Court Opinion

ID: 4538042
Source: CourtListenerOpinion
Date Created: 2020-06-01 17:00:42.818624+00
Date Added: 2024-06-11T12:42:37.211487
License: Public Domain

FOR PUBLICATION

   UNITED STATES COURT OF APPEALS
        FOR THE NINTH CIRCUIT

 IN RE RICHARD R. LANE,                            No. 18-60059
                                   Debtor,
                                                     BAP No.
                                                     16-1405
 NATHANIEL LANE; ELIZABETH LANE,
                       Appellants,
                                                     OPINION
                     v.

 THE BANK OF NEW YORK MELLON;
 BAYVIEW LOAN SERVICING, LLC,
                       Appellees.

             Appeal from the Ninth Circuit
              Bankruptcy Appellate Panel
Brand, Spraker, and Taylor, Bankruptcy Judges, Presiding

           Argued and Submitted February 7, 2020
                 San Francisco, California

                          Filed June 1, 2020

Before: Richard A. Paez and Carlos T. Bea, Circuit Judges,
         and Lynn S. Adelman, * District Judge.

                  Opinion by Judge Adelman

     *
       The Honorable Lynn S. Adelman, United States District Judge for
the Eastern District of Wisconsin, sitting by designation.
2                           IN RE LANE

                          SUMMARY **

                           Bankruptcy

    The panel affirmed the Bankruptcy Appellate Panel’s
opinion reversing the bankruptcy court’s summary judgment
in favor of a Chapter 13 debtor in the debtor’s adversary
proceeding seeking a declaration that a lien securing a
disallowed claim was void.

    The panel held that a bankruptcy court may not void a
lien under 11 U.S.C. § 506(d) when a claim relating to the
lien is disallowed because the creditor who filed the proof of
claim did not prove that it was the person entitled to enforce
the debt the lien secures. Accordingly, the panel affirmed
the BAP’s decision to reverse the bankruptcy court’s
summary judgment and award of attorney’s fees in favor of
the debtor.

                            COUNSEL

Stanley A. Zlotoff (argued), Law Office of Stanley A.
Zlotoff APC, San Jose, California, for Appellants.

Lewis R. Landau (argued), Calabasas, California; Edward G.
Schloss, Edward G. Schloss Law Corp., Los Angeles,
California; for Appellees.

    **
       This summary constitutes no part of the opinion of the court. It
has been prepared by court staff for the convenience of the reader.
                         IN RE LANE                          3

                         OPINION

ADELMAN, District Judge:

    We are asked to decide whether a bankruptcy court may
void a lien under 11 U.S.C. § 506(d) when a claim relating
to the lien is disallowed because the creditor who filed the
proof of claim did not prove that it was the person entitled to
enforce the debt the lien secures. We hold that it may not.

                              I.

    Richard Lane filed a Chapter 13 bankruptcy case in May
2011. On one of his schedules, he disclosed that he owned
real estate in Sunnyvale, California, with a value of
$420,000. The property was subject to secured claims
totaling $699,514. A second schedule listed “Bank of
America Home Loans” as a creditor holding a secured claim
on the property in the amount of $625,620. With respect to
this claim, Lane wrote that he disputed the “real party in
interest.”

    Under his original Chapter 13 plan, Lane proposed to
make monthly payments of $1,533 to Bank of America. He
wrote that he disputed the claim and that, until someone
proved that it was the real party in interest, he would “bank”
the monthly payments.

    In July 2011, an attorney entered an appearance in the
case on behalf of The Bank of New York Mellon f/k/a The
Bank of New York, as Trustee for the Certificateholders of
the CWALT, Inc. Alternative Loan Trust 2006-OA9
Mortgage Pass-Through Certificates, Series 2006-OA9. As
the name implies, the CWALT Trust is a mortgage-backed
security, and the Bank of New York Mellon (which the
parties refer to as “BONY”) is the trustee. BONY filed an
4                         IN RE LANE

objection to confirmation of Lane’s plan in which it alleged
that the trust had a secured interest in the real estate.

