Alvarez v. HSBC Bank United States (In re Alvarez)

• Decision Date: 23 October 2013
• Docket Number: No. 12–1156.,12–1156.
• Citation: 733 F.3d 136
• Parties: In re Jose Alfredo Pineda ALVAREZ, Debtor. Jose Alfredo Alvarez; Meyber L. Alvarez, Plaintiffs–Appellants, v. HSBC Bank USA, National Association, Defendant–Appellee, and Nancy Spencer Grigsby, Trustee. Lartease Martrell Tiffith, Court–Assigned Amicus Counsel.
• Court: U.S. Court of Appeals — Fourth Circuit

733 F.3d 136

In re Jose Alfredo Pineda ALVAREZ, Debtor.Jose Alfredo Alvarez; Meyber L. Alvarez, Plaintiffs–Appellants,

v. HSBC Bank USA, National Association, Defendant–Appellee,andNancy Spencer Grigsby, Trustee.Lartease Martrell Tiffith, Court–Assigned Amicus Counsel.

No. 12–1156.

United States Court of Appeals, Fourth Circuit.

Argued: Sept. 17, 2013.

Decided: Oct. 23, 2013.

John Douglas Burns, Burns Law Firm, LLC, Greenbelt, Maryland, for Appellants.

Lartease Martrell Tiffith, O'Melveny & Myers, LLP, Washington, D.C., as Court–Assigned Amicus Counsel.

Before GREGORY, DAVIS, and KEENAN, Circuit Judges.

Affirmed by published opinion. Judge KEENAN wrote the opinion, in which Judge GREGORY and Judge DAVIS joined.

BARBARA MILANO KEENAN, Circuit Judge:

In this case, we consider a district court's judgment upholding a bankruptcy court's refusal to “strip off” a “valueless lien” against certain real property that a debtor owned with his non-debtor spouse as tenants by the entireties.¹ On appeal, the debtor and his spouse contend that the bankruptcy court erred in refusing to strip off the lien on the ground that the spouse's property interest was not part of the bankruptcy estate.

Upon our review, we conclude that the statutory provisions authorizing a strip off, and applicable Maryland property law, do not permit a bankruptcy court to alter a non-debtor's interest in property held in a tenancy by the entirety. Therefore, we hold that the bankruptcy court correctly determined that it lacked authority to strip off the debtor's valueless lien because only the debtor's interest in the estate, rather than the complete entireties estate, was before the bankruptcy court. We affirm the district court's judgment.

I.

A.

We begin by describing the statutory framework for stripping off a valueless lien in a bankruptcy proceeding. Generally, a creditor's lien on real property passes through bankruptcy unaffected and “stays with the real property until the foreclosure,” based on the bargained-for agreement between a mortgagor and mortgagee. Dewsnup v. Timm, 502 U.S. 410, 417, 112 S.Ct. 773, 116 L.Ed.2d 903 (1992); accord Cen–Pen Corp. v. Hanson, 58 F.3d 89, 92 (4th Cir.1995). Thus, while a discharge in bankruptcy eliminates a lienholder's in personam rights against a debtor, the lienholder's in rem rights in the collateral property ordinarily remain intact despite a discharge. Dewsnup, 502 U.S. at 418, 112 S.Ct. 773 (citing Johnson v. Home State Bank, 501 U.S. 78, 84, 111 S.Ct. 2150, 115 L.Ed.2d 66 (1991)); Cen–Pen Corp., 58 F.3d at 92.

This Court recently determined, however, consistent with every other circuit to have considered the question, that in a typical Chapter 13 proceeding, a bankruptcy court has the authority to strip off a completely valueless lien on a debtor's primary residence, thereby eliminating a lienholder's in rem rights against the collateral property (strip off or lien strip). Branigan v. Davis, 716 F.3d 331, 335–36 (4th Cir.2013) (citing other circuit cases addressing the issue). We explained that such authority is based on application of 11 U.S.C. §§ 506(a) and 1322(b)(2).²Id. at 335.

To effectuate a lien strip, a bankruptcy court first considers the valuation provision contained in § 506(a), which states:

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 ... and is an unsecured claim to the extent that the value of such creditor's interest ... is less than the amount of such allowed claim.

11 U.S.C. § 506(a)(1). Thus, the status of a lienholder's claim “as secured or unsecured depends on the value of the collateral.” Branigan, 716 F.3d at 335.

A bankruptcy court next applies § 1322(b)(2), which addresses the debtor's reorganization plan and permits debtors in such plans to modify the rights of holders of unsecured claims.³ “The end result is that section 506(a), which classifies [completely] valueless liens as unsecured claims, operates with section 1322(b)(2) to permit a bankruptcy court, in a Chapter 13 case, to strip off a lien against a primary residence with no value.” Branigan, 716 F.3d at 335.

When a bankruptcy court confirms a debtor's reorganization plan, the plan binds the debtor and his creditors. 11 U.S.C. § 1327(a). A lien strip becomes effective and permanently eliminates a lienholder's in rem rights against the collateral property upon completion of a debtor's reorganization plan. Branigan, 716 F.3d at 338.

B.

