In re: Richard R. Lane

FILED
SEP 19 2018
1 SUSAN M. SPRAUL, CLERK
U.S. BKCY. APP. PANEL
OF THE NINTH CIRCUIT
2 ORDERED PUBLISHED
3 UNITED STATES BANKRUPTCY APPELLATE PANEL
OF THE NINTH CIRCUIT
4
5 In re: ) BAP No. NC-16-1405-BSTa
)
6 RICHARD R. LANE, ) Bk. No. 11-54766
)
7 Debtor. ) Adv. No. 16-5004
)
8 )
THE BANK OF NEW YORK MELLON; )
9 BAYVIEW LOAN SERVICING, LLC, )
)
10 Appellants, )
)
11 v. ) O P I N I O N
)
12 RICHARD R. LANE, )
)
13 Appellee. )
______________________________)
14
15 Argued and Submitted on January 25, 2018,
at San Francisco, California
16
Filed - September 19, 2018
17
Appeal from the United States Bankruptcy Court
18 for the Northern District of California
19 Honorable Stephen L. Johnson, Bankruptcy Judge, Presiding
20
Appearances: Lewis R. Landau argued for appellants, The Bank of
21 New York Mellon and Bayview Loan Servicing, LLC;
Stanley A. Zlotoff of the Law Offices of Stanley A.
22 Zlotoff argued for appellee, Richard R. Lane.
23
24 Before: BRAND, SPRAKER and TAYLOR, Bankruptcy Judges.
25
26
27
28
1 BRAND, Bankruptcy Judge:
2
3 Appellants, The Bank of New York Mellon ("BONY") and Bayview
4 Loan Servicing, LLC, appeal a judgment voiding BONY's asserted
5 first-position lien against the debtor's residence under
6 § 506(d)1, after the court had previously disallowed BONY's claim
7 and the debtor had completed his chapter 13 plan and received a
8 discharge. The debtor had objected to BONY’s proof of claim based
9 on lack of standing. BONY failed to respond to the claim
10 objection, and the claim was disallowed. After plan completion,
11 BONY sought reconsideration of the order disallowing the claim; it
12 was denied. BONY did not appeal the order disallowing the claim
13 or the order denying the motion for reconsideration.
14 The bankruptcy court voided the first-position lien under
15 § 506(d) based on disallowance of the claim. This was error. The
16 claim disallowance in this case did not affect the validity of the
17 lien; it determined only that BONY lacked standing to enforce an
18 otherwise valid lien. And because the adversary complaint was not
19 served on the party who had the right to enforce, the bankruptcy
20 court violated that party's due process rights by voiding its lien
21 without notice and a hearing. Accordingly, we REVERSE the
22 judgment voiding the first-position lien.
23 Appellants also appeal the bankruptcy court's denial of a
24 continuance of the debtor's motion for summary judgment and the
25 award of the debtor's attorney's fees under Cal. Civ. Code § 1717.
26
1
Unless specified otherwise, all chapter, code and rule
27 references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and
the Federal Rules of Bankruptcy Procedure, Rules 1001-9037. The
28 Federal Rules of Civil Procedure are referred to as "Civil Rules."
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1 We AFFIRM the decision to deny a continuance and REVERSE the order
2 awarding the debtor his attorney's fees.
3 I. FACTUAL BACKGROUND AND PROCEDURAL HISTORY
4 A. The bankruptcy case
5 Richard Lane filed his chapter 13 bankruptcy case on May 18,
6 2011. He disclosed an ownership interest in his residence (the
7 "Property"), valuing it at $420,000 and stating that it was
8 subject to secured claims totaling $699,514. Lane named Bank of
9 America as holding a first-position lien against the Property for
10 $625,620, which he asserted was "disputed" regarding the "real
11 party in interest." Lane listed a second-position lien against
12 the Property for $73,894, also held by Bank of America, which he
13 asserted was wholly unsecured and not disputed.
14 Lane's initial chapter 13 plan provided that monthly payments
15 for the first-position lien would be made to Bank of America, but
16 also stated that the loan was "disputed" and that, "[u]ntil proof
17 of real party in interest status[,]" he would set aside the
18 monthly payment. The plan proposed no payments for Bank of
19 America's second-position lien.2
20 Shortly thereafter, BONY filed a Request for Special Notice
21 directing that all notices be sent to its counsel — Vy T. Pham of
22 the (now defunct) law firm of Miles, Bauer, Bergstrom & Winters,
23 LLP — at the address provided. Pham also received electronic
24
2
Lane later filed a motion to value Bank of America's
25 second-position lien, asserting that it was wholly unsecured given
the Property's value of $420,000 and the first-position lien for
26 $676,341.19. The bankruptcy court entered a stipulated order
valuing Bank of America's second-position lien at $0. Once Lane
27 completed his Plan payments and received a discharge, the court
entered an order voiding the second lien. The second lien is not
28 at issue in this appeal.
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1 notices in the case.
2 BONY then filed a $676,361.19 secured proof of claim for the
3 first-position lien against the Property ("Claim"). Attached to
4 the Claim were copies of the original deed of trust and promissory
5 note in favor of the original lender, Countrywide Home Loans,
6 Inc., and a recorded assignment of the note and deed of trust to
7 BONY in January 2011. The note was endorsed in blank. Any
8 notices regarding the Claim were to be sent to Pham at the same
9 address she provided in the Request for Special Notice.