    In September 2011, BONY filed a proof of claim in the
amount of $676,341.19 and represented that the claim was
secured by a deed of trust (a lien on real estate that is similar
to a mortgage). The proof of claim attached a copy of the
promissory note, which showed that the original lender was
Countrywide Homes Loans, Inc. Countrywide later
endorsed the note “in blank,” which made it payable to the
bearer. See Cal. Com. Code § 3205(b). The proof of claim
also attached a copy of the deed of trust and an assignment
of the note and deed of trust to BONY on behalf of the
CWALT Trust.

    Lane objected to BONY’s claim. He alleged that the
claim “fail[ed] to establish standing” and failed to establish
that BONY was “the person entitled to enforce payment on
the claim.” The objection contained no factual allegations or
legal argument other than these two brief statements. The
objection requested an order providing that the claim was
“disallowed in its entirety.”

    BONY’s attorney did not file a timely response to Lane’s
objection. Lane then filed a motion for the court to enter a
“default order” sustaining his objection to the claim. The
bankruptcy court signed an order stating that the “[o]bjection
is sustained” and that the claim is “disallowed in its
entirety.”

    Later, Lane filed documents in which he noted that the
court’s order disallowing BONY’s claim rendered BONY’s
earlier-filed objection to plan confirmation moot. BONY
conceded this point and withdrew its objection. The
bankruptcy court then confirmed the plan. Lane completed
the plan and received a discharge on November 12, 2015. As
                         IN RE LANE                          5

far as we can tell, Lane did not “bank” payments or
otherwise pay the debt secured by the deed of trust as part of
his plan.

    After receiving his discharge, Lane filed an adversary
complaint against BONY and its servicing agent, Bayview
Loan Servicing, LLC. Lane alleged that, because the court
had disallowed BONY’s claim, the court should declare the
lien (i.e., the deed of trust) void under 11 U.S.C. § 506(d), a
provision of the Bankruptcy Code providing that, subject to
certain exceptions, liens securing disallowed claims are
void. Lane also requested attorneys’ fees under California
Civil Code § 1717.

    In response to the adversary complaint, BONY—now
represented      by     different     counsel—moved         for
reconsideration of the default order disallowing its claim.
BONY argued that Lane had not properly served it with his
objection to its claim and that its prior attorney had erred in
not responding to the objection. The bankruptcy court denied
the motion for reconsideration.

    Lane moved for summary judgment on his claims that
the lien was void and that he was entitled to attorneys’ fees.
The bankruptcy court granted this motion and entered orders
voiding the lien and awarding Lane the attorneys’ fees he
incurred in the adversary case and in opposing BONY’s
motion for reconsideration.

    BONY appealed the orders voiding the lien and granting
attorneys’ fees to the Bankruptcy Appellate Panel (“BAP”).
In a published opinion, the BAP reversed the orders. See In
re Lane, 589 B.R. 399 (B.A.P. 9th Cir. 2018), corrected,
(Sept. 26, 2018). The BAP determined that § 506(d) does not
void a lien securing a claim when a proof of claim relating
to the lien is disallowed on the ground that the claim filer
6                        IN RE LANE

had not shown that it was the person entitled to enforce the
promissory note associated with the lien. The BAP noted that
when a claim is disallowed on this ground, it implies that the
lien secures a claim that belongs to someone else—namely,
the person entitled to enforce the note. The BAP reasoned
that, under these circumstances, voiding the lien would
deprive the person entitled to enforce the note of due process
because that person had not been given notice and an
opportunity to be heard. The BAP also reversed the award of
attorneys’ fees.

    Lane appealed the BAP’s order to this court. While the
appeal was pending, Lane died. The joint executors of his
estate, Nathaniel Lane and Elizabeth Lane, have been
substituted as appellees under Federal Rule of Appellate
Procedure 43(a).

                             II.

    Whether the bankruptcy court properly granted summary
judgment to Lane under 11 U.S.C. § 506(d) presents a
question of law that this Court reviews de novo. See, e.g., In
re Swintek, 906 F.3d 1100, 1102 n.2 (9th Cir. 2018).

                             A.

    To explain § 506(d), it helps first to explain the
bankruptcy claim-filing process. A “claim” is a right to
payment, see 11 U.S.C. § 101(5), such as the right to
payment under the promissory note at issue in this case. If a
creditor wants to receive payments on a claim through the
bankruptcy proceeding, it must file a proof of claim. See
11 U.S.C. § 501; Fed. R. Bankr. P. 3002(a).

