Alert: Secured Creditor's Lien Cannot Be Avoided Based Solely on Creditor's Claim Being Disallowed for Untimeliness

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October 5, 2012

In Shelton v. CitiMortgage, Inc. (In re Shelton), --- B.R. --- (B.A.P. 8th Cir. Sept. 24, 2012), the Bankruptcy Appellate Panel for the Eighth Circuit Court of Appeals determined that a secured creditor’s lien cannot be avoided simply because the creditor’s claim was disallowed as being filed after the proof of claim bar date.

In Shelton, the Debtors filed a Chapter 13 bankruptcy petition in January 2010. CitiMortgage filed its proof of claim almost seven months after the proof of claim deadline. The Debtors objected to the claim, seeking its disallowance as untimely filed. The objection did not dispute the validity of the lien or seek its avoidance. The bankruptcy court disallowed the claim on the ground that it was filed after the bar date. Shortly thereafter, the Debtors filed an adversary proceeding seeking avoidance of the CitiMortgage lien pursuant to section 506(d) of the Bankruptcy Code. CitiMortgage moved to dismiss and the court granted its motion.

On appeal from the motion to dismiss, the Bankruptcy Appellate Panel for the Eighth Circuit considered “whether a creditor’s lien can be avoided under 11 U.S.C. § 506(d) solely on the ground that the creditor’s proof of claim has been disallowed for being untimely filed.”

Section 506(d) provides that when a lien secures a claim that is not an allowed secured claim, such lien is void unless (1) the claim was disallowed only under section 502(b)(5) or 502(e) of the Bankruptcy Code, or (2) the claim is not an allowed secured claim under section 501 of the Bankruptcy Code. The Debtors argued that CitiMortgage’s lien was void under the plain language of section 506(d) because CitiMortgage’s claim was disallowed for being untimely filed, which is not one of the exceptions to avoidance listed therein.

The Court noted that the plain language of section 506(d) lends “superficial support” to the Debtor’s argument, but also noted that all but one of the courts encountering this issue have rejected that interpretation, instead looking to long-standing bankruptcy practice to the contrary. The Court held that it could depart from the plain language of a statute where the disposition required by the text would be “absurd” and that avoiding the lien for being untimely filed would be absurd because a creditor who files no claim at all would fare better than a creditor who filed a late claim. This result, the Court stated, would be at odds with the rule that liens pass through bankruptcy unaffected.

The Court also noted that not avoiding the lien is consistent with the Eighth Circuit’s decision in In re Be-Mac Transport, which held that “the lateness of an amendment to a claim, correcting the previously filed claim’s mis-designation as an unsecured claim, is not a sufficient ground, by itself, to invalidate the lien securing that claim.” Based on this precedent, the Court concluded that “a secured creditor’s lien cannot be avoided under § 506(d) based solely on the fact that the creditor’s claim has been disallowed for untimeliness. Liens pass through bankruptcy unless avoided on their merits.”

For more information, please contact Briggs and Morgan attorneys John McDonald or Ben Gurstelle.