502 U.S. 410 (1992), 90-741, Dewsnup v. Timm

Docket Nº:No. 90-741
Citation:502 U.S. 410, 112 S.Ct. 773, 116 L.Ed.2d 903, 60 U.S.L.W. 4111
Party Name:Dewsnup v. Timm
Case Date:January 15, 1992
Court:United States Supreme Court
 
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Page 410

502 U.S. 410 (1992)

112 S.Ct. 773, 116 L.Ed.2d 903, 60 U.S.L.W. 4111

Dewsnup

v.

Timm

No. 90-741

United States Supreme Court

Jan. 15, 1992

        Argued Oct. 15, 1991

        CERTIORARI TO THE UNITED STATES COURT OF APPEALS

        FOR THE TENTH CIRCUIT

        Syllabus

        Petitioner Dewsnup, the debtor in a case under Chapter 7 of the Bankruptcy Code, filed an adversary proceeding, contending that the debt of approximately $120,000 that she owed to respondents exceeded the fair market value of the land securing the debt, and that, therefore, the Bankruptcy Court should reduce respondents' lien on the land to the land's fair market value pursuant to 11 U.S.C. § 506(d), which provides that a lien is void "[t]o the extent that [it] secures a claim against the debtor that is not an allowed secured claim." Dewsnup reasoned that respondents would have such an "allowed secured claim" only to the extent of the judicially determined value of their collateral, since, under § 506(a),

[a]n allowed claim of a creditor secured by a lien on property in which the estate has an interest . . . is a secured claim to the extent of the value of such creditor's interest in the estate's interest in such property.

        The court determined that the then value of the land in question was $39,000, but refused to grant the requested relief and entered a judgment of dismissal with prejudice. The District Court and the Court of Appeals affirmed.

        Held: Section 506(d) does not allow Dewsnup to "strip down" respondents' lien to the judicially determined value of the collateral, because respondents' claim is secured by a lien, and has been fully allowed pursuant to § 502, and, therefore, cannot be classified as "not an allowed secured claim" for purposes of the lien-voiding provision of § 506(d). Pp. 414-420.

        (a) The contrasting positions of the parties and their amici demonstrate that § 506(d) and its relationship to other Code provisions are ambiguous. Pp. 414-416.

       (b) Although not without its difficulty, the position espoused by respondents and the United States as amicus curiae -- that the words "allowed secured claim" in § 506(d) need not be read as an indivisible term of art defined by reference to § 506(a), but should be read term-by-term to refer to any claim that is, first, allowed, and, second, secured -- generally is the better of the several approaches argued in this case. Were this Court writing on a clean slate, it might be [112 S.Ct. 775] inclined to agree with Dewsnup that the quoted words must take the same meaning in § 506(d) as in § 506(a). However, the practical effect of Dewsnup's argument is to freeze the creditor's secured interest at the judicially determined

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valuation in contravention of the pre-Code rule that liens on real property pass through bankruptcy unaffected. Congress must have enacted the Code with a full understanding of the latter rule, and, given the statutory ambiguity here, to attribute to Congress the intention to grant a debtor the broad new remedy against allowed claims to the extent that they become "unsecured" for purposes of § 506(a) without mentioning the new remedy somewhere in the Code or in the legislative history is implausible, and contrary to basic bankruptcy principles. Pp. 416-420.

        908 F.2d 588 (CA10 1990), affirmed.

        BLACKMUN, J., delivered the opinion of the Court, in which REHNQUIST, C.J., and WHITE, STEVENS, O'CONNOR, and KENNEDY, JJ., joined. SCALIA, J., filed a dissenting opinion, in which SOUTER, J., joined, post, p. 420. THOMAS, J., took no part in the consideration or decision of the case.

        BLACKMUN, J., lead opinion

        JUSTICE BLACKMUN delivered the opinion of the Court.

        We are confronted in this case with an issue concerning § 506(d) of the Bankruptcy Code, 11 U.S.C. § 506(d).[1] May

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a debtor "strip down" a creditor's lien on real property to the value of the collateral, as judicially determined, when that value is less than the amount of the claim secured by the lien?

        I

        On June 1, 1978, respondents loaned $119,000 to petitioner Aletha Dewsnup and her husband, T. LaMar Dewsnup, since deceased. The loan was accompanied by a Deed of Trust granting a lien on two parcels of Utah farmland owned by the Dewsnups.

       Petitioner defaulted the following year. Under the terms of the Deed of Trust, respondents at that point could have proceeded against the real property collateral by accelerating the maturity of the loan, issuing a notice of default, and selling the land at a public foreclosure sale to satisfy the debt. [112 S.Ct. 776] See also Utah Code Ann. §§ 571-20 to 57-1-37 (1990 and Supp.1991).

