Insolvency professionals regularly recommend secured creditor clients to submit protective proofs of insurance claim in personal bankruptcy proceedings despite those customers capability to ignore bankruptcy proceedings and decline filing insurance claims without endangering their lien due to the protections paid for by state law foreclosure rights.  However a current Ninth Circuit decision is triggering lawyers and customers to reconsider whether this typically conservative technique is simply too dangerous in Chapter 13 cases. HSBC Bank v. Blendheim (In re Blendheim), No. 13-35412, 2015 WL 5730015 (9th Cir. Oct. 1, 2015).
The Blendheims submittedapplied for Chapter 13 relief after getting a Chapter 7 discharge, making them what is frequently referred to as Chapter 20 debtors. Holding a first-position lien secured by the Blendheims West Seattle condo, HSBC submitted a prompt evidence of insurance claim, to which the Blendheims submitted an objection. HSBC did not respond, and hearing no response, the court entered an order prohibiting HSBCs assert. HSBC was served with the order, however continued to take no action until several months later on when the Blendheims submitted an adversary case seeking, amongto name a few things, to void HSBCs first-position lien pursuant to Personal bankruptcy Code sect; 506(d). Section 506(d) provides that [t] o the degree that a lien protects an insurance claim versus the debtor that is not an allowed secured claim, such lien is void.
Pointing out HSBCs prompt filed evidence of claim, invoice of service of the Blendheims objection, and complete and fair chance to object to the disallowance of its insurance claim but merely picking not to, the Ninth Circuit identified its decision from 4th, Seventh, and Eighth Circuit precedent holding that bankruptcy courts might not use sect; 506(d) to void liens whose insurance claims have actually been disallowed on the sole basis that their proofs of claim were unforeseen filed. Rather, the panel concluded that while [v] oidance of a lien postured a more extreme consequence than easy disallowance of HSBCs claim in the personal bankruptcy case since voiding the lien would get rid of HSBCs state-law right of foreclosure, HSBCs rejection to defend its lien was tantamount to surrendering its claim.
Discovering that the lien was properly voided under sect; 506(d), the Ninth Circuit next analyzed whether any provisions of the Insolvency Code worked to renew the previously voided lien at the conclusion of the Blendheims Chapter 13 case. HSBC argued that a discharge was required to acquire the benefits of lien voidance due to the fact that, apart from conversion or termination, discharge was the only system readily available to bring a Chapter 13 case to close in a manner that makes lien voidance irreversible. But the court disagreed, keeping in mind that while Chapter 13 cases commonly conclude with conversion to Chapter 7, dismissal, or discharge, the Blendheims case provided an unique lsquo; Chapter 20 question.
Under a plain reading of Insolvency Code sect; 350(a),  the panel figured out closure did not require conversion, dismissal, or discharge. The panel further reasoned that since personal bankruptcy discharge, by definition, affects just in personam liability, it has never functioned as the historical means for ensuring that the Bankruptcy Codes different mechanisms for customizing or voiding a creditors in rem rights stayed in place at the conclusion of the plan.
Thus, ineligibility for a discharge does not forbid the long-term voidance of a lien under sect; 506. Signing up with the Fourth and Eleventh Circuits,  the Ninth Circuit thus concluded that Chapter 20 debtors while otherwise ineligible for a discharge under 11 USC. sect; 1328(f)  may still make use of Chapter 13s lien-voidance system on completion of their Chapter 13 plans.
Going forward, secured lenders should think about the implications of filing a proof of insurance claim in Chapter 13 cases. To be sure, if lenders do choose to file claims, they ought to strongly defend the claims to prevent losing lien rights.