Claim Disallowed as Untimely Not Void under Section 506(d)

Posted by NCBRC - November 5, 2012

The Bankruptcy Appellant Panel for the Eighth Circuit has taken it upon itself to redraft section 506(d) of the Bankruptcy Code to reflect what it believes Congress meant despite the fact that it is contrary to what Congress said. In re Shelton, 477 B.R. 749 (B.A.P. 8th Cir. Sept. 24, 2012). Section 506(d) provides that a lien that is not an allowed secured claim is void unless the claim was disallowed only under section 502(b)(5) or 502(e). Notably, the exceptions listed in section 506(d) do not include section 502(b)(9) which provides that a claim that is not timely filed shall not be allowed. Nonetheless, the Shelton court went beyond the plain language of the statute and found that a claim that is disallowed as untimely is not void under section 506(d).

Since 1992, courts have relied on Dewsnup v. Timm, 502 U.S. 410 (1992), to justify interpretations of section 506(d) that are contrary to its plain language. See Dewsnup, 502 U.S. at 422 (“[t]he Court makes no attempt to establish a textual or structural basis for overriding the plain meaning of § 506(d)”) (Justice Scalia dissenting). The Court in Dewsnup took the remarkable step of divorcing the term “allowed secured claim” in section 506(d) from its meaning as set forth in section 506(a), and found essentially that in order to be void under section 506(d) the claim must be both disallowed and unsecured. Shelton and cases like it find that even though Congress specified the reasons for disallowance that render the 506(d) voidance provision inapplicable, the list is not complete and should be read to include section 502(b)(9) as well. See, e.g., In re Hamlet, 322 F.3d 342 (4th Cir. 2003) (“506(d) only empowers the bankruptcy court to void liens supporting disallowed claims if it judges those liens to be invalid in substance.”). But see In re Wise, 41 B.R. 51 (Bankr. W.D. La. 1984) (untimely claim void under 506(d)).

In re Shelton is currently on appeal before the Eighth Circuit, Case No. 12-3555 (filed Oct. 29, 2012)

Shelton opinion

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