement requires more than

passive receipt of effective notice, the lienholder has to decide whether
to bypass the bankruptcy process, e.g., seek relief from stay to
foreclose pursuant to state law.

21
Conclusion of In re Northern New England Telephone Operations LLC

Conclusion: The Second Circuit made the following findings in

determining that the City’s liens are extinguished:

• As of the effective date, all of the debtors’ property would vest

with the reorganized debtors free and clear of all claims, liens
and interests.
• The plan was confirmed and went effective.
• The plan dealt with the City’s lien by extinguishing the lien in its
entirety.
• The City participated in the bankruptcy case by submitting
several proofs of claim for prepetition debt.

Interestingly, the Second Circuit relies heavily on section 506(d) of the

Bankruptcy Code, a section that deals with avoiding liens that are not
allowed, and rarely used in chapter 11 cases.
22
Aftermath of In re N. New England Tel. Operations LLC

One Case Has Cited Second Circuit: In re Vitro Asset Corp., 539 B.R.
108, 118 (N.D. Tex. 2015)

Facts:
• United Independent School District (“UISD”) was a secured creditor
taxing authority of the debtor.
• UISD delivered two tax bills post-petition and filed a proof of claim.
• The bills were paid.
• UISD amended its proof of claims to purportedly include disputed
fees, such as penalties, interest, and fees.
• The confirmed plan dealt with UISD’s lien and UISD did not object
nor did it appeal the confirmation order.

23
Conclusion of In re Vitro Asset Corp.
Holding: Debtor's confirmed plan “dealt with” taxing authority's lien, as
required for lien to be stripped off pursuant to provisions of plan.

Test: The court cited to a Fifth Circuit decision, In re Ahern Enterprises,

507 F.3d 817, 822 (5th Cir.2007), which explained that 1141(c)
discharge requires the following:

1. the plan must be confirmed;

2. the property that is subject to the lien must be dealt with by the
plan;
3. the lien holder must participate in the reorganization; and
4. the plan must not preserve the lien.”

24
“Dealt With” in In re Vitro Asset Corp.
• “Dealt With”: This term was not defined by the Fifth Circuit but the
court adopted the Second Circuit standard, explaining that absent
specific references, a general reference to “all property” categorically
includes the disputed property.

• The term appears to have been interpreted broadly.

25
“Participation” in In re Vitro Asset Corp.
• What Constitutes Participation? Participation is a “judicial gloss”
of section 1141(c) of the Bankruptcy Code. Courts require
participation to ensure that creditors have notice of the plan and its
potential effect.

• Citing to the Fifth Circuit, the Vitro court concluded that filing a proof
of claim as an unsecured priority creditor constitutes participation.

• Definition of Participation: The word “participation” connotes

activity, and not mere nonfeasance. See BLACK’S LAW
DICTIONARY1229 (9th ed.2009) (“The act of taking part in something,
such as a partnership, a crime, or a trial.” (emphasis added)); see
also Nat'l Fed'n of Indep. Bus. v. Sebelius, ––– U.S. ––––, 132 S.Ct.
2566, 2587 (2012) (distinguishing between “activity” and a
“deci[sion] not to do something” or a “fail[ure] to do it”).

26
Circuits Discussing Participation
Second Circuit: Filing a proof of claim is participation. In re N. New
Eng. Tel. Operations LLC, 795 F.3d 343 (2d Cir. 2015).

Fourth Circuit: Creditor participated when it filed a proof of claim,

served on a committee, discussed its claim with committee counsel.
Universal Suppliers v. Reg'l Bldg. Sys., Inc. (In re Reg'l Bldg. Sys.,
Inc.), 254 F.3d 528 (4th Cir.2001).

Fifth Circuit: Affirmative participation versus nonfeasance. Creditor

must do something versus fail to act. In re S. White Transp., Inc., 725
F.3d 494, 497 (5th Cir. 2013).

27
Circuits Discussing Participation (cont’d)
Seventh Circuit: Secured creditor participated by filing a proof of claim.
Matter of Penrod, 50 F.3d 459 (7th Cir. 1995).

Eighth Circuit: FDIC participated when it filed a proof of claim and

litigated the claim extensively. FDIC v. Union Entities (In re Be–Mac
Transp. Co.), 83 F.3d 1020 (8th Cir.1996):

Tenth Circuit: Notice must be sufficient in order to extinguish the liens.

