Note: The following is a general discussion on the specified topic or issue and may not be relied on as legal advice in any specific case or matter you encounter. You should review any applicable case, or matter with counsel experienced in this area of law and should not generally rely on the discussion in this Alert.
Date: June 3, 2020
To: All Scheer Law Group Clients and Affiliates
From: Spencer Scheer
Subject: If You Lose Your Secured Claim in Bankruptcy Do You Lose Your Lien? Maybe Not Under new 9th Circuit Ruling.
Bankruptcy is a minefield for secured creditors. Many creditors fail to timely file a claim, or fail to file a claim at all. Some file a claim, rest easy and ignore a debtor/borrower’s subsequent plan or motion/adversary that provides for disallowance or avoidance of the claim. Later, sometimes years later, the creditor wakes up to find that it has spent years in “bankruptcy hell” with no payments on its loan, and in some cases that the Debtor has completed a plan, obtained a discharge and now claims that the creditor has no security for the loan.
A new 9th Circuit case (In re Lane (9th Cir., June 1, 2020, No. 18-60059) 2020 WL 2832270, at *1) preserves the lien rights of a creditor in some cases, even if the debtor obtains an order providing that the creditor’s claim is disallowed. In essence, if the debtor objects to your claim on the basis that you have no right to assert the claim (standing), the order disallowing the claim does not void the underlying lien. Examples of this might be a “show me the note” claim, your failure to record an assignment of the deed of trust showing transfer of the security to the creditor etc. etc.
The Lane case should be distinguished from HSBC Bank USA v. Blendheim (In re Blendheim), 803 F.3d 477 (9th Cir. Oct. 1, 2015). where a creditor’s claim was disallowed and the creditor lost its lien because the challenge to the claim was based on allegations that the claim itself was invalid, not that the creditor who filed the proof of claim did not prove that it was the person/entity entitled to enforce the debt the claim secures. Examples might include where the claim is alleged to be barred by the statute of limitations, or is alleged to have been paid in full etc. etc.
Timely filing a claim in a Chapter 11, 12 or Chapter 13 case is critical (Chapter 7, only when an asset case). An alarm should go off immediately when such a case is filed and the claim must be filed by the specified deadline ( e.g. usually within 70 days of the petition date in Chapter 13 case).
Equally important is to monitor the bankruptcy proceeding to determine if a plan affecting your lien and payment rights or motion to avoid your lien is filed. If so, you must timely respond. The amount of your claim, the maturity date on the loan, the interest rate and payment amounts, who gets the payments both pre and post-petition (you or the trustee,) are just some of the critical issues that must be addressed. If you don’t monitor and protect your rights and “wake up” to find that your claim has been disallowed and lien avoided, the Lane case may help you to argue that the disallowance did not void your lien, if disallowance was not based on the merits of the claim.
Please call or email if you have questions about this case.
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