10 Lane filed a "check the box" form objection to the Claim,
11 arguing that BONY had failed to establish standing and that it was
12 the person entitled to enforce payment on the Claim ("Claim
13 Objection"). Lane asked that the Claim be disallowed in its
14 entirety. The Claim Objection warned that failure to respond
15 could result in an order granting the requested relief by default.
16 Lane's counsel served the Claim Objection on Pham at the address
17 provided on the Claim. Pham, presumably, also received electronic
18 notice of it.
19 After BONY failed to oppose the Claim Objection in the given
20 time period, Lane requested entry of a default order sustaining
21 the Claim Objection. The bankruptcy court entered the default
22 order on December 29, 2011, disallowing the Claim in its entirety
23 ("Claim Disallowance Order"). BONY did not appeal.
24 BONY objected to Lane's later-filed second amended chapter 13
25 plan, which proposed the same terms for the first and second liens
26 against the Property as in his initial plan. BONY ultimately
27 withdrew its objection prior to the plan confirmation hearing,
28 conceding that it had become moot because BONY would not receive
-4-
1 payments under the plan due to the Claim Disallowance Order.
2 The bankruptcy court confirmed Lane's second amended plan on
3 July 23, 2012 ("Plan"). Lane made no payments on the first lien
4 during his five-year bankruptcy case, and BONY never moved for
5 relief from stay.
6 The chapter 13 trustee filed a Notice of Plan Completion on
7 November 12, 2015; the court entered a discharge order that same
8 day. Three months later, a Final Decree was entered, and the case
9 was closed.
10 After reopening Lane's bankruptcy case in April 2016, BONY
11 moved to set aside the Claim Disallowance Order, arguing that its
12 failure to respond to the Claim Objection in 2011 was excusable
13 neglect ("Reconsideration Motion"). The bankruptcy court denied
14 the motion, determining that BONY's challenge to the merits of the
15 Claim Objection or the Claim Disallowance Order was untimely and
16 not a proper basis for reconsideration. In addition, BONY had
17 failed to show excusable neglect for not responding to the Claim
18 Objection. BONY did not appeal the order denying reconsideration
19 of the Claim Disallowance Order.
20 B. The adversary proceeding
21 Meanwhile, Lane filed an adversary proceeding against BONY,
22 seeking to void the first deed of trust under § 506(d) ("Lien
23 Avoidance"). Lane also sought damages for BONY's failure to
24 reconvey the deed of trust and requested attorney's fees. In its
25 answer, BONY asserted various affirmative defenses, including a
26 general defense of estoppel and equity.
27 A month after the court denied BONY's Reconsideration Motion,
28 Lane moved for summary judgment on his adversary claims and
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1 requested attorney's fees ("MSJ"). Lane argued that, because the
2 Claim had been disallowed, his chapter 13 plan had been completed
3 and he had received a discharge, BONY's first-position lien was
4 void under § 506(d). Lane argued that the recent case, HSBC Bank
5 USA, N.A. v. Blendheim (In re Blendheim), 803 F.3d 477 (9th Cir.
6 2015), supported his position.
7 In opposition, BONY argued for further discovery and a
8 continuance of the MSJ. Counsel for BONY declared that discovery
9 "could potentially produce evidence demonstrating that there was
10 no real factual or legal basis for filing the [Claim Objection]
11 and that there is no factual or legal basis supporting voidance of
12 [BONY's] lien." BONY maintained that discovery was imperative
13 because Lane was trying to get a "free house" based on the Claim
14 disallowance.
15 Next, BONY argued that Lane's interpretation of § 506(d)
16 was contrary to Dewsnup v. Timm, 502 U.S. 410, 417-18 (1992),
17 which held that liens normally pass through bankruptcy unaffected.
18 Although the Claim had been disallowed, that meant only that BONY
19 could not be paid through the Plan; the lien, nonetheless,
20 survived the bankruptcy. In addition, the Plan did not specify
21 that BONY's first-position lien would be avoided; it only limited
22 what BONY would be paid from the estate. BONY also argued that
23 Blendheim was distinguishable. Unlike the dilatory creditor
24 there, BONY had attached supporting documents to its Claim
25 evidencing its standing to enforce the lien. Further, Lane had
26 never disputed the legitimacy of the underlying loan documents as
27 the debtors had in Blendheim.
28 BONY then filed a separate motion under Civil Rule 56(d)
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1 ("56(d) Motion"), requesting that the court either dismiss the MSJ
2 or continue it so that BONY could conduct further discovery. The
3 56(d) Motion was virtually identical to what BONY had submitted in
4 its opposition to the MSJ.
5 After hearings on the MSJ and the 56(d) Motion, the
6 bankruptcy court entered an order granting the MSJ to the extent
7 Lane sought to void BONY's first-position lien under § 506(d).
8 The court determined that the lien was void based on (1) the plain
9 language of § 506(d), (2) that the Claim had been previously
10 disallowed, (3) that the exceptions under § 506(d) did not apply,
11 and (4) Blendheim. The court denied BONY's 56(d) Motion. Lastly,
12 the court considered, but rejected, BONY's affirmative defenses of
13 estoppel and equity.
