Ninth Circuit Permits Lien-Voidance For Chapter 20 Debtors

Bankruptcy practitioners routinely advise secured creditor clients to file protective proofs of claim in bankruptcy proceedings despite those clients' ability to ignore bankruptcy proceedings and decline filing claims without imperiling their lien due to the protections afforded by state law foreclosure rights.1 But a recent Ninth Circuit decision is causing attorneys and clients to reconsider whether this traditionally conservative approach is simply too risky in Chapter 13 cases. HSBC Bank v. Blendheim (In re Blendheim), No. 13-35412, 2015 WL 5730015 (9th Cir. Oct. 1, 2015).

The Blendheims filed for Chapter 13 relief after receiving a Chapter 7 discharge, making them what is commonly referred to as "Chapter 20" debtors. Holding a first-position lien secured by the Blendheims' West Seattle condominium, HSBC filed a timely proof of claim, to which the Blendheims filed an objection. HSBC did not respond, and hearing no response, the court entered an order disallowing HSBC's claim. HSBC was served with the order, but continued to take no action until several months later when the Blendheims filed an adversary proceeding seeking, among other things, to void HSBC's first-position lien...