## Facts

- John and Alyce Penrod, hog farmers, executed a $150,000 promissory note secured by a lien on their hogs; about $132,000 was owed when they filed Chapter 11.
- The secured creditor filed a proof of claim; the debtors did not object to the claim or challenge the lien’s validity.
- The confirmed Chapter 11 plan placed the creditor in a class to be paid in full with interest on a monthly schedule over a seven-year amortization.
- Neither the plan nor the confirmation order expressly addressed whether the creditor’s lien would be retained or extinguished.
- After confirmation, the hogs became unsuitable for breeding due to disease, and the debtors sold them for slaughter without turning over proceeds as required by the security agreement.
- The creditor filed a state-court action to enforce its lien in the sale proceeds; the debtors sought contempt and an injunction in bankruptcy court, asserting the plan extinguished the lien.

## Issues

1. Whether confirmation of a Chapter 11 plan that provides for payment of a secured claim but is silent as to lien retention extinguishes the lien under 11 U.S.C. § 1141(c).
2. Whether a secured creditor’s participation in the Chapter 11 case (including filing a proof of claim) is a necessary condition for lien extinguishment under § 1141(c).

## Decision

- The Seventh Circuit reversed and articulated a four-condition test governing lien extinguishment at confirmation under § 1141(c).
- The court held that a lien is extinguished only if: (1) the plan is confirmed; (2) the plan deals with the property subject to the lien; (3) the lienholder participated in the reorganization; and (4) the plan does not preserve the lien.
- Because the creditor participated by filing a proof of claim and the confirmed plan dealt with the collateral without preserving the lien, the creditor could not pursue lien enforcement in state court.

## Legal Principles

- Although liens generally survive bankruptcy, § 1141(c) permits confirmed Chapter 11 plans to strip liens from property “dealt with” by the plan, unless the plan provides otherwise.
- “Interests” in § 1141(c) include liens; thus, confirmation can make property free and clear of liens when the statutory conditions are satisfied.
- Creditor participation is a key limiting condition: when a lienholder participates (e.g., by filing a proof of claim), it submits to the bankruptcy court’s jurisdiction and is bound by the plan’s treatment of its rights.
- Plan confirmation has res judicata effect on the treatment of claims and interests; a participating secured creditor must raise lien-preservation objections during plan confirmation or be bound by the confirmed plan’s terms (and omissions).
- Lien loss may also occur through claim litigation effects in bankruptcy (including preclusion concepts referenced in connection with secured claims).

## Conclusion

A Chapter 11 plan’s silence about lien retention does not guarantee lien survival; under § 1141(c), a participating secured creditor’s lien can be extinguished upon confirmation when the plan deals with the collateral and does not preserve the lien, barring later state-law lien enforcement against the reorganized debtor’s property or proceeds.


In re Penrod, 50 F.3d 459 (7th Cir. 1995)