Ninth Circuit: Ch. 20′s Keep Stripping (In re Blendheim)

Ninth Circuit cleared it up:  In a “Chapter 20,” ineligibility for a discharge in a subsequent Ch. 13 does not preclude a debtor from permanently voiding a lien.  In short, strip away.

Debtors got Ch. 7 discharged, and next day filed Ch. 13.  Debtors home was encumbered by 2 liens.  The first lienholder, a Bank, filed a claim and it is their lien that is at issue on this appeal.

Debtors objected to the Bank’s POC arguing that it failed to attach the promissory note as required by FRBP 3001 (Bank only attached the deed of trust).  The Bank simply ignored the objection.   Court entered a default order disallowing their claim.  Next, Debtors filed an adversary to void Bank’s first lien since their claim was no longer an allowed secured claim.  Court agreed and said the lien would be void upon completion of their chapter 13 bankruptcy.

Debtor’s reached plan confirmation, and the Bank woke up…..

Bank argued that their lien remains even if their lien was avoided under 506(d) because the Debtors could only get a permanent avoidance of the lien if they got a discharge (which occurs after the chapter 13 plan is consummated).  But, since Debtors are ineligible to get a discharge in this chapter 13 since they got a discharge in a prior Chapter 7 less than 4 years ago, then they cannot complete their chapter 13 and won’t be able to get a discharge.  And if they cannot get a discharge, argued the Bank, then their lien resurrects.

Bankruptcy court disagreed and held that ineligibility for discharge does not preclude a chapter 13 debtor from modifying or stripping a lien.  The Plan was confirmed and the Bank’s first lien was stripped and the 2nd lienholder stepped up.

Does ineligibility of discharge in chapter 20 also render them ineligible to permanently void a lien upon completion of a chapter 13 plan?  No.

Can 506(d) permit voiding a lien?   Dewsnup said 506(d) is used to nullify a creditor’s legal rights in property if their claim is disallowed.  Dewnsup allows you to void a lien if the claim is disallowed but not because the claim is unsecured. Here, the Bank’s lien is properly voided because its claim was disallowed.

Do Chapter 20 Debtors have to get a discharge to be able to permanently void Bank’s lien?   No — Bank said since the Debtor cannot get a discharge (which is the only way to effectively finish chapter 13) then their lien cannot permanently be avoided.  Bank argues that apart from a conversion or dismissal (which reinstates a lien), a discharge is the only way to close a chapter 13 case and make the lien avoidance permanent.  And since these Debtors cannot get a discharge, then their lien is valid.

Ninth Circuit disagreed and held — >  Discharge is neither effective nor necessary to voiding a lien.  Discharge merely operates as an injunction against creditor’s ability to proceed personally against the debtor.  Also, 1328(f) says a chapter 20 debtor are ineligible for a discharge — and only a discharge [says nothing about a debtor from utilizing the chapter 13's tools to void or modify a creditor's lien].

So, ineligibility for a discharge does not prohibit debtor’s from permanently voiding this Bank’s first lien as long as the second case (the chapter 13) was filed in good faith (no prior filings/dismissals, no egregious behavior, no misrepresented facts, etc) and Debtor’s can show there is a purpose to reorganize.

 

Opinion here: http://cdn.ca9.uscourts.gov/datastore/opinions/2015/10/01/13-35354.pdf

 

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