There was an interesting case out of Oregon Bankruptcy Court.  The case is Monk v. LSI Title Company of Oregon (In re Monk), 2011 WL 212381 (Bankr. D. Ore. Jan. 21, 2011).
In this case a Debtor filed Chapter 13 bankruptcy.  The alleged mortgage creditor “PCFS Mortgage Company” filed a proof of claim.  The Chapter 13 Trustee was not satisfied that PCFS had a secured lien or perfected interest and therefore challenged the Proof of Claim.  PCFS failed to respond with any type of opposition and the lien was “disallowed” under Section 506(d) of the Bankruptcy Code.  This Section declares:
(d) To the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void…….

The Chapter 13 debtor completed their Chapter 13 plan and a discharge was entered (no chapter 13 plan payments were made to PCFS).  The Discharge wiped out any debt that remained as it was unsecured debt.

However, after the Bankruptcy discharge, the successor in interest to PCFS Mortgage (Litton Loan) sought to enforce the debt and to foreclose on the property.  The debtor filed a motion to reopen the bankruptcy and filed an adversary proceeding to strip the lien, quiet title to the property and seeking an injunction to halt the foreclosure and for sanctions for the discharge violation (Litton should not be trying to collect on a debt that was previously discharged).

Litton responded and sought to dismiss the claims against them and dissolve the injunction.  The Court, for the most part, found for the Debtor and upheld the preliminary injunction and the action to strip the lien and quiet title, and for sanctions for discharge violation.  Apparently there was a loan modification agreement entered into after the Chapter 13 discharge.
Here is what Litton argued in trying to dismiss the case.

1) Plaintiffs do not have a private right of action under the discharge injunction and no violation of the discharge injunction occurred under the facts of this case.
2) Plaintiffs’ Chapter 13 Plan did not affect the lien of the Defendants, which rode through bankruptcy unaffected unaffected by the order disallowing the claim of PCFS, Litton’s predecessor in interest.
3) Plaintiffs entered into a novation of the loan after the discharge order was entered in the Chapter 13 case.
4) The bankruptcy court lacks post-confirmation subject matter jurisdiction over the claims set forth in the Complaint.
5) Plaintiffs have failed to state a claim for rescission based on the foregoing and the fact that they failed to plead that they could repay moneys owed to the Defendants in order to completely unwind the transaction.
6) The claim for violation of the FDCPA should be dismissed based on the foregoing and because: a) Defendants are not “debt collectors” within the meaning of the FDCPA; b) the FDCPA claim is based on alleged conduct outside the statute of limitations; and c) no FDCPA claim lies for alleged violations of the discharge injunction.

Here is some language from the holding in the case:
Because PCFS’s claim was “disallowed,” it was not an “allowed secured claim,” and the related lien was void pursuant to § 506(d). Defendant’s claim was not of the type described in § 506(d)(1), and its claim was disallowed for reasons other than its failure to file a proof of claim.
Thus, when the discharge order was entered in Debtors’ case, Defendant held a “disallowed” claim and a void lien.  Section 1328 provides in part:(a) As soon as practicable after completion by the debtor of all payments under the plan, unless the court approves a written waiver of discharge executed by the debtor after the order for relief under this chapter, the court shall grant the debtor a discharge of all debts provided for by the plan or disallowed under section 502 of this title, except any debts—(1) provided for under section 1322(b)(5) of this title.
Defendant argues that Debtors did not file an amended Plan after disallowance of its claim and that the Plan continued to provide for ongoing payments to Defendant on the long-term debt and that the Plaintiffs did, in fact, continue to make the ongoing payments to PCFS even after the claim was disallowed.

It follows, argues Defendant, that the debt was not discharged under the exception at § 1328(a)(1).
Defendant’s argument fails for the following reason: The debt was disallowed under section 502 and, as provided by § 1328(a), it was discharged. A “debt” is defined at § 101(12) as “liability on a claim.” A “claim” is defined as a “right to payment ….“ § 101(5)(A). Once the claim was disallowed, PCFS no longer had a right to payment and thus no longer had a “claim” or a “debt.” As it no longer possessed a “debt,” it follows that it did not have a “debt [ ] provided for under section 1322(b)(5),” and cannot use § 1328(a)(1) to except its nonexistent debt from discharge.

This case shows the importance of objecting to proofs of claim in bankruptcy and demanding that the alleged creditor show its legal right to collect the alleged debt owed.  We can no longer take it for granted that the banks have dotted their i’s and crossed their t’s and that they are a secured lender just because they say so.  Proof of the claim is required.  To me, that is an endorsed note from the originator of the loan up to the securitized trustee who claims to own the note.   Interesting case for sure.

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