Disallowed Claim Renders Lien Void Under 506(d)

Posted by NCBRC - June 12, 2013

The Fourth Circuit found that a lender’s lien was extinguished upon debtor’s discharge where the lender’s proof of claim had been disallowed due to the lender’s failure to provide the necessary documents to prove that it had a perfected security interest. National Capital Management v. Gammage-Lewis, No. 12-2286 (June 6, 2013).

The debtor’s vehicle was subject to a first lien held by Wells Fargo, and when National Capital filed a proof of claim asserting a secondary lien on the vehicle the trustee objected. National Capital did not respond to the objection and the court sustained it. National Capital’s claim was treated in the chapter 13 plan as unsecured. After the debtor’s discharge, National Capital repossessed the vehicle arguing that the disallowance of the claim was a merely related to a procedural defect in the claim and did not invalidate the underlying lien. The bankruptcy court found that the lien was void and that the repossession was a violation of the discharge injunction.

The Fourth Circuit adopted the opinion of the District Court National Capital Management v. Gammage-Lewis, No. 5:10-cv-00468-F (E.D. N.C. Aug. 14, 2012), which affirmed the bankruptcy court and held that the court’s disallowance of the claim rendered the lien void under section 506(d) upon debtor’s discharge. The court found that Rule 7001(2), which provides for an adversary proceeding to determine the “validity, priority, or extent of a lien,” is the mechanism under which a disallowed lien is extinguished upon discharge. The court further found that the trustee’s objection to the claim served the same purpose as an adversary proceeding because it provided to the lender the necessary notice and opportunity to be heard.

Gammage-Lewis Dist Ct opinion

Gammage-Lewis 4th Cir. opinion


Post a Comment

You must be logged in to post a comment.