Even When Underlying Claim Disallowed, Lien may Pass Through Bankruptcy

The Ninth Circuit on June 1 affirmed a key chapter precept that liens could survive and “go by way of” the chapter course of even when the underlying declare secured by the lien is disallowed. The info in Lane v. The Financial institution of New York Mellon (Ninth Cir. Ct. Of Appeals, No. 18-60059, June 1, 2020) are all too acquainted – a mortgage mortgage originated by Countrywide Residence Loans wound up in an enormous pool of securities with The Financial institution of New York Mellon serving as trustee for the certificates holders. Countrywide had endorsed the promissory notice in clean, which made it payable to the bearer.

Richard Lane filed a Chapter 13 in 2011, itemizing Financial institution of America Residence Loans as a secured creditor, however noting that he disputed the “actual celebration in curiosity.” The Financial institution of New York Mellon filed a proof of declare and objected to the plan. Lane objected to the declare, arguing that the Financial institution did not show authorized standing and did not show possession of the notice. The Financial institution’s lawyer did not well timed reply and a default order was entered to disallow the declare in its entirety. Lane subsequently filed an adversary grievance to declare the mortgage lien to be void underneath 11 U.S.C. 506(d) which, with some exceptions, supplies that liens securing a disallowed declare are void. The Chapter Court docket granted the debtor’s movement for abstract judgment, voided the mortgage lien and awarded lawyer charges to the debtor underneath Cal. Civ. Code 1717.

Upon attraction to the Ninth Circuit’s Chapter Appellate Pane, the BAP reversed. The BAP reasoned that, if a declare is disallowed as a result of the claimant fails to show possession of the mortgage, that suggests that another person owns the declare. Since that different individual didn’t obtain discover, the Chapter Court docket’s resolution to void the lien violates due course of.

The debtor then appealed to the Ninth Circuit, which completely analyzed how a secured creditor can strategy a chapter. It notes {that a} secured creditor can implement a declare in opposition to the debtor personally (“in personam”) or in opposition to the collateral (“in rem”). In different phrases, it needn’t take part within the chapter in any respect, although the private declare for cash might be discharged, citing the 1886 case of Lengthy v. Bullard and the 1992 case of Dewsnup v. Timm, each United States Supreme Court docket instances.

The Ninth Circuit then mentioned the disallowance and lien voiding language of 11 U.S.C. part 506 by citing that provision’s saving language for claims that aren’t allowed “due solely to the failure to file a proof of declare.” After all, on this case, the Financial institution did file a declare, which sophisticated the exception, however the Ninth Circuit simply concluded that, “Sure, BONY filed a proof of declare, however the [bankruptcy] courtroom discovered that BONY was not the true celebration in curiosity, and due to this fact BONY’s proof of declare should be disregarded for functions of making use of part 506(d).” In doing so, the Ninth Circuit disagreed with the BAP’s discovering that due course of was violated; the Ninth Circuit notes that “in the true world,” the Financial institution in all probability was the true celebration in curiosity and thus did obtain the requisite due course of discover. Nevertheless, the Financial institution merely did not show possession and thus the chapter courtroom was required to conclude that the declare should be disallowed.

Fortuitously for the buyers within the large, typically poorly documented mortgage swimming pools created earlier than the Nice Recession, the Supreme Court docket concluded in 1886 that liens can go by way of chapter even when the associated declare is disallowed, and fortuitously 11 U.S.C. part 506 acknowledged exceptions to its disallowance provisions. The Lane v. Financial institution of New York Mellon case supplies a helpful primer on the how the chapter claims course of is meant to perform and maybe tips on how to keep away from the issues created by lower than optimum documentation of secured loans.