In re Barton Industries, Inc., 104 F.3d 1241, 1245 (10th Cir. 1997).

28
Courts Rejecting “Penrod” Case
• Bankruptcy Court District of Maryland: In re Regl. Bldg. Sys., 251
B.R. 274, 286 (Bankr. D. Md. 2000) subsequently aff'd sub nom. In
re Regl. Bldg. Sys., Inc., 254 F.3d 528 (4th Cir. 2001)

• Holding: notice alone satisfies the participation requirement for the

extinguishment of liens under section 1141(c) of the Code.

• This is a much more expansive interpretation of section 1141(c).

Under the Maryland court’s holding, a creditor’s lien can be stripped
in a chapter 11 so long as notice was provided.

• It would not matter if the creditor participated in the case.

29
Why Did In re Regl. Bldg. Sys. Go This Far?
• “The Penrod dicta's second premise—that a proof of claim must
have been filed for the lien to be affected by the plan—makes no
sense.” In re Regl. Bldg. Sys., 251 B.R. at 286.

• “A plan calling for the retention or transfer of specified property deals

with that property, including the part encumbered by a lien, even if
the lienholder did not file a proof of claim.” In re Regl. Bldg. Sys.,
251 B.R. at 286.

• “[N]othing in the Bankruptcy Code requires that a proof of claim have

been filed as a precondition to permitting the plan to deal with the
property encumbered by the lien securing the claim.” In re Regl.
Bldg. Sys., 251 B.R. at 286.

30
Treatment of Liens in Chapter 7
Liens are not stripped in chapter 7 cases
• Dewsnup v. Timm, 502 U.S. 410 (1992) is the seminal case.
• Issue: whether a debtor can strip down a creditor’s lien on real
property to the value of the collateral when that value is less than the
amount of the claim secured by the lien
• Facts:
• Debtor loaned money and received a security interest in farmland. The
debtor defaulted.
• Debtor files for bankruptcy to avoid a portion of creditor’s lien, arguing
that the loan exceeded the fair value of the land.
• Debtor argued that under section 506(a) a claim is secured only up to
the value of the collateral and that under section 506(d), if a claim is not
an allowed secured claim it is void.

31
Determination of Secured Status
11 U.S.C. 506:

(a) (1) An allowed claim of a creditor secured by a lien on property in which the estate has
an interest . . . is a secured claim to the extent of the value of such creditor's interest in
the estate's interest in such property . . . and is an unsecured claim to the extent that the
value of such creditor's interest . . . is less than the amount of such allowed claim. Such
value shall be determined in light of the purpose of the valuation and of the proposed
disposition or use of such property, and in conjunction with any hearing on such
disposition or use or on a plan affecting such creditor's interest.

(2) If the debtor is an individual in a case under chapter 7 or 13, such value with respect
to personal property securing an allowed claim shall be determined based on the
replacement value of such property as of the date of the filing of the petition without
deduction for costs of sale or marketing. With respect to property acquired for personal,
family, or household purposes, replacement value shall mean the price a retail merchant
would charge for property of that kind considering the age and condition of the property at
the time value is determined.

(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— (1) such claim was disallowed only under
section 502(b)(5) or 502(e) of this title; or (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.

32
Conclusion in Dewsnup
• Holding: in evaluating the words allowed + secured + claim
(independently), the Court held that creditor had a claim, that was
allowed, and secured by the property, therefore, it could not be
stripped-down under section 506(d)
• Notice that the allowed + secured + claim analysis under section 506(d)
is not the same as the “allowed secured claim” analysis under section
506(a), which bifurcates secured and unsecured claims

• Dissent: a lien is void if the claim is not both allowed and secured
because of the language of section 502(a)

33
What Happens After Dewsnup?
• Takeaway from Dewsnup: a creditor’s lien stays with the real
property until the foreclosure and any increase in value of the
property at the time belongs to the creditor

• Problem: after Dewsnup, when you see the term “allowed secured
claim” throughout the Code, how do you read it – like (a) or (d)?

• What has happened since Dewsnup?

