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with in a confirmed plan free and clear of encumbrances under 11 U.S.C. § 1141(c): "(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." The Fifth Circuit concluded that "participation" requires some active involvement by the secured creditor, relying on cases from the Seventh Circuit and Eighth Circuit in accord. Thus, the secured creditor's lien survived plan confirmation because the creditor did not participate in the reorganization simply by receiving notice of the bankruptcy.
ii. Bank of New York, Mellon Trust Company, N.A. v. Becker (In re Lower Bucks Hospital), 488 B.R. 303 (E.D. Pa. 2013)
Issue: Whether the bankruptcy court erred in determining that bondholders received improper notice of a third-party release in the debtor's plan, that the bondholders did not consent to the third-party release when they failed to object to a motion to confirm a settlement stipulation, and that the third-party release in the debtor's plan was an impermissible nonconsensual release.
Holding: The court upheld the bankruptcy court's determinations that that bondholders received improper notice of a third-party release in the debtor's plan, that the bondholders did not consent to the third-party release when they failed to object to a motion to confirm a settlement stipulation, and that the third-party release in the debtor's plan was an impermissible nonconsensual release. Certain bondholders objected to the debtor's proposed plan on the grounds that it contained an impermissible third-party release that would prevent the bondholders from bringing actions against the indenture trustee involved in the issuance of prepetition bonds to fund the debtor. The provision with the release was removed, and the plan was confirmed. The bankruptcy court held the third-party release could not be included in the plan, and the indenture trustee appealed. The district court found that notice of the third-party release was improper because among others, the release was inconspicuous and placed near the end of a 62- page disclosure statement. Furthermore, the disclosure statement did not mention the third-party release in other areas that should have mentioned it. Other notices to the bondholders also did not did not describe the bondholders' potential claims against the indenture trustee. The court also reasoned that the bondholders did not consent to the third-party release by not objecting the settlement stipulation, which clearly released claims against the indenture trustee, including the claims of the bondholders. The court found that the settlement stipulation was conditioned on plan confirmation, and the confirmed plan did not include the third-party settlement. The court also found that the third-party release was an impermissible nonconsensual release because the indenture trustee did not show that its contribution to the reorganization, through its surrender of its indemnity claims against the debtor, was adequate to meet approval of the third-party release. Additionally, the court found that some of the bondholders accepting the plan were unaware of what they were giving up due to the inadequate notice of the third-party release.
©2014 William L. Norton III
