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The Bankruptcy Protector

June 8, 2020

Employing Narrow Reading of Section 506(d), Ninth Circuit Holds That the Basis for Disallowance of a Claim Must be Considered Before Lien Can be Avoided

By Shane G. Ramsey

In Lane v. Bank of New York Mellon (In re Lane), No. 18-60059, 2020 WL 2832270 (9th Cir. June 1, 2020), the United States Court of Appeals for the Ninth Circuit was asked to decide whether a bankruptcy court may void a lien under section 506(d) of the Bankruptcy Code when a claim relating to the lien is disallowed because the creditor who filed the proof of claim did not prove that it was the person entitled to enforce the debt the lien secures. Employing a narrow reading of section 506(d), the Ninth Circuit answered the question in the negative.

The court began by laying out a secured creditor’s options in chapter 13 cases, with reference to the Supreme Court’s decision in Dewsnup v. Timm, 502 U.S. 410 (1992), which arguably ignored the plain language of the statute by allowing a lien to pass through bankruptcy unaffected when the secured creditor failed to file a claim.

Based on Dewsnup, the Ninth Circuit said that a secured creditor in chapter 13 has the option of filing a proof of claim or not. If the creditor does not file a claim, the creditor will not be paid under the chapter 13 plan but retains the mortgage that may be enforced when the automatic stay ends. If there was no claim on file, the lender cannot pursue the debtor for a deficiency.

But the facts before the court presented a more complicated set of legal issues to resolve. Here, the bankruptcy court disallowed the claim for lack of standing and later invoked section 506(d) to void the underlying mortgage lien.

Evidentially, the basis for claim disallowance matters under section 506(d). As the Ninth Circuit explained: “[I]f the person who files the proof of claim is not the person entitled to enforce the note, then that person does not have a claim against the debtor. Essentially, a finding that the claim filer is not the person entitled to enforce the note is a finding that the filer is not the true creditor — it is a finding that someone other than the claim filer may be the person entitled to payment under the note. Importantly, such a finding does not imply that either the note or the lien securing the note is invalid.” Id. at *4–5.

The court went on, “In a nutshell, a bankruptcy court cannot destroy the property rights of the person who is the real party in interest based on the actions of a person who is not the real party in interest.” Id. at *5.


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