   Importantly, however, a secured creditor might decide to
bypass the bankruptcy proceeding and not file a proof of
                         IN RE LANE                          7

claim. This is because a secured creditor has the option of
enforcing its claim against the debtor in two ways:
(1) against the debtor personally (in personam), or
(2) against the collateral (in rem). See In re Blendheim,
803 F.3d 477, 486 (9th Cir. 2015). If the secured creditor
does not file a proof of claim, it will forfeit its right to
proceed against the debtor personally—the creditor will
receive no payments through the bankruptcy proceeding and
the creditor’s right to proceed against the debtor personally
will be discharged. Id. However, under a longstanding
principle of bankruptcy law, the creditor may ignore the
bankruptcy proceeding, in which case its lien will pass
through the proceeding unaffected. See, e.g., Dewsnup v.
Timm, 502 U.S. 410, 417–19 (1992); Long v. Bullard,
117 U.S. 617, 620–21 (1886). If the creditor bypasses the
bankruptcy proceeding, it may enforce its lien in a
foreclosure proceeding outside of the bankruptcy. See In re
Blendheim, 803 F.3d at 486. In that event, the creditor will
apply the proceeds of the foreclosure sale to the balance of
the debt. However, if the proceeds do not satisfy the debt,
the creditor may not look to the debtor for a deficiency
judgment because the creditor lost its right to proceed
against the debtor personally by not filing a proof of claim
during the bankruptcy case. Id.

     Here, we note that persons other than the creditor who
allegedly holds the claim may file a proof of that claim and
then give notice to the creditor that a proof of claim has been
filed on its behalf. For example, if a creditor does not file a
proof of claim within the time permitted for doing so, the
debtor or the trustee may file a proof of claim on that
creditor’s behalf. See Fed. R. Bankr. P. 3004. A debtor or
trustee might do this if the creditor’s claim is
nondischargeable and therefore the creditor has no need to
file a claim, but the debtor or trustee wishes to provide for
8                        IN RE LANE

payments to that creditor through the bankruptcy
proceeding. See 4 Collier on Bankruptcy ¶ 501.04 (Richard
Levin & Henry J. Sommer eds., 16th ed.).

    If someone files a proof of claim, that claim will be
“allowed” unless an objection is filed by a party in interest.
See 11 U.S.C. § 502. If an objection is filed, the bankruptcy
court must adjudicate the objection and determine whether
the claim should be allowed. If the court determines that the
claim should not be allowed—meaning that the creditor has
no right to payment on the claim through the bankruptcy
proceeding—the court enters an order disallowing the claim.
Such an order is a final judgment for purposes of appeal and
res judicata. See Siegel v. Fed. Home Loan Mortg. Corp.,
143 F.3d 525, 529 (9th Cir. 1998).

   Here is where § 506(d) comes into the picture. It
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.

11 U.S.C. § 506(d). The purpose of this provision is to allow
the bankruptcy court to void a lien after it determines that the
claim the lien secures is invalid. See Matter of Tarnow,
749 F.2d 464, 466 (7th Cir. 1984). The general idea is that if
                          IN RE LANE                           9

a creditor does not have a good secured claim, it does not
have a valid lien, and therefore the court should void the lien.
Id. For example, say a secured creditor files a proof of claim
relating to a mortgage debt. The debtor objects to the claim
on the ground that the debt has been completely repaid, and
therefore nothing more is owed. The bankruptcy court
sustains this objection and disallows the claim, which means
that the debt is deemed satisfied and the lien is no longer
valid. Under § 506(d), the lien is void—the lien “secures a
claim against the debtor that is not an allowed secured claim”
and neither of the two exceptions applies.

    In the present case, however, the second exception to
§ 506(d) is relevant. It preserves the lien of a secured creditor
who chooses to bypass the bankruptcy and enforce its lien
outside of bankruptcy. Technically, a secured creditor who
does not file a proof of claim will hold “a claim against the
debtor that is not an allowed secured claim” and thus would
seem to be in danger of losing its lien under § 506(d).
However, the second exception to § 506(d) saves the lien by
providing that if the 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,” then the lien is not
void. 11 U.S.C. § 506(d)(2). Thus, if a secured creditor does
not file a proof of claim (and no other entity files a proof of
claim on its behalf), its lien will pass through the bankruptcy
unaffected.