14 Upon further briefing on the issue of attorney's fees, the
15 bankruptcy court entered an order bifurcating Lane's attorney's
16 fees from the MSJ and treating it as a separate motion. On the
17 same day, the court entered a separate judgment for its § 506(d)
18 ruling in the MSJ. The court then entered an order awarding Lane
19 his attorney's fees for prosecuting the Lien Avoidance action,
20 defending the Reconsideration Motion, and for filing the fee
21 motion ("Fee Order"). BONY timely appealed the MSJ order, the
22 § 506(d) judgment and the Fee Order.
23 II. JURISDICTION
24 The bankruptcy court had jurisdiction under 28 U.S.C. §§ 133425 and 157(b)(2)(K). We have jurisdiction under 28 U.S.C. § 158.
26 III. ISSUES
27 1. Did the bankruptcy court err in voiding the first-position
28 lien under § 506(d)?
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1 2. Did the bankruptcy court abuse its discretion in denying
2 BONY's 56(d) Motion?
3 3. Did the bankruptcy court abuse its discretion in awarding
4 Lane his attorney's fees under Cal. Civ. Code § 1717?
5 IV. STANDARDS OF REVIEW
6 We review de novo the bankruptcy court's summary judgment
7 ruling. Ulrich v. Schian Walker, P.L.C. (In re Boates), 551 B.R.
8 428, 433 (9th Cir. BAP 2016). A bankruptcy court's conclusions of
9 law, including its interpretation of the Code, are reviewed de
10 novo. In re Blendheim, 803 F.3d at 489.
11 The bankruptcy court's decision not to permit additional
12 discovery under Civil Rule 56(d) is reviewed for an abuse of
13 discretion. Chance v. Pac-Tel Teletrac Inc., 242 F.3d 1151, 1161
14 n.6 (9th Cir. 2001) (applying former Civil Rule 56(f)). "We will
15 only find that the [bankruptcy] court abused its discretion if the
16 movant [under Civil Rule 56(d)] diligently pursued its previous
17 discovery opportunities, and if the movant can show how allowing
18 additional discovery would have precluded summary judgment."
19 Qualls by and through Qualls v. Blue Cross of Cal., Inc., 22 F.3d
20 839, 844 (9th Cir. 1994) (emphasis in original).
21 We review the bankruptcy court's award of attorney's fees
22 under state law for an abuse of discretion. Muniz v. United
23 Parcel Serv., Inc., 738 F.3d 214, 218-19 (9th Cir. 2013).
24 A bankruptcy court abuses its discretion if it applies the
25 wrong legal standard, misapplies the correct legal standard, or
26 makes factual findings that are illogical, implausible, or
27 without support in inferences that may be drawn from the facts
28 in the record. See TrafficSchool.com, Inc. v. Edriver Inc.,
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1 653 F.3d 820, 832 (9th Cir. 2011) (citing United States v.
2 Hinkson, 585 F.3d 1247, 1262 (9th Cir. 2009) (en banc)).
3 V. DISCUSSION
4 A. The bankruptcy court erred in voiding the first-position lien
under § 506(d) on these facts.
5
6 1. Summary judgment standards
7 Summary judgment is properly granted when no genuine issues
8 of disputed material fact remain, and, when viewing the evidence
9 most favorably to the non-moving party, the movant is entitled to
10 prevail as a matter of law. Civil Rule 56; Rule 7056; Celotex
11 Corp. v. Catrett, 477 U.S. 317, 322-23 (1986). Material facts are
12 those that may affect the outcome of the case under applicable
13 substantive law. Anderson v. Liberty Lobby, Inc., 477 U.S. 242,
14 248 (1986). And issues are genuine only if the trier of fact
15 reasonably could find in favor of the nonmoving party on the
16 evidence presented. Far Out Prods., Inc. v. Oskar, 247 F.3d 986,
17 992 (9th Cir. 2001) (citing Anderson, 477 U.S. at 248-49).
18 2. Analysis
19 Under the plain language of § 506(d)3, if the creditor's
20 secured claim is not allowed, its lien is void, unless the claim
21 was disallowed under § 502(b)(5), or (e) or was not an allowed
22 claim due only to the creditor's failure to file a proof of claim.
23 It is undisputed that neither exception under § 506(d) applies in
24
3
Section 506(d) provides:
25
To the extent that a lien secures a claim against the debtor
26 that is not an allowed secured claim, such lien is void,
unless —
27
(1) such claim was disallowed only under section 502(b)(5) or
28 502(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.
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1 this case.
2 a. Lack of standing is a substantive objection under
§ 502(b)(1).4
3
4 BONY contends the bankruptcy court erred in holding that the
5 earlier disallowance of the Claim necessarily resulted in lien
6 avoidance under the plain language of § 506(d) and Blendheim. In
7 Blendheim, the Ninth Circuit Court of Appeals held that the
8 bankruptcy court properly avoided the secured creditor's senior
9 lien under § 506(d) based on the earlier disallowance of the
10 creditor's claim. BONY argues that, unlike Blendheim, where the
11 claim was disallowed on the substantive ground of forgery, the
12 Claim here was disallowed on the non-substantive, procedural
13 ground of lack of standing. BONY argues that the bankruptcy court
14 erred by not acknowledging that procedural-based claim
15 disallowances do not trigger application of § 506(d) to void the
16 creditor's lien.
