BKR: Denial of Proof of Claim VOIDS the Lien

This court decided in 2015 that if a party submits a proof of claim in support of a secured debt, the denial of the POC results in voiding the lien. Thus a successful attack in BKR Court on a POC submitted by or on behalf of a party who is a stranger to the debt not only loses the right to be paid in the BKR proceedings but also loses the lien as a matter of law. The express wording of the opinion means that the voiding of the lien survives the BKR proceedings which means it cannot be revived after discharge.

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see In-re-Blendheim – a Non-Allowed POC voids the Lien

Hat tip to Dan Gyurec and the offices of Stephen Lopez, Esq. for bringing this case to my attention.

Voiding the lien means there is no secured transaction and denying the proof of claim measn that the alleged “creditor” does not get paid.

We have all seen how judges in BKR court have allowed foreclosrues to continue based upon a motion for relief from stay. The test for granting such a motion is whether there is any colorable interest in the debt. If so, then the matter is referred back into the state system to determine the rights and obligations of the parties.

But this is different. A so-called mortgage lender or “successor” doesn’t need to file a proof of claim in a BKR proceeding in order for the lien to  survive the discharge. But if the “creditor” does file a proof of claim then the standard of proof is much higher for the creditor and they run the danger of having their proof of claim denied, since the entire claim is predicated, in most cases, on false representations and fabricated documents.

But if the creditor does not file a proof of claim, there is a provision in the rules that allows the debtor to file a proof of claim on behalf of the creditor. That may sound counterintuitive but there is a reason for the rule and it is applied. The debtor is then able to challenge the proof of claim filed on “behalf” of the alleged “Creditor” and the possibility of getting a denial of the proof of claim is increased.

Keep in mind that the “creditor” is in nearly all cases not a creditor as defined by law. It is a party claiming authority to enforce. Hence the proof of claim filed by the debtor for “creditor” would probably be filed on behalf of the party making the claim and potentially the the unknown investors who get notice of the proceeding through notice to the Trustee of the REMIC Trust.

Careful. You don’t want to argue too strongly that notice to an agent is notice to the investors because then you may be arguing and admitting that the claimant does indeed have a representative relationship with the investors, which actually they do not; but you could argue that the investors are only known to the Trustee and thus, even if the Trust was never funded and never acquired an interest in the loan, the investors only path of notice lies through the alleged Trustee.

As you can see from this case, you can raise the stakes and the burden of proof for the “creditor” by elevating the argument from a “motion to lift stay” which is nearly always granted to an objection to the proof of claim where the claim and the debt receive far more scrutiny.

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