The U.S. Court of Appeals for the Ninth Circuit has ruled that a Chapter 20 debtor who is ineligible for a discharge may still void a lien if a lender fails to defend its claim.
In In re Blendheim, the Blendheims owned a condominium with two mortgages. They first filed Chapter 7 to discharge their unsecured debts, and then filed Chapter 13 to restructure the two mortgages on their residence — a process known as “Chapter 20.” The senior servicer, HSBC, filed proof of claim, which the debtors challenged on the grounds that HSBC only attached the deed of trust, and not the promissory note, to the proof of claim, and that one of the signatures on the promissory note was allegedly forged.
HSBC did not respond to the challenge and the bankruptcy court entered a default order disallowing HSBC’s claim. Subsequently, the Blendheims sought to void the mortgage under 11 U.S.C. § 506(d), which provides that “[t]o the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void.”
In its ruling, the Ninth Circuit said that while “[v]oidance of a lien posed a more drastic consequence than simple disallowance of HSBC’s claim in the bankruptcy proceeding” because “voiding the lien would eliminate HSBC’s state-law right of foreclosure,” HSBC’s failure to defend its lien was equivalent to forfeiting its claim.
In addition, the court found that a debtor’s ineligibility for a discharge does not prohibit the permanent voidance of a lien under § 506(d), dismissing HSBC’s argument that a discharge was necessary in order for a debtor to attain the benefits of lien voidance since discharge is the only way to close a Chapter 13 case in a way that makes lien voidance permanent.
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