Dewsnup, In re

• Citation: 908 F.2d 588
• Decision Date: 11 July 1990
• Docket Number: No. 89-4067,89-4067
• Parties: , 23 Collier Bankr.Cas.2d 1110, 21 Bankr.Ct.Dec. 539, Bankr. L. Rep. P 73,533 In re Lamar DEWSNUP and Aletha Dewsnup, Debtors. Lamar DEWSNUP, Plaintiff, Aletha Dewsnup, Plaintiff-Appellant, v. Louis L. TIMM, et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 588

908 F.2d 588

59 USLW 2117, 23 Collier Bankr.Cas.2d 1110,

21 Bankr.Ct.Dec. 539, Bankr. L. Rep. P 73,533

In re Lamar DEWSNUP and Aletha Dewsnup, Debtors.

Lamar DEWSNUP, Plaintiff, Aletha Dewsnup, Plaintiff-Appellant, v. Louis L. TIMM, et al., Defendants-Appellees.

No. 89-4067.

United States Court of Appeals,

Tenth Circuit.

July 11, 1990.

William Thomas Thurman and Scott C. Pierce, of McKay, Burton & Thurman, Salt Lake City, Utah, for plaintiff-appellant.

Michael Z. Hayes, of Mazuran, Verhaaren & Hayes, P.C., Salt Lake City, Utah, for defendants-appellees.

Before ANDERSON, BARRETT and BALDOCK, Circuit Judges.

PER CURIAM.

The issue presented in this appeal is whether a Chapter 7 debtor may use 11 U.S.C. Sec. 506(d) of the Bankruptcy Code to void the undersecured portion of a lien on real property which has been abandoned by the bankruptcy estate. ¹

Facts

Debtors Aletha and Lamar Dewsnup filed a Chapter 7 bankruptcy petition in 1984. Within that case, they commenced this adversary proceeding to determine the validity and extent of a note and trust deed held on real property they own in Millard County, Utah. The two parcels of land are used for farming and are not the debtors' primary residence. The various appellees are the secured creditors of the property.

At the trial of this matter, debtors argued they could use section 506(d) to redeem this property. Specifically, they asserted this section allows them to void creditors' liens to the extent they exceed the fair market value of the parcels. At the time of trial, the bankruptcy court valued the land at $39,000. The note and trust deed held by creditors are far in excess of that amount. Debtors assert section 506(d) allows them to fully redeem the property by tendering the assessed market value to creditors in cash. Although it was not entirely clear at the time of trial, the bankruptcy trustee has abandoned this property pursuant to 11 U.S.C. Sec. 554(a). ²

The bankruptcy court dismissed debtors' argument, holding section 506(d) was not intended to be used in this manner. See In re Dewsnup, 87 B.R. 676, 683 (Bankr.D.Utah 1988). The district court affirmed. On appeal, debtors urge this court to reject the bankruptcy court's reasoning and join the majority of courts which have allowed avoidance under section 506(d).

Discussion

Although courts are clearly divided on this issue, a majority have adopted the position which debtors urge. See In re Gaglia, 889 F.2d 1304, 1306-11 (3d Cir.1989); In re Brouse, 110 B.R. 539, 541 (Bankr.D.Colo.1990); In re Moses, 110 B.R. 962, 963-64 (Bankr.N.D.Okla.1990); In re Zlogar, 101 B.R. 1, 7 (Bankr.N.D.Ill.1989); In re Tanner, 14 B.R. 933, 939 (Bankr.W.D.Pa.1981). Included within this majority is the Third Circuit, which is the only circuit court to specifically address this issue. See Gaglia, 889 F.2d at 1306. Two other circuit courts have addressed questions which are tangentially related, and have recognized a debtor's ability to void liens under section 506(d). See In re Folendore, 862 F.2d 1537, 1539 (11th Cir.1989); In re Lindsey, 823 F.2d 189, 191 (7th Cir 1987).

However, a strong minority of courts have rejected this approach, concluding it is inconsistent with the intended purpose of the section and is unfair to lienholders. See In re Shrum, 98 B.R. 995, 1002 (Bankr.W.D.Okla.1989); In re McLaughlin, 92 B.R. 913, 915 (Bankr.S.D.Cal.1988); Dewsnup, 87 B.R. at 683; In re Maitland, 61 B.R. 130, 134-35 (Bankr.E.D.Va.1986).

Courts denying relief under this section have stated various reasons for doing so, including: 1) that abandoned property is not administered by the estate and therefore sections 506(a) and (d) have no application; 2) that allowing this relief inequitably gives debtors more in a Chapter 7 liquidation than they would receive in the reorganization chapters; and finally, 3) that allowing avoidance pursuant to section 506(d) renders the redemption provision found in Code section 722 meaningless. Because we agree with the district court's sound reasoning in this case, we reject the analysis of the Third Circuit in Gaglia and affirm.

