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Can a creditor's lien be avoided under 11 U.S.C. § 506(d) solely on the ground that the creditor's proof of claim has been disallowed for untimeliness?
The Eighth Circuit Court of Appeals says no.
Gary and Elizabeth Shelton filed a Chapter 13 bankruptcy petition on September 21, 2010. The deadline for filing timely proofs of claim was January 25, 2011. CitiMortgage, which had a lien on the Sheltons' home, did not file its proof of claim until August 22, 2011, almost seven months late.
The Sheltons objected to CitiMortgage's proof of claim on August 29, 2011, seeking its disallowance as an untimely filed claim. On November 18, 2011, the bankruptcy court barred the claim.
Shortly thereafter, on December 9, 2011, the Sheltons filed an adversary proceeding seeking the avoidance of CitiMortgage's lien. CitiMortgage responded with a motion to dismiss the adversary proceeding. On April 30, 2012, the court granted CitiMortgage's motion.
Section 506(d) provides:
To the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void, unless--
(1) such claim was disallowed only under section 502(b)(5) or 502(e) of this title; or
(2) such claim is not an allowed secured claim due only to the failure of any entity to file a proof of such claim under section 501 of this title.
The Sheltons argued that CitiMortgage's lien was void under the plain language of §506(d) because CitiMortgage's claim was disallowed for being untimely filed, which was not one of the specific exceptions to avoidance provided in § 506(d)(1) and (2).
The Eighth Circuit Court of Appeals disagreed, noting that most courts that have addressed this issue concluded that long-standing bankruptcy practice -- and Supreme Court precedent -- warrant looking beyond the plain language of the statute to hold that a creditor's lien cannot be avoided under § 506(d) solely because the claim has been disallowed for untimeliness.
Liens pass through bankruptcy unless voided on their merits. Here, the Sheltons never asserted that CitiMortgage's lien was voidable on any ground other than the untimeliness of the proof of claim, so CitiMortgage still had a valid lien.