ENTERPRISE RISK MANAGEMENT: WHERE IS LEGAL AND COMPLIANCE? Thomas C. Baxter, Jr., and Won B. Chai

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1 An A.S. Pratt PUBLICATION JANUARY 2016 EDITOR S NOTE: WELCOME 2016! Steven A. Meyerowitz ENTERPRISE RISK MANAGEMENT: WHERE IS LEGAL AND COMPLIANCE? Thomas C. Baxter, Jr., and Won B. Chai ROBUST CAUSALITY AND CAUTIONARY STANDARDS: WHY THE INCLUSIVE COMMUNITIES DECISION, DESPITE UPHOLDING DISPARATE-IMPACT LIABILITY, ESTABLISHES NEW PROTECTIONS FOR DEFENDANTS PART II Elizabeth L. McKeen, Bimal Patel, and Ashley Pavel RECENT DEVELOPMENTS IN THE LAW GOVERNING THE FIDUCIARY DUTIES OF BANK DIRECTORS David W. Moon, Michael C. Keats, and Stephen J. Newman SECURED CREDITORS BEWARE: LIENS MAY BE EXTINGUISHED UNDER A CHAPTER 11 PLAN Marc Skapof and George Klidonas OCC ANTICIPATES NEARLY HALF OF OUTSTANDING HELOCS WILL REACH END-OF-DRAW PERIOD BY 2017 Heather L. Hansche and Lindsay S. Henry BANKING BRIEFS Terence G. Banich

2 QUESTIONS ABOUT THIS PUBLICATION? For questions about the Editorial Content appearing in these volumes or reprint permission, please call: Matthew T. Burke at... (800) For assistance with replacement pages, shipments, billing or other customer service matters, please call: Customer Services Department at (800) Outside the United States and Canada, please call (518) Fax Number (518) Customer Service Web site For information on other Matthew Bender publications, please call Your account manager or (800) Outside the United States and Canada, please call (518) ISBN: (print) ISBN: (ebook) ISSN: (Print) ISSN: (Online) Cite this publication as: The Banking Law Journal (LexisNexis A.S. Pratt) Because the section you are citing may be revised in a later release, you may wish to photocopy or print out the section for convenient future reference. This publication is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional services. If legal advice or other expert assistance is required, the services of a competent professional should be sought. LexisNexis and the Knowledge Burst logo are registered trademarks of Reed Elsevier Properties Inc., used under license. Sheshunoff is a registered trademark of Reed Elsevier Properties SA, used under license. Copyright 2016 Reed Elsevier Properties SA, used under license by Matthew Bender & Company, Inc. All Rights Reserved. No copyright is claimed by LexisNexis, Matthew Bender & Company, Inc., or Reed Elsevier Properties SA, in the text of statutes, regulations, and excerpts from court opinions quoted within this work. Permission to copy material may be licensed for a fee from the Copyright Clearance Center, 222 Rosewood Drive, Danvers, Mass , telephone (978) An A.S. Pratt Publication Editorial Office 630 Central Ave., New Providence, NJ (908) (2016 Pub.4815)

3 Editor-in-Chief & Board of Editors EDITOR-IN-CHIEF Steven A. Meyerowitz President, Meyerowitz Communications Inc. BOARD OF EDITORS Barkley Clark Partner, Stinson Leonard Street LLP John F. Dolan Professor of Law Wayne State Univ. Law School David F. Freeman, Jr. Partner, Arnold & Porter LLP Thomas J. Hall Partner, Chadbourne & Parke LLP Kirk D. Jensen Partner, BuckleySandler LLP Satish M. Kini Partner, Debevoise & Plimpton LLP Douglas Landy Partner, Milbank, Tweed, Hadley & McCloy LLP Paul L. Lee Of Counsel, Debevoise & Plimpton LLP Jonathan R. Macey Professor of Law Yale Law School Stephen J. Newman Partner, Stroock & Stroock & Lavan LLP Bimal Patel Counsel, O Melveny & Myers LLP Sarah L. Reid Partner, Kelley Drye & Warren LLP David Richardson Partner, Dorsey & Whitney Heath P. Tarbert Partner, Allen & Overy LLP Stephen B. Weissman Partner, Rivkin Radler LLP Elizabeth C. Yen Partner, Hudson Cook, LLP Regional Banking Outlook James F. Bauerle Keevican Weiss Bauerle & Hirsch LLC Recapitalizations Christopher J. Zinski Partner, Schiff Hardin LLP Banking Briefs Terence G. Banich Member, Shaw Fishman Glantz & Towbin LLC Intellectual Property Stephen T. Schreiner Partner, Goodwin Procter LLP THE BANKING LAW JOURNAL (ISBN ) (USPS ) is published ten times a year by Matthew Bender & Company, Inc. Periodicals Postage Paid at Washington, D.C., and at additional mailing offices. Copyright 2016 Reed Elsevier Properties SA., used under license by Matthew Bender & Company, Inc. No part of this journal may be reproduced in any form by microfilm, xerography, or otherwise or incorporated into any information retrieval system without the written permission of the copyright owner. For customer support, please contact LexisNexis Matthew Bender, 1275 Broadway, Albany, NY or Customer. Support@lexisnexis.com. Direct any editorial inquires and send any material for publication to Steven A. Meyerowitz, Editor-in-Chief, Meyerowitz Communications Inc., Grand Central Parkway, #18R, Floral Park, NY 11005, smeyerowitz@meyerowitzcommunications.com, (phone). Material for publication is welcomed articles, decisions, or other items of interest to bankers, officers of financial institutions, and their attorneys. This publication is designed to be accurate and authoritative, but neither the publisher nor the authors are rendering legal, accounting, or other professional services in this publication. If legal or other expert advice iii