Code sections 506(a) and (d) provide the starting point for our analysis. Those sections state:

(a) An allowed claim of a creditor secured by a lien on property in which the estate has an interest, or that is subject to setoff under section 553 of this title, is a secured claim to the extent of the value of such creditor's interest in the estate's interest in such property, or to the extent of the amount subject to setoff, as the case may be, and is an unsecured claim to the extent that the value of such creditor's interest or the amount so subject to setoff is less than the amount of such allowed claim. Such value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property, and in conjunction with any hearing on such disposition or use or on a plan affecting such creditor's interest.

....

(d) To the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void unless--

(1) such claim was disallowed only under section 502(b)(5) or 502(e) of this title; or

(2) such claim is not an allowed secured claim due only to the failure of any entity to file a proof of such claim under section 501 of this title.

11 U.S.C. Secs. 506(a) and (d).

These sections were included in the Code to govern the definition and treatment of secured claims. United States v. Ron Pair Enters., Inc., 489 U.S. 235, 109 S.Ct. 1026, 1029, 103 L.Ed.2d 290 (1989). Application of subsection (a) results in a bifurcation of previously secured claims. It provides that a claim is secured only to the extent of the value of the property which serves as collateral. The remainder of the claim, up to the amount of the original obligation, is unsecured. Id.; see also H.R.Rep. No. 95-595, 95th Cong., 1st Sess. 5, reprinted in 1978 U.S.Code Cong. & Admin.News 5963, 6312.

In interpreting these provisions, we begin by recognizing, as the bankruptcy court did, that the trustee abandoned this property pursuant to section 554 of the Code. That section allows abandonment of property that "is burdensome to the estate or that is of inconsequential value and benefit to the estate." 11 U.S.C. Sec. 554(a). Property abandoned under this section ceases to be part of the estate. See H.R.Rep. No. 95-595, 95th Cong., 1st Sess. 5, reprinted in 1978 U.S.Code Cong. & Admin.News at 6299. ("Property ceases to be property of the estate, such as by sale, abandonment, or exemption."). It reverts to the debtor and stands as if no bankruptcy petition was filed. See Brown v. O'Keefe, 300 U.S. 598, 602, 57 S.Ct. 543, 546, 81 L.Ed. 827 (1937); Wallace v. Lawrence Warehouse Co., 338 F.2d 392, 394 n. 1 (9th Cir.1964); Dewsnup, 87 B.R. at 681. Following abandonment, "whoever had the possessory right to the property at the filing of bankruptcy again reacquires that right." Dewsnup, 87 B.R. at 681. Abandoned property is not property administered by the estate. Recognition of this principle is essential in considering whether debtors may void these liens.

Pursuant to the plain language of section 506(a), an allowed claim of a creditor is one in which the estate has an interest. It is "a secured claim to the extent of the value of such creditor's interest in the estate's interest in such property...." Here, debtors argue that because an allowed secured claim is limited to the value of the collateral under 506(a), they may completely redeem the property and retain possession by paying creditors the property's fair market value.

This analysis overlooks the fundamental premise of the language contained in this section. In order to apply section 506(a), the estate must have an interest in the property. The estate has no interest in, and does not administer, abandoned property. In In re Maitland, the court stated:

The difficulty this section presents is that Sec. 506(a) seems limited in its application to "property in which the estate has an interest," and it is clear that if the property never has been property of the estate or if property has been abandoned by the trustee as an asset of the estate, the estate does not have an interest which would allow for a Sec. 506(a) determination.

61 B.R. 130, 132-33 (Bankr.E.D.Va.1986). Consequently, debtors cannot void these liens. This assessment is consistent with our examination of statutory language generally. As we have stated, when statutory language is clear, "it is conclusive 'absent a clearly expressed legislative intent to the contrary.' " Miller v. Commissioner, 836 F.2d 1274, 1283 (10th Cir.1988) (quoting Consumer Prod. Safety Comm'n v. GTE Sylvania, Inc., 447 U.S. 102, 108, 100 S.Ct. 2051, 2056, 64 L.Ed.2d 766 (1980)). Because abandoned property is not property in which the estate has an interest, section 506(a) does not apply.

In the Gaglia case, the Third Circuit rejected this reasoning, concluding:

If Sec. 506(a) is so interpreted, it would seem to conflict with the plain meaning of Sec. 506(d). Moreover, when a debtor files a Chapter 7 petition, all of his right and title to property, legal as well as equitable, passes to the estate. This includes the legal title to property secured by a mortgage. Thus, even though the Gaglias had no equity in the property, the estate had an interest in it.

889 F.2d at 1308 (citations and footnote omitted).

We reject this approach for two reasons. First, we reject the notion that section 506(d) must be read in isolation. It is a fundamental precept of statutory construction that "[i]n expounding a statute, we must not be guided by a single sentence or member of a sentence, but look to the provisions of the whole law, and to its object and policy." Mastro Plastics Corp. v. NLRB, 350 U.S. 270, 285, 76 S.Ct. 349, 359, 100 L.Ed. 309 (1956) (quoting United States v. Boisdore's Heirs, 8 How. 113, 121, 12 L.Ed. 1009 (1850)).

Second, the Third...