In the present case, Jose Alvarez (Mr. Alvarez) filed a Chapter 13 petition in the United States Bankruptcy Court for the District of Maryland. In that petition, Mr. Alvarez identified his property, including his interest in his primary residence located in Maryland (the property or the entireties property). The property is owned by Mr. Alvarez and his wife, Meyber L. Alvarez (Mrs. Alvarez), as tenants by the entireties. Mrs. Alvarez was not a party to Mr. Alvarez's bankruptcy petition, nor did she file a separate bankruptcy petition.

At the time Mr. Alvarez's bankruptcy petition was filed, the property had a value of $442,400.00 and was encumbered by two mortgage liens.⁴ The first-priority mortgage lien, held by Chase Home Finance, had a balance of $447,572.84. HSBC Mortgage Service (HSBC) held the second-priority mortgage lien with a balance of $75,455.08. Thus, the value of the property when the petition was filed was less than the full amount owed on the first-priority lien, rendering the second-priority lien valueless.

In accordance with the Federal Rules of Bankruptcy Procedure, Mr. and Mrs. Alvarez jointly filed a complaint in the bankruptcy court against HSBC. In their complaint, the Alvarezes maintained that because HSBC's lien was completely valueless and, thus, was unsecured under 11 U.S.C. § 506(a), they were entitled to strip off the lien.⁵ The bankruptcy court denied the requested relief, concluding that the lien on the entireties property could not be stripped because both tenants by the entireties had not filed a petition for bankruptcy.⁶

The district court affirmed the bankruptcy court's decision, and the Alvarezes timely filed the present appeal. We have jurisdiction under 28 U.S.C. § 158(d). See Educ. Credit Mgmt. Corp. v. Kirkland, 600 F.3d 310, 314 (4th Cir.2010); Sumy v. Schlossberg, 777 F.2d 921, 922–23 (4th Cir.1985).

II.

The question before us is whether a bankruptcy court, in a Chapter 13 case filed by only one spouse, can strip off a valueless lien on property that the debtor and his non-debtor spouse own as tenants by the entireties. This is an issue of first impression among federal appellate courts, and bankruptcy courts have reached different conclusions in answering the question. Compare In re Hunter, 284 B.R. 806 (Bankr.E.D.Va.2002) (applying Pennsylvania law and concluding that an individual debtor spouse cannot strip off a lien on entireties property), and In re Pierre, 468 B.R. 419 (Bankr.M.D.Fla.2012) (reaching same result under Florida law), with, e.g., In re Strausbough, 426 B.R. 243 (Bankr.E.D.Mich.2010) (applying Michigan law and determining that an individual debtor can strip a valueless lien on entireties property).

When we review a district court's judgment affirming a bankruptcy court's decision, we employ a de novo standard and consider directly the bankruptcy court's findings of fact and conclusions of law. Branigan, 716 F.3d at 334 (citing Morris v. Quigley, 673 F.3d 269, 271 (4th Cir.2012)). We will not reverse the bankruptcy court's factual findings absent clear error and review that court's legal conclusions de novo. Id. Also, because this appeal involves a debtor's rights in real property, we consider established principles of Maryland law regarding property held in a tenancy by the entirety. See Butner v. United States, 440 U.S. 48, 54, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979) (“Congress has generally left the determination of property rights in the assets of a bankrupt's estate to state law.”).

Under Maryland law, a tenancy by the entirety is a joint tenancy of spouses with rights of survivorship between the spouses. Schlossberg v. Barney, 380 F.3d 174, 178 (4th Cir.2004) (citing Bruce v. Dyer, 309 Md. 421, 524 A.2d 777, 780 (1987)). In such an estate, the property is not owned by either spouse individually, but by the marital unit, with each spouse having an undivided interest in the whole property. Id.;Arbesman v. Winer, 298 Md. 282, 468 A.2d 633, 640 (1983).

A tenancy by the entirety is created under Maryland law only when the four essential common law unities co-exist. Bruce, 524 A.2d at 780 (internal citation omitted). Those unities require “that the tenants enjoy identical interests; enjoy identical, undivided possession; and that the tenancy commence at the same time via the same instrument.” Id.

While both spouses are alive, a tenancy by the entirety can be severed only by divorce or by the joint action of both spouses. Id. at 781. One spouse alone cannot alienate, convey, or encumber his or her interest in the entireties property. United States v. Gresham, 964 F.2d 1426, 1430 n. 7 (4th Cir.1992) (citing Beall v. Beall, 291 Md. 224, 434 A.2d 1015, 1021 (1981)). Also, the tenancy cannot be severed by individual judgment creditors during the tenants' joint, married life. Beall, 434 A.2d at 1021.

When an individual files a bankruptcy petition, a bankruptcy estate is created by operation of law. 11 U.S.C. §§ 301, 541(a). Subject to some exceptions not relevant here, 11 U.S.C. § 541 mandates that a debtor's bankruptcy estate contain “all legal or equitable interests of the debtor in property as of the commencement of the case.” 11 U.S.C. § 541(a)(1). Thus, under this provision, a debtor's undivided interest in entireties property is part of that debtor's bankruptcy estate. In re Ford, 3 B.R. 559, 571 (Bankr.D.Md.1980), aff'd sub nom. Greenblatt v....