34
Split in Courts on Valueless Second Liens

Aftereffects of Dewsnup v. Timm Has Created a Split:

• You can strip-off: even though the lien is allowed and there is a
claim, the claim is not secured at all and, therefore, under Dewsnup,
you can strip-off

• You cannot strip-off: under pre-Code law and Dewsnup, liens

should pass through, therefore, it should go right through bankruptcy

35
How Debtors Deal with Dewsnup v. Timm
File a Chapter 20:

• This is when a debtor files a chapter 7 bankruptcy case and then a

chapter 13 case.

• By filing the chapter 7 first, the debtor discharges the second lien.

• By filing the chapter 13, the debtor satisfies the secured claims
evidenced by a lien over a period of time.

• Although no discharge is granted, the stay is still in effect so the

secured creditor cannot foreclose.

• A split of authority exists on whether a debtor may strip off of a

worthless lien in a Chapter 20 case.

36
Bank of America v. Caulkett: No Lien Stripping for
Underwater Liens
Bank of Am., N.A. v. Caulkett, 135 S. Ct. 1995 (2015)

Facts:
• The secured creditor’s claim was partially secured.
• The home was worth less than the first mortgage.
• The second mortgage was completely underwater.
• The secured creditor argued that junior liens should not be treated as
unsecured loans, because the bankruptcy code only “strips off” claims
from property that are disallowed and because the Supreme Court’s
ruling in Dewsnup v. Timm, disallowing “stripping down” of primary liens
to the value of the underlying property, should extend to this case.
• The defendants argued that second liens should be treated as
unsecured, and hence disallowed.

Held: The Bankruptcy Code does not allow a chapter 7 debtor to strip off a
wholly underwater junior mortgage

37
Bank of America v. Caulkett: Reasoning
The Court declined to limit Dewsnup to underwater liens.

• The definition of “secured claim” under Dewsnup and the Code did
not depend on whether a lien is partially or wholly underwater

• The Court declined to redefine “secured claim” in section 506(d) as a

claim secured by collateral that has any value, concluding that such
a distinction is artificial.

• The debtors’ suggestion that the historical and policy concerns that
motivated the Court in Dewsnup do not apply in the context of wholly
underwater liens is an insufficient justification for giving the term
“secured claim” a different definition depending on the value of the
collateral.

38
Treatment of liens in Chapter 13
• Dewsnup v. Timm does not apply in chapter 13 cases.

• The Supreme Court held that in a chapter 13 case the debtor cannot use
section 506(a) to bifurcate and “strip down” an undersecured home
mortgage to the residence's current fair market value, because such a
procedure would contravene section 1322(b)(2)'s prohibition against
modifying the rights of the holder of a security interest secured only by the
debtors' principal residence. Nobelman v. Am. Sav. Bank, 508 U.S. 324
(1993).

• When the claim of a lien holder secured only by the debtor's principal
residence is a completely or wholly unsecured claim, the anti-modification
provision in section 1322(b)(2) does not apply; in that circumstance, a debtor
may utilize section 506(a) under a chapter 13 plan to effectively “strip off” a
wholly unsecured lien. In re Quevedo, 2015 WL 6150602, at *3 (Bankr. C.D.
Cal. Oct. 19, 2015).

39
Does Dewsnup Apply in Chapter 13 Cases?
Nobelman v. Am. Sav. Bank, 508 U.S. 324 (1993)

Facts:
• Debtor relied on section 506(a) in the plan, which proposed bifurcating
a $71,335 home mortgage into a $23,500 secured claim and a $47,835
unsecured claim.
• The plan would make regular monthly mortgage payments for the
secured portion and the creditor would receive the same treatment
under the plan as other unsecured claims.

Holding: in a chapter 13 case, the debtor cannot use section 506(a) to

bifurcate and “strip down” an undersecured home mortgage to the
residence's current fair market value, because such a procedure would
contravene section 1322(b)(2)'s prohibition against modifying the rights of
the holder of a security interest secured only by the debtors' principal
residence.

