Restructuring

Contributed by Erika del Nido
In the Ninth Circuit’s recent decision, Va Bene Trist, LLC v. Washington Mutual Bank, the United States Court of Appeals for the Ninth Circuit held that secured creditors were not required to file proofs of claim in a chapter 12 case to preserve their liens because liens ordinarily “pass through” a bankruptcy case unaffected.  This default rule was most famously discussed in Dewsnup v. Timm, a chapter 7 case in which the court relied on that same rule in holding that “lien-stripping” to the value of collateral securing a loan was impermissible because such liens historically survive bankruptcy.  Dewsnup’s applicability outside the chapter 7 context has been debated in the courts, and the Ninth Circuit’s recent decision indicates that Dewsnup’s rationale reaches chapter 12 cases.
Va Bene Trist, LLC, acquired a ranch in satisfaction of a loan that it made to a third party.  The manager of Va Bene Trist resided at the ranch and obtained two loans, including a $1.19 million loan, in his name — not Va Bene Trist’s.  The loans, however, were secured by deeds of trust on the property, which was held by Va Bene Trist, not the manager.  After no mortgage payments were made for several months, a trustee’s sale was noticed, and Va Bene Trist filed for chapter 12 bankruptcy, which covers the adjustment of debts for family farmers.
The key issue before the bankruptcy court was whether the holder of the $1.19 million note, which had not filed a timely proof of claim against the debtor, held a valid secured claim against the debtor.  The bankruptcy court held that it did.  In a one-sentence response, the district court concluded that the argument was without merit because “[a]ppellees, as secured creditors, were not required to file a proof of claim.”  In so holding, the district court cited Brawders v. County of Ventura.  Although the Ninth Circuit’s opinion in Brawders does not expressly cite to Dewsnup, it supports the same principles set forth in that famous Supreme Court case.  Specifically, without significant analysis of the provisions of the Bankruptcy Code, it quotes the Bankruptcy Appellate Panel:  “Absent some action by the representative of the bankruptcy estate, liens ordinarily pass through bankruptcy unaffected, regardless whether the creditor holding that lien ignores the bankruptcy case, or files an unsecured claim when it meant to file a secured claim, or files an untimely claim after the bar date has passed.”  Furthermore, the first case that Brawders cites in support of this proposition based its holding in part on Dewsnup.
The Ninth Circuit looked to Brawders in affirming the district court’s ruling that secured creditors are not required to file a proof of claim to preserve a lien in a chapter 12 case.  The court simply asserted that the claimants were secured creditors, so failure to timely file a proof of claim would not bar them from asserting their secured claim.
In holding that a secured creditor is not required to file a proof of claim in a chapter 12 case to preserve its lien, the Ninth Circuit followed a long line of cases holding that liens generally survive a bankruptcy case unaffected.  As we have noted in a previous blog entry, though, many of these decisions suffer from a lack of in-depth discussion about the specific provisions of the Bankruptcy Code that may affect the decision.
But how does Va Bene relate to chapter 11?  Notably, the effect of confirmation of a chapter 12 plan, as set forth in section 1227(c) of the Bankruptcy Code, is different from the effect of confirmation of a chapter 11 plan, as set forth in section 1141(c) of the Bankruptcy Code.  Section 1227(c) only vests property in the debtor “free and clear of any claim or interest of any creditor provided for by the plan” (emphasis added).  Section 1141(c), however, does not require that the creditor be provided for by the plan, but states that “property dealt with by the plan” revests in the reorganized debtor free and clear.  Few courts have yet to address this distinction, and it remains to be seen how far Dewsnup applies in the chapter 11 context.  Neverthess, the legacy of Dewsnup lives on in this opinion and extends Dewsnup’s principles to chapter 12 cases.