17 In essence, BONY wants us to equate a claim objection based
18 on lack of standing with that of a claim objection based on a
19 procedural deficiency, such as an untimely filed claim or a claim
20 filed without proper documentation to support it.5 BONY never
21
22 4
Section 502(b)(1) provides, in relevant part, that if an
objection to a claim is made, the court, after notice and a
23 hearing, shall determine the amount of such claim and allow such
claim in such amount, except to the extent that such claim is
24 unenforceable against the debtor and property of the debtor, under
any agreement or applicable law for a reason other than because
25 such claim is contingent or unmatured.
26 5
The debtors in Blendheim also objected to HSBC's lack of
documentation to support its claim. Although the court did not
27 discuss the merits of this objection, we held in two companion
cases — Heath v. American Express Travel Related Services Co. (In
28 re Heath), 331 B.R. 424 (9th Cir. BAP 2005) (considering claim
objections for lack of documentation in chapter 7 case), and
Campbell v. Verizon Wireless S-CA (In re Campbell), 336 B.R. 430(continued...)
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1 raised this exact argument before the bankruptcy court. However,
2 because the court implicitly ruled that lack of standing is a
3 substantive objection under § 502(b)(1), and because this is an
4 important issue of law and does not depend on the factual record,
5 we exercise our discretion to consider it. See El Paso City of
6 Tex. v. Am. W. Airlines, Inc. (In re Am. W. Airlines), 217 F.3d
7 1161, 1165 (9th Cir. 2000) (we have discretion to consider
8 arguments raised for the first time on appeal when the issue
9 presented is purely one of law and either does not depend on the
10 factual record developed below or the pertinent record has been
11 fully developed).
12 BONY asks us to consider the holdings of the Fourth, Seventh
13 and Eighth Circuits in Hamlett v. Amsouth Bank (In re Hamlett),
14 322 F.3d 342, 350 (4th Cir. 2003), In re Tarnow, 749 F.2d 464, 466
15 (7th Cir. 1984), and Shelton v. CitiMortgage, Inc. (In re
16 Shelton), 735 F.3d 749, 750 (8th Cir. 2013), to hold that lack of
17 standing is a procedural-based ruling in the context of a claim
18 objection and cannot support lien avoidance under § 506(d). In
19 each of these cases, the proof of claim was untimely filed. The
20 debtors sought claim disallowance on the sole basis of
21 untimeliness; they did not contest the validity of the underlying
22 debt or lien. In refusing to apply § 506(d), these courts
23 concluded that a claim filed late is tantamount to not filing a
24 claim at all – the exception found in § 506(d)(2). They reasoned
25
26 5
(...continued)
(9th Cir. BAP 2005) (same as to chapter 13 cases) — that claim
27 objections based solely on issues regarding the documentation
provided, without any contest as to the debtor's liability or the
28 amount of the debt, are not a sufficient basis for disallowing
claims; failure to comply with Rule 3001(c) is not included as a
ground for disallowance under § 502(b). In re Heath, 331 B.R. at
431-32; In re Campbell, 336 B.R. at 432.
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1 that voiding liens merely because of an untimely filed claim
2 violates the long-standing, pre-Code principle that "valid liens
3 pass through bankruptcy unaffected." In re Shelton, 735 F.3d at
4 748 (discussing Dewsnup, 502 U.S. at 418). Thus, an untimely
5 claim could not justify voiding the otherwise valid lien securing
6 it. Id. at 750; In re Hamlett, 322 F.3d at 349; In re Tarnow, 749
7 F.2d at 466-67.
8 First, we distinguish this case from Tarnow, Hamlett and
9 Shelton on its facts. Here, BONY timely filed its Claim. BONY
10 received proper notice of the Claim Objection and had a full and
11 fair opportunity to contest the disallowance of its Claim. BONY
12 failed to defend the Claim Objection, resulting in the Claim's
13 disallowance. It then proceeded to disappear for five years, only
14 to return when Lane filed his Lien Avoidance action seeking to
15 void the first-position lien.
16 Second, we simply disagree with BONY's argument that a claim
17 objection based on lack of standing is merely procedural and does
18 not concern enforceability of the underlying loan documents.
19 While such an objection may not concern the validity of the note
20 or deed of trust, as would the forgery objection in Blendheim, it
21 absolutely concerns that claimant's ability to enforce the
22 otherwise valid note or deed of trust.
23 In the context of a claim objection under § 502(b), the
24 question of whether standing is a substantive or procedural
25 objection has been addressed by only a few courts. However, those
26 courts are unanimous in stating that it is a substantive objection
27 under § 502(b)(1), which provides that a claim may be disallowed
28 to the extent it is unenforceable against a debtor under any
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1 applicable law, including state law. See In re Richter, 478 B.R.
2 30, 48-49 (Bankr. D. Colo. 2012); Pursley v. eCAST Settlement
3 Corp. (In re Pursley), 451 B.R. 213, 231-32 (Bankr. M.D. Ga.
4 2011); In re King, 2009 WL 960766, at *5 (Bankr. E.D. Va. Apr. 8,
5 2009); In re Cleveland, 396 B.R. 83, 93-94 (Bankr. N.D. Okla.
