Many secured creditors wrongly believe that if they fail to participate in a bankruptcy proceeding, their lien will be extinguished on plan confirmation. In fact, the opposite may be true. There may clearly and somewhat surprisingly be a benefit to a secured creditor in not participating in a bankruptcy proceeding, at least in the context of a plan of reorganization.
The peculiar confluence of rules and exceptions that govern extinguishment of liens in bankruptcy has been the subject of a series of decisions in recent years by federal courts. A focus of these decisions has been determining what happens in the event the lienholder fails to participate in the bankruptcy proceeding. This issue was analyzed initially in this column several years ago in the context of a Mississippi federal district court ruling.1 Very recently, however, the Second Circuit weighed in as well as part of the broader analysis of a question of first impression, namely, under what circumstances does a plan of reorganization extinguish a lien.
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