The Second Circuit began its analysis by noting the "longstanding background rule" that "liens pass through bankruptcy unaffected" (Dewsnup v. Timm, 502 U.S. 410, 417 (1992)). While the text of the Bankruptcy Code leaves that general principle intact, the Second Circuit noted that section 1141(c) of the Bankruptcy Code contains a caveat to this general rule in Chapter 11 cases, providing that:

(§ 1141(c), Bankruptcy Code) (emphasis added). Therefore, the Second Circuit explained that the express wording of section 1141(c) provides that a lien is extinguished if:

The Second Circuit noted that while a lienholder's participation in the bankruptcy proceedings is not expressly required by the text of section 1141(c), it is inherent in the requirement that the underlying property be "dealt with" in the bankruptcy proceeding. Similarly, other circuits have held that a lien can only be extinguished by a reorganization plan where the lienholder has participated in the bankruptcy proceedings (see FDIC v. Union Entities (In re Be-mac Transp. Co.), 83 F.3d 1020 (8th Cir. 1996); In re Penrod, 50 F.3d 459 (7th Cir. 1995)). The Second Circuit explained that bankruptcy courts are courts of equity and because the express conditions of section 1141(c) cannot be fairly satisfied without the lienholder's participation, the participation requirement "implements the background rule . . . that liens pass through bankruptcy unaffected."

While the parties agreed that the first two prongs of the above analysis were satisfied, the City contended that the plan did not sufficiently deal with the property subject to its lien and that the City did not sufficiently participate in the bankruptcy proceedings.

The Second Circuit held that the Free and Clear provision of the plan dealt with the property subject to the City's lien, rejecting the City's argument that such a broad catch-all clause was insufficiently specific to satisfy the requirement of section 1141(c) of the Bankruptcy Code. It explained that a plain reading of this provision establishes that "all property" categorically includes each individual parcel and lot of the debtor's property, including the property subject to the City's lien. In addition, the Second Circuit noted that administrative considerations weighed heavily against requiring a plan to list each specific property and that the plan's categorical phrasing alerted all participants in the proceedings to the risk that their rights might be affected.

The Second Circuit held that the City's limited participation in the bankruptcy proceedings was sufficient to satisfy the participation requirement. It rejected the City's argument that it did not participate with respect to the Q3 and Q4 tax bills, nor with respect to the lien that secured their payment. The Second Circuit reasoned that when the City filed proofs of claim for the Q1 and Q2 tax bills with respect to the same parcels of real property, it participated as to the property subject to the lien. Further, payment of the Q1 and Q2 tax bills was secured by the same lien as the Q3 and Q4 tax bills, which bills related to the same tax years and the same properties. Therefore, the Court was not persuaded by the fact that the City did not participate with respect to the specific claims at issue.