6 2008).
7 In Richter, the court held that "a challenge to standing is a
8 substantive objection under § 502(b)(1) because if a claimant has
9 not proven it is the owner of a claim with a right to payment
10 (i.e. the party with standing), the claim is unenforceable against
11 the debtor under state law." 478 B.R. at 49.
12 In Cleveland, one of the debtors' assertions in their claim
13 objection was that they had no liability to the claimant because
14 the claimant, an assignee, had not proven it was the owner of the
15 claim with a right to payment. 396 B.R. at 93. In ruling that
16 standing is a substantive objection in the claim objection
17 process, the court stated:
18 In the face of a substantive objection by a party in
interest, the Court is required to determine the amount of
19 each claim as of the petition date, and to allow the claim
in that amount, except to the extent the claim is
20 unenforceable against the debtor or the debtor's property
under applicable law. Claimants therefore must first
21 establish that they hold enforceable claims against the
respective Debtors.
22
23 Id.24 In Pursley, the debtors admitted to the existence of their
25 credit card debt but disputed the claimant's standing to enforce
26 the debt. 451 B.R. at 231. The court held:
27 To start, it is a substantive objection if a party claims not
to owe money to another party; that goes directly to the
28 validity of the claim. It is not enough 'that the debtor
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1 owes someone money; the issue is whether the debtor (and
hence the bankruptcy estate) owes it to the party filing the
2 proof of claim.'
3 Id. at 231-32 (quoting In re King, 2009 WL 960766, at *5). See
4 also In re Gilbreath, 395 B.R. 356, 365 n.3 (Bankr. S.D. Tex.
5 2008) (debtors' claim objection based on claimant's alleged lack
6 of standing due to no proof of the assignment was a substantive
7 objection).
8 We are persuaded by the reasoning of these courts, that a
9 challenge to a claimant's standing is a substantive objection
10 under § 502(b)(1), and not merely a procedural one, because it
11 goes directly to the claimant's ability to enforce the debt. Veal
12 v. Amercian Home Mortgage, Inc. (In re Veal), 450 B.R. 897 (9th
13 Cir. BAP 2011), also supports our holding:
14 In the context of a claim objection, both the
injury-in-fact requirement of constitutional standing and
15 the real party in interest requirement of prudential
standing hinge on who holds the right to payment under the
16 Note and hence the right to enforce the Note. . . .
Otherwise, the estate may pay funds to a stranger to the
17 case; indeed, the primary purpose of the real party in
interest doctrine is to ensure that such mistaken payments
18 do not occur.
19 Id. at 920. Further, § 502(b)(1) compels this result. It directs
20 a bankruptcy court to disallow a claim if it can be defeated by a
21 legitimate non-bankruptcy defense. "Inability to qualify as a
22 'person entitled to enforce' a promissory note under the UCC would
23 be one such defense." Tarantola v. Deutsche Bank Nat’l Tr. Co.
24 (In re Tarantola), 491 B.R. 111, 121 (Bankr. D. Ariz. 2013).
25 The only case BONY cites in support of its position is Green
26 Tree Servicing LLC v. Giusto (In re Giusto), 553 B.R. 778 (N.D.
27 Cal. 2016). There, the court denied attorney's fees to the debtor
28 under California law, because opposing relief from stay based on a
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1 movant's lack of standing "does not concern the enforceability of
2 the Note itself" and therefore was not an action on the contract.
3 Id. at 786. However, we noted the distinction between claim
4 objections and motions for relief from stay in Veal. In the
5 claim-objection context, standing is a prerequisite to the
6 evidentiary benefits of Rule 3001(f), and the claim allowance
7 process yields a final adjudication of the parties' underlying
8 rights. 450 B.R. at 918-19. On the other hand, a motion for
9 relief from stay is primarily procedural, handled in a summary
10 fashion, and if the motion is granted there will be a subsequent
11 determination of the parties' rights in another forum, generally
12 the state court. Id. at 914. As such, Giusto does not help BONY.
13 Accordingly, we decline to equate lack of standing to the
14 procedural deficiency of an untimely filed claim, and we could not
15 locate any case where a court has done so. Thus, the bankruptcy
16 court did not err in concluding that lack of standing is a
17 substantive objection under § 502(b)(1). And it matters not that
18 the Claim Disallowance Order was entered as a result of BONY's
19 default. In re Blendheim, 803 F.3d at 491.
20 b. Blendheim does not control.
21 This is where we part company with the bankruptcy court's
22 decision. We conclude that Blendheim is not applicable in this
23 case, because the bankruptcy court never adjudicated the validity
24 of the first-position lien and the underlying note in the Claim
25 Disallowance Order.
26 In Blendheim, the debtors filed a chapter 13 case after
27 receiving a chapter 7 discharge. 803 F.3d at 481. The senior
28 lienholder on debtors' residence, HSBC, filed a proof of claim in
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1 the case, to which debtors objected on the grounds of lack of
2 documentation (no promissory note) and that the copy of the note
3 they had previously received contained a forged signature. HSBC
4 failed to oppose the claim objection, and the bankruptcy court
5 entered a default order disallowing HSBC's claim. HSBC did not
6 appeal. Thereafter, debtors sought to void HSBC's lien under
7 § 506(d). After significant prompting from the court, HSBC moved
8 to set aside the claim disallowance order under Civil Rule 60(b),
9 some eighteen months after its entry. Id. at 481-82. Not finding
10 any grounds to reconsider, the bankruptcy court denied the motion.
