Snoozing Lender Sleeps On Its Rights, Screws Itself In Homeowner's "Chapter 20" Bankruptcy; Winds Up w/ Wiped Out Lien On Non-Underwater $340K+ 1st Mortgage When It Filed Proof Of Claim, Then Inexplicably Failed To Defend It When Debtors Filed An Objection To It

Financially-strapped homeowners who have availed itself of the bankruptcy planning maneuver colloquially referred to as a "Chapter 20" bankruptcy scored a big win recently, getting a favorable ruling from a federal appeals court that resulted in a snoozing bankster having its interest in a $340,000+, non-underwater first mortgage first mortgage secured by the debtor's personal residence completely voided.

It may be of some interest to point out that the bankster apparently shot itself in the foot in this case by filing a proof of claim in the Chapter 13 portion of the maneuver (which it ostensibly didn't have to do - Section 506 of the Bankruptcy Code; the lienholder is not required to file a proof of claim at all, and may instead look to its lien for satisfaction of the debt), and then inexplicably, failing to defend its claim when the homeowner/debtors filed an objection to it.

Another point of some note - the homeowner-couple only did not wait very long after receiving their Chapter 7 discharge before filing their Chapter 13 petition - they filed for Chapter 13 the very next day. The appeals court, as well as the lower courts, upheld the filing, finding no bad faith in such filing under the facts and circumstances of this case.(1)

An excerpt laying out some of the facts from the case:

• In 2007, Robert and Darlene Blendheim filed for bankruptcy under Chapter 7 of the Bankruptcy Code. The Blendheims eventually received a discharge of their unsecured debts in 2009.
  
  The day after receiving the discharge in their Chapter 7 case, the Blendheims filed a second bankruptcy petition under Chapter 13 to restructure debts relating to their primary residence, a condominium in West Seattle. In their schedule, the Blendheims listed their condo at a value of $450,000, subject to two liens: a first-position lien securing a debt of $347,900 owed to HSBC Bank USA, N.A., and a second-position lien securing a debt of $90,474 owed to HSBC Mortgage Services. The first-position lien is the only interest at issue in this appeal.
  
  The first-position lien holder ("HSBC"), represented in bankruptcy proceedings by its servicing agent, filed a proof of claim in the Chapter 13 proceeding seeking allowance of its claim, which authorizes a creditor to participate in the bankruptcy process and receive distribution payments from the estate.
  
  The Blendheims filed an objection to the claim on the basis that, although HSBC properly attached a copy of the relevant deed of trust to its proof of claim, HSBC failed to attach a copy of the promissory note.[1] The Blendheims also alleged that a copy of the promissory note they had previously received appeared to bear a forged signature.
  
  For reasons unknown, HSBC never responded to the Blendheims' objection to its proof of claim. The deadline for responding passed, and in November 2009, hearing no objection from HSBC, the bankruptcy judge entered an order disallowing HSBC's claim. Even after the Blendheims served HSBC and its counsel with a copy of the disallowance order, HSBC took no action in response. Instead, it withdrew its pending motion and requested no future electronic notifications from the court.
  
  In April 2010, the Blendheims filed an adversary proceeding complaint seeking, among other things, to void HSBC's first-position lien pursuant to 11 U.S.C. § 506(d), which states 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." The Blendheims contended that because HSBC's claim had been disallowed, its lien secured a claim that is "not an allowed secured claim" and thus the lien could be voided.
  
  The bankruptcy court held a hearing the following month, specifically advising HSBC to take action to address the disallowance order. Voidance of the lien posed a more drastic consequence than simple disallowance of HSBC's claim in the bankruptcy proceeding: voiding the lien would eliminate HSBC's state-law right of foreclosure.
  
  Even though the threat of voidance loomed, a year passed, and still HSBC took no action to set aside the order.

For more, see In re Blendheim, Nos. 13-35354, 13-35412 (9th Cir. October 1, 2015), aff'g In re Blendheim, Bankruptcy No. 09-10283-MLB (Bankr. W.D. Washington, 2011).

See also:

• File a Proof of Claim, Lose Your Lien? Ninth Circuit Holds That Lien Associated With Disallowed Claim is Void,
• Big Ninth Circuit Win for 'Chapter 20' Debtors.

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(1) The court explained its finding that the Chapter 13 petition was filed in good faith in this excerpt:

• Examining the facts presented here, and considering the totality of the circumstances, the bankruptcy court did not err in finding that the petition and plan were filed in good faith.
  
  The Blendheims received their Chapter 7 discharge in January 2009 and filed their Chapter 13 petition the following day; their Chapter 7 case was not closed until November 2010.
  
  Contrary to HSBC's contention that the Blendheims sought Chapter 13 relief solely to avert foreclosure, the bankruptcy court found that the Blendheims sought Chapter 13 protection for additional, valid reasons. The Blendheims filed their Chapter 13 case to deal with fraud claims and other issues surrounding the first-position lien, to repay secured debt owed to their homeowners association, and to clarify how post-petition debts would be paid.
  
  According to the court, the Blendheims "do not appear to be serial `repeat filers' [who are] systematically and regularly abusing the bankruptcy system." And with respect to the automatic stay, the court stated: "Although the Chapter 13 filing appears to be motivated by Debtors' wish to avoid the foreclosure sale of their Residence, the Court does not find that filing for Chapter 13 bankruptcy under those circumstances necessarily constitutes bad faith." It explained, "[m]any Chapter 13 debtors file for bankruptcy on the eve of foreclosure sale as a last resort." The bankruptcy court did not clearly err in concluding that the Blendheims filed their Chapter 13 petition in good faith on these facts.
  
  We conclude that the bankruptcy court properly voided HSBC's lien under § 506(d), confirmed the Blendheims' Chapter 13 plan offering permanent voidance of HSBC's lien upon successful plan completion, and found no due process violation or bad faith purpose in filing the Chapter 13 petition. Accordingly, we affirm the bankruptcy court's lien voidance order, plan confirmation order, and plan implementation order.