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In re Lane

United States Bankruptcy Appellate Panel of the Ninth Circuit

September 19, 2018

In re: RICHARD R. LANE, Debtor.
v.
RICHARD R. LANE, Appellee. THE BANK OF NEW YORK MELLON; BAYVIEW LOAN SERVICING, LLC, Appellants, Adv. No. 16-5004

          Argued and Submitted on January 25, 2018, at San Francisco, California

          Appeal from the United States Bankruptcy Court for the Northern District of California Honorable Stephen L. Johnson, Bankruptcy Judge, Presiding

          Lewis R. Landau argued for appellants

          The Bank of New York Mellon and Bayview Loan Servicing, LLC; Stanley A. Zlotoff of the Law Offices of Stanley A. Zlotoff argued for appellee, Richard R. Lane.

          Before: BRAND, SPRAKER and TAYLOR, Bankruptcy Judges.

          OPINION

          BRAND, BANKRUPTCY JUDGE.

         Appellants, The Bank of New York Mellon ("BONY") and Bayview Loan Servicing, LLC, appeal a judgment voiding BONY's asserted first-position lien against the debtor's residence under § 506(d)[1], after the court had previously disallowed BONY's claim and the debtor had completed his chapter 13 plan and received a discharge. The debtor had objected to BONY's proof of claim based on lack of standing. BONY failed to respond to the claim objection, and the claim was disallowed. After plan completion, BONY sought reconsideration of the order disallowing the claim; it was denied. BONY did not appeal the order disallowing the claim or the order denying the motion for reconsideration.

         The bankruptcy court voided the first-position lien under § 506(d) based on disallowance of the claim. This was error. The claim disallowance in this case did not affect the validity of the lien; it determined only that BONY lacked standing to enforce an otherwise valid lien. And because the adversary complaint was not served on the party who had the right to enforce, the bankruptcy court violated that party's due process rights by voiding its lien without notice and a hearing. Accordingly, we REVERSE the judgment voiding the first-position lien.

         Appellants also appeal the bankruptcy court's denial of a continuance of the debtor's motion for summary judgment and the award of the debtor's attorney's fees under Cal. Civ. Code § 1717. We AFFIRM the decision to deny a continuance and REVERSE the order awarding the debtor his attorney's fees.

         I. FACTUAL BACKGROUND AND PROCEDURAL HISTORY

         A. The bankruptcy case

         Richard Lane filed his chapter 13 bankruptcy case on May 18, 2011. He disclosed an ownership interest in his residence (the "Property"), valuing it at $420, 000 and stating that it was subject to secured claims totaling $699, 514. Lane named Bank of America as holding a first-position lien against the Property for $625, 620, which he asserted was "disputed" regarding the "real party in interest." Lane listed a second-position lien against the Property for $73, 894, also held by Bank of America, which he asserted was wholly unsecured and not disputed.

         Lane's initial chapter 13 plan provided that monthly payments for the first-position lien would be made to Bank of America, but also stated that the loan was "disputed" and that, "[u]ntil proof of real party in interest status[, ]" he would set aside the monthly payment. The plan proposed no payments for Bank of America's second-position lien.[2]

         Shortly thereafter, BONY filed a Request for Special Notice directing that all notices be sent to its counsel - Vy T. Pham of the (now defunct) law firm of Miles, Bauer, Bergstrom & Winters, LLP - at the address provided. Pham also received electronic notices in the case.

         BONY then filed a $676, 361.19 secured proof of claim for the first-position lien against the Property ("Claim"). Attached to the Claim were copies of the original deed of trust and promissory note in favor of the original lender, Countrywide Home Loans, Inc., and a recorded assignment of the note and deed of trust to BONY in January 2011. The note was endorsed in blank. Any notices regarding the Claim were to be sent to Pham at the same address she provided in the Request for Special Notice.

         Lane filed a "check the box" form objection to the Claim, arguing that BONY had failed to establish standing and that it was the person entitled to enforce payment on the Claim ("Claim Objection"). Lane asked that the Claim be disallowed in its entirety. The Claim Objection warned that failure to respond could result in an order granting the requested relief by default. Lane's counsel served the Claim Objection on Pham at the address provided on the Claim. Pham, presumably, also received electronic notice of it.

         After BONY failed to oppose the Claim Objection in the given time period, Lane requested entry of a default order sustaining the Claim Objection. The bankruptcy court entered the default order on December 29, 2011, disallowing the Claim in its entirety ("Claim Disallowance Order"). BONY did not appeal.