11 Id. at 482. Ultimately, the bankruptcy court voided HSBC's lien
12 under § 506(d). Id.
13 The Ninth Circuit Court of Appeals affirmed, holding that,
14 "if a claim is disallowed, then under § 506(d) and consistent with
15 Dewsnup, the claim's associated lien is void." Id. at 490. The
16 Blendheim court distinguished Tarnow, Hamlett and Shelton from the
17 case before it. In those cases, the claims were disallowed for
18 timeliness and the creditors had no ability to defend their claims
19 on the merits. Id. at 490-91. Here, HSBC "slept on its rights"
20 and refused to defend its claim, which was challenged on the
21 substantive ground of forgery. Id. at 491. HSBC's failure to
22 respond was "more akin to a concession of error than a failure to
23 file a timely claim." Id. Thus, voidance of the lien under
24 § 506(d) was "not so severe a sanction[.]" Id.
25 Implicit in Blendheim's analysis is a conclusion that
26 § 506(d) should apply only when a claim disallowance addresses the
27 merits of the underlying debt. Indeed, other courts have
28 concluded this as well, relying on the long-standing pre-Code rule
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1 that liens pass through bankruptcy unaffected.6 See In re Tarnow,
2 749 F.2d at 465-66 (rejecting notion that claim disallowance for
3 any reason automatically voids the lien that secures it; lien
4 avoidance under § 506(d) should follow only when the lien's
5 validity was adjudicated in the claims allowance process); In re
6 Hamlett, 322 F.3d at 348 ("[Section] 506(d) only empowers the
7 bankruptcy court to void liens supporting disallowed claims if it
8 judges those liens to be invalid in substance."); Shelton v.
9 CitiMortgage, Inc. (In re Shelton), 477 B.R. 749, 752 (8th Cir.
10 BAP 2012) ("Liens pass through bankruptcy unless avoided on their
11 merits.") (citing In re Be-Mac Transport Co., 83 F.3d 1020, 1025
12 (8th Cir. 1996)).
13 BONY disputes the merits of the bankruptcy court's ruling
14 that it lacked standing to enforce the note. The Claim
15 Disallowance Order and the order denying reconsideration of that
16 order are final and were not appealed. As a result, BONY is stuck
17 with that ruling. Nonetheless, we cannot ignore the legal fiction
18 that BONY lacked standing to enforce the note. The documents
19 attached to the Claim established BONY's standing. As such, the
20 Claim Disallowance Order should never have been entered. However,
21 it was, and we must now deal with the effects of that erroneous
22 ruling.
23 After failing to respond to the Claim Objection, the Claim
24 was disallowed on the ground that BONY lacked standing and was not
25 the "person entitled to enforce" the note. See Cal. Comm. Code
26 § 3301. However, unlike the debtors in Blendheim, Lane never
27 attacked the validity of the underlying loan documents, and he
28 certainly never disputed getting the $560,000 loan for the
6
Dewsnup, 502 U.S. at 417.
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1 Property. In fact, he acknowledged throughout his bankruptcy case
2 that he owed "someone" money for the loan and that the debt was
3 secured by a first-position lien against the Property. The Plan
4 provided for payments to the person entitled to enforce the note
5 once that party appeared. All Lane disputed was whether BONY was
6 the person entitled to enforce the note.
7 This case is not Blendheim. The bankruptcy court never
8 judged the first-position lien to be invalid in substance, only
9 that BONY lacked standing to enforce it. Thus, even though Lane's
10 standing argument was a substantive objection to BONY's Claim, it
11 did not invalidate the lien. Accordingly, the court erred when it
12 applied § 506(d) to void the first-position lien.7
13
14 7
We take special note of the case Kohout v. Nationstar
Mortgage, LLC, 576 B.R. 290 (N.D.N.Y. 2017), which presented
15 similar facts. There, the debtors objected to Nationstar's proof
of claim for a mortgage loan on the grounds of absence of
16 documentation establishing a security interest in debtors'
property and an incorrectly-stated arrearage amount. Nationstar
17 failed to respond and the claim was disallowed based on what the
bankruptcy court determined were "procedural" objections. The
18 debtors then attempted to void Nationstar's lien under § 506(d).
Nationstar prevailed and debtors appealed, arguing that the lien
19 should have been voided because Nationstar forfeited its claim by
failing to present evidence of its validity and slept on its
20 rights, just like the creditor in Blendheim.
21 The district court affirmed but noted that the issue
presented a "close call." Id. at 295. Alarmed by Nationstar's
22 failure to respond to debtors' objection after filing a timely
proof of claim, the court further admonished:
23
Although Nationstar's predecessor-in-interest did not have
24 to file a proof of claim to preserve its lien, it chose to
do so, thereby subjecting itself to the jurisdiction of
25 the Bankruptcy Court and its rules. Nationstar's
predecessor-in-interest therefore should have remained
26 vigilant in defending the validity of its lien once
Debtors filed an objection instead of deciding, without
27 warning, that it would rely on the longstanding rule that
(continued...)
