In re Blendheim

Robert and Darlene Blendheim (debtors) filed for Chapter 7 bankruptcy and received a discharge of their unsecured debts. One day after the discharge, while the Chapter 7 case was still pending, the Blendheims filed a Chapter 13 bankruptcy petition. The Blendheims thus became what are colloquially known as “Chapter 20 debtors” (i.e., 7 + 13). The Blendheims’ Chapter 13 schedule listed their home’s value as $450,000. HSBC Bank USA, N.A. (HSBC) (creditor) held a first-position lien on the home securing a $347,900 debt. HSBC sought allowance of its claim in the Chapter 13 proceeding, but the Blendheims objected, asserting that HSBC had not properly documented its proof of claim. HSBC never responded to the objection, and the bankruptcy court disallowed HSBC’s claim. The Blendheims subsequently sought to void HSBC’s lien under 11 U.S.C. § 506(d). Section 506(d) provided that to the extent a lien secured a claim against a debtor that was “not an allowed secured claim,” the lien was void. The Blendheims asserted that HSBC’s lien was void because HSBC’s claim had been disallowed. HSBC moved for reconsideration of the disallowance order, but the bankruptcy court denied the motion and voided HSBC’s lien under § 506(d). During plan-confirmation proceedings, HSBC asserted that the lien needed to be reinstated upon completion of the Blendheims’ Chapter 13 plan. HSBC argued that the only way for the Blendheims to permanently void the lien would be through discharge, but under 11 U.S.C. § 1328(f), the Blendheims were ineligible for Chapter 13 discharge because they had obtained a Chapter 7 discharge within the previous four years. The bankruptcy court rejected HSBC’s argument and confirmed a Chapter 13 plan that allowed the Blendheims to permanently void HSBC’s lien once the plan was completed. The district court affirmed the bankruptcy court’s decision and also rejected HSBC’s argument that the Blendheims had not filed their Chapter 13 case in good faith because they filed while their Chapter 7 case remained pending. HSBC appealed.