4 is desired, retain the services of an appropriate professional. The articles and columns reflect only the present considerations and views of the authors and do not necessarily reflect those of the firms or organizations with which they are affiliated, any of the former or present clients of the authors or their firms or organizations, or the editors or publisher. POSTMASTER: Send address changes to THE BANKING LAW JOURNAL LexisNexis Matthew Bender, 630 Central Ave, New Providence, NJ POSTMASTER: Send address changes to THE BANKING LAW JOURNAL, A.S. Pratt & Sons, 805 Fifteenth Street, NW., Third Floor, Washington, DC iv

5 THE BANKING LAW JOURNAL Secured Creditors Beware: Liens May Be Extinguished under a Chapter 11 Plan Marc Skapof and George Klidonas * In a recent case of first impression, the United States Court of Appeals for the Second Circuit considered lien stripping in Chapter 11 cases, holding that, where a plan deals with a secured creditor s lien and the secured creditor participates in the bankruptcy case, confirmation of a plan extinguishing the lien can be valid. The authors of this article explain the decision and its lessons for secured creditors. The maxim that liens pass-through a bankruptcy case even if the secured lienholder does not participate in such case has been affirmed by numerous courts and also been the subject of much commentary. For example, in Dewsnup v. Timm, the U.S. Supreme Court held that in a liquidation, under Chapter 7 of the Bankruptcy Code, a lien passes through the bankruptcy case unaffected, notwithstanding the discharge of the debtor s other unsecured debt. 1 The Court grounded its decision based on case law construing the Bankruptcy Act of 1898 (the Act ), the predecessor statute to the Bankruptcy Code. Under the Act, the law was clear: liens pass through bankruptcy unaffected. 2 That is, a secured creditor could elect to abstain from participating in a bankruptcy case and the lien securing the collateral would remain intact after the bankruptcy case was over. The Bankruptcy Code preserved this rule with one statutory exception: liens are extinguished if the property securing the lien was dealt with by a confirmed plan under Chapter 11. Specifically, Section 1141(c) of the Bankruptcy Code provides that 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, 3 and makes no distinction between secured and unsecured creditors. In a recent case of first impression, the United States Court of Appeals for the Second Circuit considered lien stripping in Chapter 11 cases. The court held that, where a plan deals with a secured creditor s lien and the secured creditor * Marc Skapof is a counsel and George Klidonas is an associate in BakerHostetler s Bankruptcy, Restructuring, and Creditors Rights group. The authors may be contacted at mskapof@bakerlaw.com and gklidonas@bakerlaw.com, respectively. 1 Dewsnup v. Timm, 502 U.S. 410, (1992). 2 Id. at U.S.C. 1141(c) (emphasis added). 32

6 SECURED CREDITORS BEWARE: LIENS MAY BE EXTINGUISHED UNDER A CHAPTER 11 PLAN participates in the bankruptcy case, confirmation of a plan extinguishing the lien can be valid, notwithstanding the maxim. 4 The court s decision will now guide how lower courts in the Second Circuit treat lienholders whose lien was contemplated to be extinguished under a plan and failed to actively participate in the bankruptcy case. PROCEDURAL AND FACTUAL BACKGROUND On October 26, 2009, Northern New England Telephone Operations, LLC ( New England Telephone ) and its parent filed petitions for relief under Chapter 11 of the Bankruptcy Code. On January 13, 2011, the bankruptcy court confirmed the debtors Third Amended Joint Plan of Reorganization (the Plan ). The Plan provided that, in pertinent part, all property of the debtors would vest in the reorganized debtor free and clear of creditors interests. Before confirmation of the Plan, a dispute arose between the debtors and the City of Concord (the City ). The City had filed timely proofs of claim for prepetition property taxes billed and owed by New England Telephone, but did not file proofs of claim for property taxes invoiced during the pendency of the bankruptcy cases. 5 A single statutory tax lien secured both the prepetition and post-petition debts. More than two years after the Plan was confirmed, the City took issue with its lien s extinguishment and filed a motion for allowance and payment of its post-petition tax claims with the bankruptcy court. The bankruptcy court ruled that the confirmed Plan extinguished the City s lien, reasoning that the Plan clearly provided that all of New England Telephone s property was to vest in the reorganized debtor free and clear of all liens because the City had only asserted claims for the prepetition tax liabilities, but not the post-petition ones. The City challenged the bankruptcy court s decision and the district court, on appeal, agreed with the bankruptcy court. The City further appealed to the Second Circuit. LIENS CAN BE STRIPPED IN CHAPTER 11 CASES The Second Circuit affirmed the decisions of the bankruptcy court and 4 In re N. New Eng. Tel. Operations LLC, BK (2d Cir. Aug. 4, 2015). 5 Id. The bankruptcy court stated that the City had filed 21 proofs of claim relating to property taxes, water charges, and sewage charges, In re N. New Eng. Tel. Operations LLC, 504 B.R. 372, 376 (Bankr. S.D.N.Y. 2014) aff d sub nom. In re N. New Eng. Tel. Operations, LLC, CGM (S.D.N.Y. Aug. 12, 2014) aff d sub nom. In re N. New Eng. Tel. Operations LLC, BK (2d Cir. Aug. 4, 2015). A number of those proofs of claim were unopposed and paid in full. The only claims at issue are the two post-petition claims, whereby the City did not file a proof claim and, instead, filed a motion two years after confirmation. 33

