Disallowance for Procedural Reasons Does Not Support Voidance of Lien

Posted by NCBRC - September 29, 2017

Where the mortgage servicer’s proof of claim was disallowed for procedural rather than substantive reasons, the debtors were not entitled to have the underlying lien declared void under section 506(d). Kohout v. Nationstar Mortgage,LLC., No. 3:16-CV-1372 (N.D. N.Y. Sept. 11, 2017).

Chapter 13 debtors, Kevin and Susan Kohout, objected to the mortgage servicer’s proof of claim on the basis that it was not supported by proper documentation as required by Rule 3001(c). When Nationstar (through its predecessor-in-interest) failed to respond to the objection, the bankruptcy court disallowed the claim. The Kohouts then sought to void the lien that was the subject of the disallowed claim under section 506(d). The bankruptcy court granted summary judgment in favor of Nationstar.

Acknowledging that the debtor’s position was supported by the plain language of section 506(d), and calling it a close call, the district court affirmed. The case turned on its finding that the bankruptcy court’s disallowance of Nationstar’s proof of claim was procedural rather than substantive. Distinguishing the case from In re Blendheim, 803 F.3d 477 (9th Cir. 2015), where the debtor challenged the claim on its merits and the creditor repeatedly ignored court orders to respond, the court pointed to the fact that the Kohouts conceded the validity of the lien. The court found that the bankruptcy court disallowed the claim due to Nationstar’s failure to comply with Rule 3001’s documentation requirements rather than for any of the substantive reasons listed in section 502(b). It was this absence of challenge to the lien’s validity that tipped the balance in favor of Nationstar.

The Kohouts argued that this case was distinguishable from other cases in which courts found that section 506(d) did not mandate voidance of liens where the creditor’s claims were disallowed due to their having filed untimely claims. Rather than allowing the lien to pass through bankruptcy unaffected by failing to file a proof of claim at all, the Kohouts argued that Nationstar’s predecessor filed a timely proof of claim thereby subjecting it to the operation of the Bankruptcy Rules and sections 502 and 506 of the Code. The Kohouts further argued that failure to comply with Rule 3001(c) does not provide a basis for claim disallowance, therefore, the bankruptcy court must have relied on one of the substantive reasons for disallowance listed in section 502(b).

The district court disagreed. It found that, while section 506(b) lists substantive reasons for disallowance of a claim, lack of documentation and failure to respond to the objection can provide an alternative valid basis for disallowance. The court concluded: “Indeed, it is only because no determination was made as to the validity of Nationstar’s lien and the fact that Debtors conceded that Nationstar holds a valid perfected mortgage lien that Nationstar does not now face the same consequences as the creditor in Blendheim.”

Kohout ND NY opinion Sept 2017

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