28
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1 c. Someone still holds a valid lien against the
Property.
2
3 Under California law, the deed of trust follows the note it
4 secures. See Yvanova v. New Century Mortg. Corp., 62 Cal. 4th
5 919, 927 (2016) (deed of trust follows the note it secures even
6 without a separate assignment). Once it was adjudicated that BONY
7 lacked standing and could not enforce the note, it was also
8 necessarily determined that BONY did not have the right to enforce
9 the deed of trust — i.e., the first-position lien. So, even
10 though BONY no longer had the ability to enforce the note and deed
11 of trust, the logical conclusion is that someone must have had
12 that right.
13 In this circumstance, the "true" lienholder never subjected
14 itself to the bankruptcy court's jurisdiction by filing a proof of
15 claim; nor was this never-filed claim deemed disallowed. Under
16 California law, the person who had standing and could enforce the
17 note still holds what must be presumed to be a valid lien. See
18 Dewsnup, 502 U.S. at 417-18 (liens pass through bankruptcy
19 unaffected). In the Lien Avoidance action, Lane served only BONY
20 and asked the court to avoid BONY's first-position lien. However,
21 the legal determination established as a result of Lane's actions
22
23 7
(...continued)
a creditor can ignore the claims allowance process without
24 losing its in rem rights. Indeed, it is only because no
determination was made as to the validity of Nationstar's
25 lien and the fact that Debtors conceded that Nationstar
holds a valid perfected mortgage lien that Nationstar does
26 not now face the same consequences as the creditor in
Blendheim.
27
Id. at 296 (emphasis added).
28
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1 and BONY's inaction was limited and specific; BONY did not have
2 the right to enforce the first lien to collect on an obligation
3 that Lane conceded he owed to some party. Therefore, Lane failed
4 to notice the proper lienholder of his intent to avoid the lien
5 under § 506(d), and the bankruptcy court violated an unknown
6 party's due process rights by expunging its deed of trust without
7 notice and an opportunity to be heard. See Tennant v. Rojas (In
8 re Tennant), 318 B.R. 860, 870 (9th Cir. BAP 2004) (due process
9 requires that a party must receive sufficient notice of any
10 potentially adverse action and the opportunity to be heard).
11 Because the bankruptcy court could not void a lien belonging
12 to a party not before it, it erred in granting Lane summary
13 judgment and voiding the first-position lien under § 506(d).
14 Thus, the first-position lien remains against the Property,
15 notwithstanding the final determination that BONY could not
16 enforce it. We realize this outcome puts the parties in a bit of
17 a quandary, albeit one of their own making. The outcome here is
18 dictated by their conduct or lack thereof and the unique facts of
19 the case, including Lane's objection to a claim that included
20 evidence of BONY's standing, BONY's failure to defend its claim
21 and the entry of a default order sustaining the claim objection on
22 these facts.
23 B. The bankruptcy court did not abuse its discretion in denying
BONY's 56(d) Motion.
24
25 To justify a continuance of summary judgment under Civil Rule
26 56(d), the movant must: (1) set forth in affidavit form the
27 specific facts it hopes to elicit through further discovery;
28 (2) show the facts sought exist; and (3) show that the sought-
-20-
1 after facts are essential to oppose summary judgment. Family Home
2 & Fin. Ctr. v. Fed. Home Loan Mortg. Corp., 525 F.3d 822, 827 (9th
3 Cir. 2008); Mackey v. Pioneer Nat'l Bank, 867 F.2d 520, 524 (9th
4 Cir. 1989) (party seeking postponement of summary judgment motion
5 must "show how additional discovery would preclude summary
6 judgment and why [it] cannot immediately provide 'specific facts'
7 demonstrating a genuine issue of material fact.") (citing former
8 Civil Rule 56(f)). The party seeking to conduct additional
9 discovery has the burden to put forth sufficient facts to show
10 that the evidence sought exists. Volk v. D.A. Davidson & Co., 816
11 F.2d 1406, 1416 (9th Cir. 1987).
12 The bankruptcy court determined that BONY failed to meet any
13 of the elements for granting a continuance under Civil Rule 56(d).
14 First, BONY failed to state with any specificity what evidence it
15 hoped to obtain. Second, BONY failed to establish that the
16 evidence it sought actually existed. Finally, BONY failed to
17 establish that it could obtain evidence of a material fact to
18 negate Lane's claim under § 506(d) and preclude summary judgment.
19 We agree. Not only was BONY's 56(d) Motion deficient, which was
20 sufficient grounds to deny it, the evidence BONY was seeking,
21 namely facts establishing Lane's intent and that his Claim
22 Objection lacked any factual or legal basis to support it, was
23 nothing more than an improper collateral attack on the final,
24 unappealed Claim Disallowance Order.
25 Accordingly, we conclude that the bankruptcy court did not
26 abuse its discretion when it denied BONY's 56(d) Motion.
27
28
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1 C. The bankruptcy court abused its discretion in awarding Lane
attorney's fees under Cal. Civ. Code § 1717.