40
Reasoning Provided in Nobleman
• Justice Thomas based the decision on the practical difficulties of a
chapter 13 bifurcation, stating:

• Petitioners proposed to reduce the outstanding mortgage principal to

the fair market value of the collateral, and, at the same time, they insist
that they can do so without modifying the bank's rights as to interest
rates, payment amounts and contract terms—that appears to be
impossible. . . . To preserve the interest rate and the amount of each
monthly payment specified in the note after having reduced the
principal to $23,500, the plan would have to reduce the term of the note
dramatically. That would be a significant modification of a contractual
right.

41
Questions Raised After Nobleman
• Questions Arise After Nobleman:
• Whether the section 1322(b)(2) analysis applies in wholly unsecured
liens
• If there is zero value in a lien, should it receive protection?

• The majority of courts subsequent to Nobelman have indicated that

section 1322(b)(2) does not protect the wholly unsecured mortgage,
thus allowing it to be subject to modification. See, e.g., In re Lane,
280 F.3d 663 (6th Cir. 2002) (holing that a second mortgagee whose
lien was completely underwater was not within the anti-modifications
provisions of § 1322(b)(2) as the second mortgagee did not have a
secured claim, thus allowing it to be modified).

42
Chapter 13 “Participation” Case
In re Pajian, 785 F.3d 1161 (7th Cir. 2015)
Facts:
• Secured creditor filed a proof of claim approximately three months after the
bar date.
• Effectively, the secured creditor did not participate timely in the case.
• Creditor argued that:
• Secured creditor need not file a proof of claim in a chapter 13 case.
• Secured creditor filed an information proof of claim.
• Bankruptcy Rule 3002(c) governing deadlines is inapplicable to secured
claims.
• The Bankruptcy Court agreed with the third argument, concluding that a
creditor seeking distributions in a chapter 13 case need only file a proof of
claim prior to confirmation (and not prior to the bar date).
Holding: a secured creditor’s lien can be extinguished if it fails to file a proof of
claim in a chapter 13 case—thus it does not necessarily “ride-through” the
bankruptcy.

43
Reasoning in In re Pajan
The court provided a number of reasons for its holding:

• Courts have reached conflicting conclusions regarding whether the

temporal language of Bankruptcy Rule 3002(c), which does not
expressly refer to "secured creditors," applies to unsecured creditors
only.

• The “better interpretation is that all creditors—unsecured and secured

alike—are bound by the Rule 3002(c) deadline."

• Requiring all creditors to file claims by the same date allows the debtor
to create a chapter 13 plan without the concern that other creditors
might swoop in at the last minute and upend a carefully constructed
repayment schedule. Otherwise, secured creditors could wreak havoc
on the ability of the debtor and the bankruptcy court to assemble and
approve an effective plan.

44
Why is 506 so Important in Chapter 11?
• Courts analyzing lien-stripping issues in chapter 11 have used
section 506 to analyze this issue, especially in the tax lien context.

• In re Dever, 164 B.R. 132 (Bankr. C.D. Cal. 1994): the court held that
lien stripping is allowed in a chapter 11 case where an involuntary tax
lien against debtors' property was held by the IRS. The lien was
subject to avoidance or modification with the result that the debtors
were entitled to limit the secured claim to the fair market value of its
interest in the collateral pursuant to the plan
• In re Johnson, 386 B.R. 171 (Bankr. W.D. Pa. 2008) aff'd sub nom.
I.R.S. Dept. of Treas. of U.S. v. Johnson, 415 B.R. 159 (W.D. Pa. 2009):
concluding that the Dewsnup bar on the stripping-down of liens on real
property in chapter 7 cases does not extend to chapter 11
reorganization cases with the result that the debtor could strip off a
federal tax lien on his residence.
• In re Berkebile, 444 B.R. 326 (Bankr. W.D. Pa. 2011): chapter 11 debtor
could strip-down a federal tax lien by bifurcating the claim against the
value of the property and modifying the claim under the plan.

45
Lessons Learned
Lessons Arising from Lien-Stripping, Participating in Cases, Ride-
Through:

• Secured creditors should consider the following:

• File a proof of claim;
• If you file a proof of claim, however, you probably participated so you
should also object to the plan;
• Provide the plan proponent with specific language that you wish to
include in the plan and confirmation order;
• Request a determination pursuant to section 506 as to the secured
status of their claims.

46
Thank You
Marc E. Hirschfield
[email protected]

Marc Skapof
[email protected]

George Klidonas
[email protected]

47