7 THE BANKING LAW JOURNAL district court. The court analyzed Section 1141(c) to determine whether a plan can extinguish a lien. A literal reading of that provision provided that a lien is extinguished if (i) a plan is confirmed, (ii) the property subject to the lien is dealt with by the plan, and (iii) neither the plan nor the confirmation order preserves it. 6 The court, however, did not stop there and added an additional requirement for a debtor to extinguish a lien under a Chapter 11 plan. Citing to numerous other decisions, 7 the Second Circuit concluded that the Section 1141(c) also requires active lienholder participation in the bankruptcy case. The court explained that the participation requirement serves equitable principles in two ways. 8 First, it ensures that 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 mere passive receipt of effective notice, the lienholder effectively has to decide whether to bypass the bankruptcy proceeding and seek leave from the automatic stay to enforce the lien under applicable state law or enforce its rights in the bankruptcy proceeding. Applying that test to the New England Telephone case, the court concluded that the Plan did not preserve the City s lien because it provided: (i) (ii) (iii) (iv) that as of the effective date all of the debtors property would vest in the reorganized debtors free and clear of all claims, liens and interests, except as enumerated in the Plan, confirmation order, or new credit agreement; the Plan was confirmed and went effective; the plan dealt with the City s lien by extinguishing the lien in its entirety; and the City participated in the bankruptcy case by submitting several proofs of claim for prepetition debts. Notably, however, the City never filed a proof of claim for post-petition taxes or objected to its treatment under the Plan. 6 In re N. New Eng. Tel. Operations LLC, BK. 7 In re Penrod, 50 F.3d 459, (7th Cir. 1995); FDIC v. Union Entities (In re Be Mac Transp. Co.), 83 F.3d 1020, 1022 (8th Cir. 1996); Elixir Indus., Inc. v. City Bank & Tr. Co. (In re Ahern Enters., Inc.), 507 F.3d 817, (5th Cir. 2007); Universal Suppliers, Inc. v. Reg l Bldg. Sys., Inc. (In re Reg l Bldg. Sys., Inc.), 254 F.3d 528, (4th Cir. 2001); Am. Bank & Tr. Co. v. Jardine Ins. Serv. Tex., Inc. (In re Barton Indus., Inc.), 104 F.3d 1241, 1245 & n.1 (10th Cir. 1997). 8 In re N. New Eng. Tel. Operations LLC, BK (quoting In re Penrod, 50 F.3d at 461). 34

8 SECURED CREDITORS BEWARE: LIENS MAY BE EXTINGUISHED UNDER A CHAPTER 11 PLAN LESSONS FOR SECURED CREDITORS In deciding this issue of first impression, the Second Circuit articulated a very clear standard for lien extinguishment under a Chapter 11 plan. Notably, the Second Circuit added an element of active participation by the secured creditor to the literal text of Section 1141(c) 9 to encourage secured creditors from sitting on their rights, whether under state or federal bankruptcy law. Citing to a U.S. Court of Appeals for the Tenth Circuit decision, the Second Circuit explained that creditors have a responsibility to take an active role in protecting their claims. 10 Secured creditors should be mindful of the consequences of abstaining from exercising their rights and the results in Northern New England Telephone Operations, LLC case are a clear example of those consequences. In the case at hand, although the City filed prepetition proofs of claim, it failed to take any action to protect its interest on getting paid for post-petition services that it provided to the debtor. As such, the City s tax lien was extinguished, and because it failed to timely file a proof of claim for post-petition services that it provided, the City was not entitled to payment on its tax claim This appears, on its face, to run afoul of plain language of the statute. 10 In re N. New Eng. Tel. Operations LLC, BK (quoting In re Barton Industries, Inc., 104 F.3d 1241, 1246 (10th Cir. 1997)). 11 In re N. New Eng. Tel. Operations LLC, 504 B.R. 372, 378 (Bankr. S.D.N.Y. 2014) aff d sub nom. In re N. New Eng. Tel. Operations, LLC, CGM (S.D.N.Y. Aug. 12, 2014) aff d sub nom. In re N. New Eng. Tel. Operations LLC, BK (2d Cir. Aug. 4, 2015) ( The City is not entitled to payment on the Tax Claim without having filed a timely proof of claim. ). 35