2
3 California Civil Code § 17178 makes reciprocal an otherwise
4 unilateral contractual obligation to pay attorney's fees.
5 Santisas v. Goodin, 17 Cal. 4th 599, 610-11 (1998). The parties
6 agree that Cal. Civ. Code § 1717 provided the only basis for Lane
7 (or BONY) to recover attorney's fees.9 Three conditions must be
8 met before the statute applies: (1) the action in which the fees
9 are incurred must be an action on a contract; (2) the contract
10 must contain a provision stating that attorney's fees incurred to
11 enforce the contract shall be awarded either to one of the parties
12 or to the prevailing party; and (3) the party seeking fees must be
13 the party who prevailed on the contract. Penrod v. AmeriCredit
14 Fin. Servs., Inc. (In re Penrod), 802 F.3d 1084, 1087-88 (9th Cir.
15 2015). An action is "on a contract" when a party seeks to
16 enforce, or avoid enforcement of, the provisions of the contract.
17 Id. at 1088.
18 The bankruptcy court, applying Penrod, concluded that the
19 Claim Objection, Reconsideration Motion and Lien Avoidance action
20
21 8
Cal. Civ. Code § 1717 provides, in relevant part:
22 In any action on a contract, where the contract
23 specifically provides that attorney's fees and costs,
which are incurred to enforce that contract, shall be
24 awarded either to one of the parties or to the prevailing
party, then the party who is determined to be the party
25 prevailing on the contract, whether he or she is the party
specified in the contract or not, shall be entitled to
26 reasonable attorney's fees in addition to other costs.
27 Cal. Civ. Code § 1717(a).
9
28 The contractual basis for fees is found in the unilateral
attorney's fees provision in Paragraph 9 of the deed of trust.
-22-
1 were actions on a contract. It further concluded that Lane was
2 the prevailing party for both the Reconsideration Motion and Lien
3 Avoidance action. Accordingly, Lane could recover all of his fees
4 under Cal. Civ. Code § 1717. Even assuming the Lien Avoidance
5 action was an action "on a contract," as determined above, Lane is
6 not the prevailing party. Accordingly, the bankruptcy court
7 abused its discretion by awarding Lane his attorney's fees for
8 that action under Cal. Civ. Code § 1717.
9 On the other hand, Lane was successful on the Reconsideration
10 Motion. However, even again assuming that the bankruptcy court
11 correctly determined it was an action "on a contract" and that
12 fees could be awarded under Cal. Civ. Code § 1717, the court
13 applied an incorrect standard of law to award Lane his attorney's
14 fees. As relevant here, Civil Rule 54(d)(2), incorporated by Rule
15 7054, requires that a motion for attorney's fees be filed within
16 14 days after the entry of judgment. The 14-day period is not
17 jurisdictional and may be waived for cause, particularly where
18 there has been no prejudice to the opposing party. Kona Enters.,
19 Inc. v. Estate of Bishop, 229 F.3d 877, 889-90 (9th Cir. 2000).
20 It is undisputed that Lane's fee motion was untimely filed
21 with respect to the Reconsideration Motion. Whether to allow an
22 untimely motion for attorney's fees is within the discretion of
23 the court. Petrone v. Veritas Software Corp. (In re Veritas
24 Software Corp. Sec. Litig.), 496 F.3d 962, 973-74 (9th Cir. 2007)
25 (holding that district court did not abuse its discretion by
26 finding that a fee motion filed 15 days late was untimely, but
27 also holding that the district court would not have abused its
28 discretion in granting the fee motion).
-23-
1 In a case of an untimely motion for attorney's fees under
2 Civil Rule 54(d)(2)(B), the Ninth Circuit requires the court to
3 apply Civil Rule 6(b)(1)(B). Id. at 973. We apply Rule
4 9006(b)(1), which is substantively identical to Civil Rule
5 6(b)(1)(B). The court should grant the motion only when the
6 moving party missed the deadline due to "excusable neglect." To
7 determine whether neglect is excusable, the court must consider
8 the four factors set forth in Pioneer Investment Services Co. v.
9 Brunswick Associates Limited Partnership, 507 U.S. 380, 395
10 (1993). Id. See also Farris v. Ranade, 584 Fed. App'x 887, 890
11 (9th Cir. 2014) (applying "excusable neglect" standard and Pioneer
12 factors to untimely motion for attorney's fees under Civil Rule
13 54(d)(2)(B)).
14 The bankruptcy court did not apply this standard before
15 awarding Lane his attorney's fees for the Reconsideration Motion.
16 Therefore, it additionally abused its discretion by applying an
17 incorrect standard of law for these fees.
18 VI. CONCLUSION
19 We REVERSE the MSJ to the extent the bankruptcy court voided
20 the first-position lien under § 506(d), and we REVERSE the court's
21 later judgment voiding the lien. We AFFIRM the court's decision
22 to deny BONY's 56(d) Motion and to not grant a continuance of the
23 MSJ. Finally, because Lane was not the prevailing party in the
24 Lien Avoidance action, and because the court applied an incorrect
25 legal standard to award Lane his attorney's fees for the
26 Reconsideration Motion, we REVERSE the Fee Order awarding Lane all
27 of his attorney's fees under Cal. Civ. Code § 1717.
28
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