Page 413

        Respondents did issue a notice of default in 1981. Before the foreclosure sale took place, however, petitioner sought reorganization under Chapter 11 of the Bankruptcy Code, 11 U.S.C. § 1101 et seq. That bankruptcy petition was dismissed, as was a subsequent Chapter 11 petition. In June, 1984, petitioner filed a petition seeking liquidation under Chapter 7 of the Code, 11 U.S.C. § 701 et seq. Because of the pendency of these bankruptcy proceedings, respondents were not able to proceed to the foreclosure sale. See 11 U.S.C. § 362.

        In 1987, petitioner filed the present adversary proceeding in the Bankruptcy Court for the District of Utah seeking, pursuant to § 506, to "avoid" a portion of respondents' lien. App. 3. Petitioner represented that the debt of approximately $120,000 then owed to respondents exceeded the fair market value of the land, and that, therefore, the Bankruptcy Court should reduce the lien to that value. According to petitioner, this was compelled by the interrelationship of the security-reducing provision of § 506(a) and the lien-voiding provision of § 506(d). Under § 506(a) ("An allowed claim of a creditor secured by a lien on property in which the estate has an interest. . . . is a secured claim to the extent of the value of such creditor's interest in the estate's interest in such property"), respondents would have an "allowed secured claim" only to the extent of the judicially determined value of their collateral. And under § 506(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 court would be required to void the lien as to the remaining portion of respondents' claim, because the remaining portion was not an "allowed secured claim" within the meaning of § 506(a).

        The Bankruptcy Court refused to grant this relief. In re Dewsnup, 87 B.R. 676 (1988). After a trial, it determined that the then value of the land subject to the Deed of Trust was $39,000. It indulged in the assumption that the property had been abandoned by the trustee pursuant to § 554,

Page 414

and reasoned that, once property was abandoned, it no longer fell within the reach of § 506(a), which applies only to "property in which the estate has an interest," and therefore was not covered by § 506(d).

        The United States District Court, without a supporting opinion, summarily affirmed the Bankruptcy Court's judgment of dismissal with prejudice. App. to Pet. for Cert. 12a.

        The Court of Appeals for the Tenth Circuit, in its turn, also affirmed. In re Dewsnup, 908 F.2d 588 (1990). Starting from the "fundamental premise" of § 506(a) that a claim is subject to reduction in security only when the estate has an interest in the property, the court reasoned that, because the estate had no interest in abandoned property, § 506(a) did not apply (nor, by implication, did § 506(d)). 908 F.2d at 590-591. The court then noted that a contrary result would be inconsistent with § 722, under which a debtor has a limited right to redeem certain personal property. Id. at 592.

        Because the result reached by the Court of Appeals was at odds with that reached by the Third Circuit in Gaglia v. First Federal Savings & Loan Assn., 889 F.2d 1304, 1306-1311 (1989), and was expressly recognized by the Tenth Circuit as being in conflict, see 908 F.2d at 591, we granted certiorari. 498 U.S. 1081 (1991).

        II

       As we read their several submissions, the parties and their amici are not in agreement in their respective approaches to the problem of statutory interpretation that confronts us. Petitioner-debtor takes the position that § 506(a) and § 506(d) are complementary, and to be read together. Because, under § 506(a), a claim is secured only to the extent of the judicially determined value of the real property on which the lien is fixed, a debtor [112 S.Ct. 777] can void a lien on the property pursuant to § 506(d) to the extent the claim is no longer secured, and thus is not "an allowed secured claim." In other words, § 506(a) bifurcates classes of claims allowed under § 502 into secured

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claims and unsecured claims; any portion of an allowed claim deemed to be unsecured under § 506(a) is not an "allowed secured claim" within the lien-voiding scope of § 506(d). Petitioner argues that there is no exception for unsecured property abandoned by the trustee.

        Petitioner's amicus argues that the plain language of § 506(d) dictates that the proper portion of an undersecured lien on property in a Chapter 7 case is void, whether or not the property is abandoned by the trustee. It further argues that the rationale of the Court of Appeals would lead to evisceration of the debtor's right of redemption and the elimination of an undersecured creditor's ability to participate in the distribution of the estate's assets.

        Respondents primarily assert that § 506(d) is not, as petitioner would have it, "rigidly tied" to § 506(a), Brief for Respondents 7. They argue that § 506(a) performs the function of classifying claims by true secured status at the time of distribution of the estate to ensure fairness to unsecured claimants. In...

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