         BONY objected to Lane's later-filed second amended chapter 13 plan, which proposed the same terms for the first and second liens against the Property as in his initial plan. BONY ultimately withdrew its objection prior to the plan confirmation hearing, conceding that it had become moot because BONY would not receive payments under the plan due to the Claim Disallowance Order.

         The bankruptcy court confirmed Lane's second amended plan on July 23, 2012 ("Plan"). Lane made no payments on the first lien during his five-year bankruptcy case, and BONY never moved for relief from stay.

         The chapter 13 trustee filed a Notice of Plan Completion on November 12, 2015; the court entered a discharge order that same day. Three months later, a Final Decree was entered, and the case was closed.

         After reopening Lane's bankruptcy case in April 2016, BONY moved to set aside the Claim Disallowance Order, arguing that its failure to respond to the Claim Objection in 2011 was excusable neglect ("Reconsideration Motion"). The bankruptcy court denied the motion, determining that BONY's challenge to the merits of the Claim Objection or the Claim Disallowance Order was untimely and not a proper basis for reconsideration. In addition, BONY had failed to show excusable neglect for not responding to the Claim Objection. BONY did not appeal the order denying reconsideration of the Claim Disallowance Order.

         B. The adversary proceeding

         Meanwhile, Lane filed an adversary proceeding against BONY, seeking to void the first deed of trust under § 506(d) ("Lien Avoidance"). Lane also sought damages for BONY's failure to reconvey the deed of trust and requested attorney's fees. In its answer, BONY asserted various affirmative defenses, including a general defense of estoppel and equity.

         A month after the court denied BONY's Reconsideration Motion, Lane moved for summary judgment on his adversary claims and requested attorney's fees ("MSJ"). Lane argued that, because the Claim had been disallowed, his chapter 13 plan had been completed and he had received a discharge, BONY's first-position lien was void under § 506(d). Lane argued that the recent case, HSBC Bank USA, N.A. v. Blendheim (In re Blendheim), 803 F.3d 477 (9th Cir. 2015), supported his position.

         In opposition, BONY argued for further discovery and a continuance of the MSJ. Counsel for BONY declared that discovery "could potentially produce evidence demonstrating that there was no real factual or legal basis for filing the [Claim Objection] and that there is no factual or legal basis supporting voidance of [BONY's] lien." BONY maintained that discovery was imperative because Lane was trying to get a "free house" based on the Claim disallowance.

         Next, BONY argued that Lane's interpretation of § 506(d) was contrary to Dewsnup v. Timm, 502 U.S. 410, 417-18 (1992), which held that liens normally pass through bankruptcy unaffected. Although the Claim had been disallowed, that meant only that BONY could not be paid through the Plan; the lien, nonetheless, survived the bankruptcy. In addition, the Plan did not specify that BONY's first-position lien would be avoided; it only limited what BONY would be paid from the estate. BONY also argued that Blendheim was distinguishable. Unlike the dilatory creditor there, BONY had attached supporting documents to its Claim evidencing its standing to enforce the lien. Further, Lane had never disputed the legitimacy of the underlying loan documents as the debtors had in Blendheim.

         BONY then filed a separate motion under Civil Rule 56(d) ("56(d) Motion"), requesting that the court either dismiss the MSJ or continue it so that BONY could conduct further discovery. The 56(d) Motion was virtually identical to what BONY had submitted in its opposition to the MSJ.

         After hearings on the MSJ and the 56(d) Motion, the bankruptcy court entered an order granting the MSJ to the extent Lane sought to void BONY's first-position lien under § 506(d). The court determined that the lien was void based on (1) the plain language of § 506(d), (2) that the Claim had been previously disallowed, (3) that the exceptions under § 506(d) did not apply, and (4) Blendheim. The court denied BONY's 56(d) Motion. Lastly, the court considered, but rejected, BONY's affirmative defenses of estoppel and equity.

         Upon further briefing on the issue of attorney's fees, the bankruptcy court entered an order bifurcating Lane's attorney's fees from the MSJ and treating it as a separate motion. On the same day, the court entered a separate judgment for its § 506(d) ruling in the MSJ. The court then entered an order awarding Lane his attorney's fees for prosecuting the Lien Avoidance action, defending the Reconsideration Motion, and for filing the fee motion ("Fee Order"). BONY timely appealed the MSJ order, the § 506(d) judgment and the Fee Order.

         II. JURISDICTION

         The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and 157(b)(2)(K). We have jurisdiction under 28 U.S.C. § 158.

         III. ...


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