HSBC Bank USA, Nat'l Ass'n v. Blendheim (In re Blendheim)

• Decision Date: 01 October 2015
• Docket Number: 13–35412.,Nos. 13–35354,s. 13–35354
• Citation: 803 F.3d 477
• Parties: In the Matter of Robert S. BLENDHEIM and Darlene G. Blendheim, Debtor, HSBC Bank USA, National Association, as Indenture Trustee of the Fieldstone Mortgage Investment Trust, Series 2006–1, Appellant/Cross–Appellee, v. Robert S. Blendheim; Darlene G. Blendheim, Appellees/Cross–Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

803 F.3d 477

In the Matter of Robert S. BLENDHEIM and Darlene G. Blendheim, DebtorHSBC Bank USA, National Association, as Indenture Trustee of the Fieldstone Mortgage Investment Trust, Series 2006–1, Appellant/Cross–Appellee

v.Robert S. Blendheim; Darlene G. Blendheim, Appellees/Cross–Appellant.

Nos. 13–35354

13–35412.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Oct. 7, 2014.

Filed Oct. 1, 2015.

Christopher M. Alston (argued) and W. Adam Coady, Foster Pepper PLLC, Seattle, WA, for Appellant/Cross–Appellee.

Taryn M. Darling Hill (argued) and David F. Betz, Impact Law Group, Seattle, WA, for Appellees/Cross–Appellants.

Appeal from the United States District Court for the Western District of Washington, Marsha J. Pechman, Chief District Judge, Presiding. D.C. No. 2:11–cv–02004–MJP.

Before: RICHARD A. PAEZ, JAY S. BYBEE, and CONSUELO M. CALLAHAN, Circuit Judges.

OPINION

BYBEE, Circuit Judge:

Robert and Darlene Blendheim are colloquially known as “Chapter 20” debtors. Like many others who sought bankruptcy relief during the housing crisis, they took advantage of the bankruptcy tools available under Chapter 7 and then filed for Chapter 13 relief. One of the tools available in a Chapter 13 reorganization is lien voidance, or “lien stripping.” Ordinarily, the Bankruptcy Code permits Chapter 13 debtors to void or modify certain creditor liens on the debtor's property, permanently barring the creditor from foreclosing on that property. However, a 2005 amendment to the Bankruptcy Code bars Chapter 20 debtors from receiving a discharge at the conclusion of their Chapter 13 reorganization if they received a Chapter 7 discharge within four years of filing for Chapter 13 relief. 11 U.S.C. § 1328(f).

In this case, we are tasked with deciding whether by making Chapter 20 debtors like the Blendheims ineligible for a discharge, Congress also rendered them ineligible for Chapter 13's lien-voidance mechanism. This question has divided bankruptcy courts in our circuit and divided bankruptcy courts, bankruptcy appellate panels, district courts, and courts of appeals throughout the country. The bankruptcy court below concluded that HSBC's lien on the Blendheims' home would be void upon the successful completion of their Chapter 13 plan, and the district court affirmed. We agree with the district court's conclusion that discharge ineligibility does not prohibit the Blendheims from taking advantage of the lien-voidance tools available in a typical Chapter 13 proceeding, and therefore affirm.

I. BANKRUPTCY PROCEEDINGS

A. Claim Disallowance and Lien Voidance

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. Once more, the court advised HSBC to file a motion to set aside the disallowance order. This time, almost a year and a half after the disallowance order was entered, HSBC responded. In April 2011, HSBC filed a motion for reconsideration of the disallowance order, alleging grounds of mistake, inadvertence, surprise, excusable neglect, due process violations, and inadequate service. Following a hearing, the bankruptcy court denied the motion. The court explained that HSBC presented “no argument or evidence as to why its failure to respond was due to mistake, inadvertence, surprise, or excusable neglect,” and “[HSBC] has not provided any rationale for waiting nearly 18 months after entry of the [disallowance] order to request reconsideration.” It therefore declined to set aside the disallowance order.

The Blendheims subsequently moved for summary judgment, once again seeking lien voidance. HSBC filed a response, arguing that it would be improper and inequitable to void the lien after the claim was disallowed for mere failure to respond. In support of its argument, HSBC pointed to a Seventh Circuit case called In re Tarnow, 749 F.2d 464 (7th Cir.1984), which had similarly dealt with the voidance of liens under § 506(d). As HSBC explained, there, the Seventh Circuit declined to permit a court to void a lien under § 506(d) where the creditor's claim had been disallowed for untimely filing. The court concluded that because a secured creditor is not required to file a proof of claim at all, and may instead look to its lien for satisfaction of the debt, destruction of a lien under § 506(d) is a “disproportionately severe sanction” for an untimely filed claim. HSBC argued that destruction is equally inappropriate in the case of simple default.

The bankruptcy court held a hearing and offered an oral ruling at the conclusion of argument. The bankruptcy court acknowledged that voiding HSBC's lien under § 506(d) “based on a default gives the Court pause.” However, the court explained, the text of § 506(d) seemed clearly to contradict HSBC's contentions: “[T]he trouble with the lender's arguments here [is] they would just blue pencil 506(d) right out of the equation. 506(d) very clearly says if the secured debt ... is purporting to secure a disallowed claim, then the lien can be avoided.” The court acknowledged that “there's plenty of case law that says, even in a [Chapter] 13 ... the secured creditor can just take a pass on the whole proceeding” without imperiling his lien. But it distinguished Tarnow, explaining that while that case involved a late-filed claim, here HSBC had filed a timely claim in the bankruptcy proceeding:

The claim [in Tarnow ] was only disallowed because it was late in a situation where they didn't need to file a claim at all.... So it's as if the secured creditor in Tarnow didn't file the claim at all.

That's substantially different than what we have here where the claim was filed. There was a[n] objection to it that went to the substance, did not have anything to do with the form of the claim or the lateness of the claim.

And regardless of arguments now as to whether that would have been a meritorious objection if it had been responded to, [HSBC] just slept on its rights....

Because HSBC's claim had been disallowed and the court had found no legitimate basis for setting aside the disallowance, the disallowance was “clearly a predicate under 506(d) for disallowance of the lien ... and therefore the lien should be set aside.” The court ordered that “upon Debtors' completion of a Bankruptcy, this order shall be self-executing and the subject Deed of Trust ... is void pursuant to 11 U.S.C. § 506(d), and hereby cancelled.”

B. Plan Confirmation and Permanent Lien–Voidance

The parties then proceeded to the plan confirmation process. The bankruptcy court rejected several proposed plans, ultimately confirming the Blendheims' eleventh amended plan. The bankruptcy court's discussion of its reasons for rejecting the Blendheims' ninth amended plan, however, is relevant here.

After the Blendheims filed their proposed ninth amended plan, HSBC objected on two grounds. First, HSBC argued that the Blendheims “improperly seek to cancel and void [HSBC's] lien upon completion of the ... Plan.” According to HSBC, even if a lien is properly voided under § 506(d), that lien must be reinstated upon the completion of a Chapter 13 plan. This is because the Blendheims could only obtain permanent voidance of the lien through a discharge, and the Blendheims were statutorily ineligible for such a discharge because they had already received a Chapter 7 discharge within the...