Can a lien be avoided based on 11 U.S.C. § 506(d) solely on the ground that a proof of claim was disallowed because it was filed late?

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26th Oct 2012

Can a lien be avoided based on 11 U.S.C. § 506(d) solely on the ground that a proof of claim was disallowed because it was filed late?

In Shelton v. CitiMortgage, Inc. (In re Shelton), — B.R. — (B.A.P. 8th Cir. Sept. 24, 2012), the Eighth Circuit Bankruptcy Appellate Panel concluded that a creditor’s lien could not be avoided solely on the ground that the creditor’s proof of claim was disallowed for being untimely filed. Although the plain language of § 506(d) states:

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.

The BAP stated “[w]e conclude 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.”

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