                               B.

   Having explained the mechanics of claim filing and lien
voidance, we may discuss what happened in this case.

   After Lane filed his bankruptcy case, BONY filed a
timely proof of claim. Lane objected to the claim on the
grounds that it “fail[ed] to establish that [BONY] has
10                       IN RE LANE

standing” and “fail[ed] to establish that, pursuant to
applicable law, [BONY] is the person entitled to enforce
payment on the claim.” In the context of a mortgage debt or
debt secured by a deed of trust, these objections essentially
mean the same thing: the debtor is challenging whether the
claim filer is “the person entitled to enforce” the note that
created the debt. See In re Veal, 450 B.R. 897, 902 (B.A.P.
9th Cir. 2011).

     The concept of “the person entitled to enforce” the note
is governed by Article 3 of the Uniform Commercial Code.
See id. at 908–12. Under the UCC, the maker of a note—in
this case, Lane—must pay the amount of the note to the
person entitled to enforce it. See, e.g., Cal. Com. Code
§ 3412. Thus, if the person who files the proof of claim is
not the person entitled to enforce the note, then that person
does not have a claim against the debtor. Essentially, a
finding that the claim filer is not the person entitled to
enforce the note is a finding that the filer is not the true
creditor—it is a finding that someone other than the claim
filer may be the person entitled to payment under the note.

    Importantly, such a finding does not imply that either the
note or the lien securing the note is invalid. Rather, such a
finding simply establishes that, to the extent there is a valid
note secured by a valid lien, the person before the court is
not the person entitled to prosecute the claim for payment
under the note or to foreclose the lien. As far as the court is
concerned, there might be some person out in the world who
is entitled to enforce the note, and that person might also
hold a valid lien securing the note. If there is such a person,
then the debtor owes payments to that person, and if he does
not make them, then that person may foreclose on the
collateral.
                         IN RE LANE                         11

    Accordingly, when the bankruptcy court entered the
claim-disallowance order, it found that BONY was not the
person entitled to enforce the promissory note creating
Lane’s mortgage debt. It did not find that the note or any lien
securing it was invalid or otherwise unenforceable. As far as
the bankruptcy record showed, someone other than BONY
was the person entitled to enforce the note, and possibly that
person also held a valid lien securing the note. No entity in
the bankruptcy proceeding filed a proof of claim on behalf
of that person, and thus perhaps the person was exercising
its right to bypass the bankruptcy and foreclose its lien
outside of the bankruptcy.

    At this point, we can ask whether the claim-disallowance
order had the effect of rendering any lien securing the note
void under § 506(d). The answer is that it did not. This is
because, under the factual record created when the court
entered the claim-disallowance order, the person entitled to
enforce the note did not file a proof of claim. Again, the
claim-disallowance order found that BONY was not the
person entitled to enforce the note, and therefore BONY was
not the person that Lane was supposed to pay. Thus, the
court found that, to the extent there is a “claim” consisting
of a right to payment under the note, it belonged to someone
other than BONY. But if the claim belonged to someone
other than BONY, and if a lien secured that person’s claim,
then BONY’s actions in the bankruptcy case could not result
in voidance of the lien securing the claim. In a nutshell, a
bankruptcy court cannot destroy the property rights of the
person who is the real party in interest based on the actions
of a person who is not the real party in interest.

    To put this in the language of § 506(d), to no “extent”
did a lien secure BONY’s claim against Lane. Instead, if
there was a lien, it secured the claim of the real party in
12                       IN RE LANE

interest—the person entitled to enforce the note. But,
according to the bankruptcy court, the real party in interest
did not file a proof of claim, and no one filed a proof of claim
on that party’s behalf. Thus, that party’s lien would not be
void because the second exception to § 506(d) protects it: the
lien “secures a claim against the debtor that is not an allowed
secured claim” but “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.” Yes, BONY filed
a proof of claim, but the court found that BONY was not the
real party in interest, and therefore BONY’s proof of claim
must be disregarded for purposes of applying § 506(d).

