In a receivership, a secured creditor retains its lien even if it fails to file a proof of claim by the bar date, the Eleventh Circuit holds, based on reasoning informed by analogy to bankruptcy law.
The opinion does not reference the controversy over the Supreme Court’s 1992 decision in Dewsnup v. Timm, 502 U.S. 410, nor does it cite the Seventh Circuit’s In re Pajian, 785 F.3d 1161 (7th Cir. 2015), holding that a secured creditor must file a proof of claim by the deadline set for unsecured creditors in a chapter 13 case.
The Eleventh Circuit case involved a Ponzi scheme where the Securities and Exchange Commission initiated a receivership in federal court. At the receiver’s request, the court established a bar date, not distinguishing between secured and unsecured claims. A secured creditor failed to file a claim on time.
More than a year later, the secured creditor filed a motion to preserve its security interest in collateral held by the receiver, even though the secured creditor was given notice of the bar date. The district court denied the motion, ruling that the lender lost its lien by failing to file a claim before the bar date.
In an opinion on Feb. 22 by District Judge R. David Proctor, sitting by designation, the Eleventh Circuit reversed, holding that the court did “not have the authority to extinguish a creditor’s pre-existing state law security interest.”
Saying there was “minimal authority” on the issue in receivership law, Judge Proctor looked to bankruptcy law, finding it “both analogous and instructive.”
Judge Proctor began his analysis by citing Eleventh Circuit authority for the broad statement, “In the bankruptcy context, a secured creditor’s lien remains intact through the bankruptcy, regardless of whether the creditor files a proof of claim.” Naturally, he cited other Eleventh Circuit authority for the proposition that a secured creditor must file a claim in chapter 13 to preserve a deficiency.
Indeed, secured creditors are not required to file claims in chapters 7 and 13. After bankruptcy, they may enforce their liens against the debtor’s property, although they would have waived any unsecured deficiency claims and retained no claims against the debtor personally. Secured creditors often refrain from filing claims to avoid submitting to the jurisdiction of the bankruptcy court and the possibility of having consented to entry of a final order in bankruptcy court.
However, Judge Proctor did not mention Bankruptcy Rule 3003, which requires secured creditors in chapter 11 and 9 cases to file claims if they were not scheduled as undisputed.
After citing a receivership treatise for the proposition that no creditors aside from the lienholder are entitled to proceeds of collateral until the lien is paid in full, Judge Proctor held that “a federal district court cannot order a secured creditor to either file a proof of claim and submit its claim for determination by the receivership court, or lose its secured state-law property right that existed prior to the receivership.” The holding seems to be based on the power of the federal court as opposed to the court’s in rem jurisdiction.
The opinion does not discuss the difficulties in administration that could result when secured creditors do not file claims. Would a receiver be in peril for distributing collateral to unsecured creditors if the lienholder has not appeared to assert its right? Must a receiver track down and obtain jurisdiction over a lienholder to challenge the validity of a lien or secure permission to distribute proceeds to creditors other than the lienholder? Does the opinion suggest that the receivership court may not have jurisdiction if the lienholder has not voluntarily filed a claim, or does the in rem jurisdiction of the receivership court confer jurisdiction, assuming there is sufficient notice to the lienholder?
In a recent case analyzed by ABI but also not cited by the Eleventh Circuit, a bankruptcy court in Ohio followed Pajian on a question where the courts are divided and held that the claim-filing deadline in Bankruptcy Rule 3002(c) applies to secured creditors in chapter 13 cases, even though secured creditors are not required to file claims in chapter 13 cases. To read about the Ohio case, click here.
The opinion also does not discuss Dewsnup, where the Supreme Court arguably disregarded the language of the Bankruptcy Code and held that liens pass through chapter 7 unaffected. Dewsnup was a 6/2 decision, with a vigorous dissent by the late Justice Antonin Scalia. Justice David Souter joined the dissent.
Justice Scalia did not abandon his dissent. At oral argument in Bank of America v. Caulkett, 135 S. Ct. 1995, 192 L. Ed. 2d 52 (2015), he noted that the majority in Dewsnup had disregarded the plain meaning of the statute to implement a policy without support in the law. The high court did not use Caulkett as a vehicle to overrule Dewsnup, because the debtor did not ask the court to do so.
At oral argument in Caulkett, Justice Scalia was not the only justice who seemed primed to reexamine Dewsnup. Although the 1992 case remains good law, Justice Scalia’s dissent was vindicated by the unanimous opinion in Caulkett, which said that a “straightforward reading” of Section 506(d) would produce the result that the late justice advocated 23 years earlier.
The decision by the Eleventh Circuit may be correct, but the issue, we submit, is somewhat more complex. Doubtless, pre-Code law permitted liens to pass through bankruptcy unaffected. In fact, the bankruptcy court had the power to impair secured claims only in Chapter X.
The adoption of the Bankruptcy Code at least modified pre-Code law by compelling secured creditors to file claims in chapter 11, and also in chapter 13 where Pajian is good law.
Because receiverships predate the adoption of the Bankruptcy Code, Judge Proctor was arguably on solid ground by adopting pre-Code concepts of the inability to impair liens.