     Now, in the real world—as opposed to the world created
by the bankruptcy court’s findings—BONY almost certainly
is the person entitled to enforce Lane’s promissory note, and
the lien almost certainly secures BONY’s claim. Indeed, as
the BAP noted, there are documents in the record showing
that the note and the deed of trust had been assigned to
BONY. See In re Lane, 589 B.R. at 403, 410. Had BONY
responded to Lane’s objection instead of defaulting, the
bankruptcy court likely would have overruled the objection.
But, because BONY defaulted, the bankruptcy court found
that BONY was not the real party in interest, and that finding
was not appealed or reconsidered by the bankruptcy court.
Thus, for purposes of this case, we must assume that BONY
is not the person entitled to enforce the note. Under that
assumption, § 506(d) does not void the lien securing the
note.

    The bankruptcy court thought that it was bound by this
Court’s decision in In re Blendheim, 803 F.3d 477 (9th Cir.
2015). That case is superficially like this one, in that it
involved a secured creditor who did not respond to an
objection to its proof of claim. After the secured creditor
                         IN RE LANE                          13

defaulted, the bankruptcy court entered an order disallowing
the claim. Later, the debtor filed an adversary compliant
alleging that the creditor’s lien was void under § 506(d). The
bankruptcy court agreed and voided the lien. This Court
affirmed, stating that “if a claim is disallowed, then under
§ 506(d) . . . the claim’s associated lien is void.” Id. at 490.

    Importantly, however, Blendheim did not involve a claim
that was disallowed on the ground that the claim filer was
not the person entitled to enforce the note. Instead, the debtor
objected to the claim on the ground that the creditor did not
attach a copy of the promissory note to its proof of claim and
the copy the debtor possessed appeared to bear a forged
signature. Id. at 481. Thus, when the bankruptcy court
sustained the objection and disallowed the claim, it did not
find that the creditor who filed the proof of claim was not the
real party in interest. Instead, it found that the note giving
rise to the claim was invalid. Under those findings, § 506(d)
voided “the claim’s associated lien.” Id. at 490. In the
present case, the bankruptcy court found that BONY was not
the person entitled to enforce the claim. Thus, the proof-of-
claim filer did not have a claim with an “associated lien,” as
did the claim filer in Blendheim. Instead, the lien was
“associated” with the claim belonging to the real party in
interest, who, according to the bankruptcy court’s findings,
did not file a proof of claim. Thus, unlike in Blendheim,
§ 506(d) does not void the lien on Lane’s real estate.

    For these reasons, we agree with the BAP that the
bankruptcy court erred in voiding the lien. However, we add
that we do not entirely agree with the BAP’s reasoning.
According to the BAP, when the bankruptcy court voided
the lien, it “violated an unknown party’s due process rights
by expunging its deed of trust without notice and an
opportunity to be heard.” In re Lane, 589 B.R. at 411. We do
14                       IN RE LANE

not think the record shows that anyone’s due-process rights
have been violated. Instead, what the record shows is that it
is possible that some third party’s due-process rights have
been violated. Under the bankruptcy court’s findings,
BONY failed to prove that it was the true creditor, and thus
the bankruptcy court was required to assume that the note
and lien belonged to an absent third party and that this third
party did not receive notice and an opportunity to be heard
in the adversary proceeding. However, in the real world,
BONY likely is the true creditor—it just failed to prove this
fact when it was asked to do so. BONY, of course, received
notice and an opportunity to be heard, and therefore voiding
the lien could not have violated BONY’s due-process rights.
Accordingly, based on the bankruptcy court’s findings, the
most that we can say is that we do not know whether voiding
the lien would have deprived an unknown party of its due-
process rights.

                             III.

     Consistently applying the bankruptcy court’s finding
that BONY was not the person entitled to enforce Lane’s
mortgage debt shows that the deed of trust securing that debt
is not void under § 506(d). Under the bankruptcy court’s
finding, the deed of trust “secures a claim against the debtor
that is not an allowed secured claim,” but “such claim is not
an allowed secured claim due only to the failure of any entity
to file a proof of such claim.” 11 U.S.C. § 506(d). Therefore,
the BAP’s decision reversing the bankruptcy court’s order
granting Lane’s motion for summary judgment should be
affirmed. Lane conceded that if we affirm the BAP on this
issue, then the order reversing the fee award should also be
affirmed. See Reply Br. at 10. Accordingly, we also affirm
the BAP’s decision to reverse the fee award.

     AFFIRMED.