In re Dewsnup

• Decision Date: 15 June 1988
• Docket Number: Bankruptcy No. 84C-01746.
• Parties: In re Lamar DEWSNUP and Aletha Dewsnup, Debtors. Lamar DEWSNUP and Aletha Dewsnup, Plaintiffs, v. Louis L. TIMM, et al., Defendants.
• Court: United States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — District of Utah

87 B.R. 676 (1988)

In re Lamar DEWSNUP and Aletha Dewsnup, Debtors.

Lamar DEWSNUP and Aletha Dewsnup, Plaintiffs, v. Louis L. TIMM, et al., Defendants.

Bankruptcy No. 84C-01746.

United States Bankruptcy Court, D. Utah.

June 15, 1988.

William Thomas Thurman, Scott C. Pierce, McKay, Burton & Thurman, Salt Lake City, Utah, for plaintiffs.

Michael Z. Hayes, Mazuran, Verhaaren & Hayes, Salt Lake City, Utah, for defendants.

MEMORANDUM OPINION

GLEN E. CLARK, Chief Judge.

This is an action to determine the validity and extent of a trust deed on real property. The Plaintiffs' amended complaint alleges that "the security interests of the Defendants can be satisfied in full by Plaintiffs remitting to the Defendants the fair market value of the property upon which the security interest attaches." At the time of trial of this matter, the Court valued the real property subject to the Defendants' security interest at $39,000.00. The Court then took the matter under advisement for the sole purpose of resolving the issue of whether the debtors in this Chapter 7 case may "redeem" real property, which has been or may be abandoned to them,¹ by paying to the secured creditors the fair market value of the property.

The debtors argue that pursuant to § 506(d) of the Bankruptcy Code, a lien is void to the extent it does not secure an "allowed secured claim." Since an "allowed secured claim" is limited to the value of the collateral pursuant to § 506(a), then they should be allowed to simply pay to the Defendants the value of the real property and take the property free and clear of any security interest which the Defendants might assert.

The Defendants, on the other hand, argue that to allow the debtors to redeem real property under § 506(d) would make § 722 (which deals specifically with redemption in Chapter 7 cases) a superfluous provision. They contend that although the provisions of § 506 apply generally in Chapter 7 cases, see, § 103(a), principles of statutory construction dictate that the more specific provision (here § 722) should take priority over the general Chapter 5 provision.

Section 506 provides in pertinent part:

(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, . . . 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.

* * * * * *

(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.

Section 722 provides:

An individual debtor may, whether or not the debtor has waived the right to redeem under this section, redeem tangible personal property intended primarily for personal, family, or household use, from a lien securing a dischargeable consumer debt, if such property is exempted under section 522 of this title or has been abandoned under section 554 of this title, by paying the holder of such lien the amount of the allowed secured claim of such holder that is secured by such lien.

Courts which have considered the interplay between these provisions of the Code are divided on the issue of whether a Chapter 7 debtor may utilize § 506(d) to avoid the undersecured portion of a lien on real property which has or will be abandoned to it and whether such a debtor may pay a secured creditor the fair market value of such real property in full satisfaction of the lien. The leading case allowing such avoidance pursuant to § 506(d) is In re Tanner, 14 B.R. 933 (Bkrtcy.N.D.Penn.1981). See also, In re Walker, 11 B.R. 43 (Bkrtcy.N.D. Ill.1981); In re Brace, 33 B.R. 91, 93-94 (Bkrtcy.S.D.Ohio 1983); In re Bracken, 35 B.R. 84 (Bkrtcy.E.D.Penn.1983); In re Gibbs, 44 B.R. 475, 478-79 (Bkrtcy.D. Minn.1984); In re Lyons, 46 B.R. 604 (Bkrtcy.N.D.Ill.1985); In re Cleveringa, 52 B.R. 56 (Bkrtcy.N.D.Iowa 1985); In re Lindsey, 64 B.R. 19 (Bkrtcy.C.D.Ill.1986); In re Worrell, 67 B.R. 16 (C.D.Ill.1986); In re O'Leary, 75 B.R. 881 (Bkrtcy.D.Ore. 1987); In re Gaglia, 76 B.R. 82 (Bkrtcy.W. D.Penn.1987); and In re Crouch, 76 B.R. 91 (Bkrtcy.W.D.Va.1987).

In Tanner, the debtor had filed an action requesting the court to declare a third mortgage unsecured and, therefore, void under § 506. The defendant argued that Congress did not intend real property mortgages to be voidable and that "lien" as used in § 506(d) does not refer to a lien of a mortgage on real property. In rejecting that argument, the court recognized the broad definition of "lien" under § 101, and stated:

It is unlikely that Congress would define a lien broadly and then use the word in a narrower sense without so indicating. Further indications of Congressional intent that a real property mortgage is included within the meaning of lien in Section 506(d) are apparent from language elsewhere in the Code. . . . Specific terms are used throughout the Code indicating Congress knew how to designate subspecies of lien when it is so desired. In addition, Congress has demonstrated that when it desired to single out a real property mortgage for special treatment, it will clearly so indicate. An example is Section 1322(b)(2).

14 B.R. at 935. Moreover, the court reasoned that § 506(d) must be construed "in light of the definitional section, Section 506 in its entirety, and the overall scheme of the Code. . . ." Id. at 936. In so analyzing the applicable provisions the court concluded that if the undersecured portion of a real property mortgage is not avoidable, a prepetition creditor will impair the debtor's fresh start by partaking in his postpetition property acquisitions, which here includes the postpetition appreciation of real property.

Finally, the court concluded that the bankruptcy procedure was designed to put the debtor and its creditors in the same position they would be if the property had been sold at a non-bankruptcy forced sale on the petition date:

At a forced sale the Debtor does not retain title to the property and the over-valued lien holder would not gain from future appreciation or increases in the equity. The Defendant\'s argument requires attributing to Congress an intent to benefit the real property mortgage holder more under a bankruptcy proceeding than under a non-bankruptcy forced sale. Clearly that is not consistent with the intent of Congress in providing for Debtor "relief" under the Bankruptcy Code.

14 B.R. at 937.

The leading cases which have rejected Tanner and its progeny and have refused to allow Chapter 7 debtors to avoid the undersecured liens on abandoned real property are In re Mahaner, 34 B.R. 308 (Bkrtcy.W.D.N.Y.1983) and In re Maitland, 61 B.R. 130 (Bkrtcy.E.D.Va.1986). See also, In re Cordes, 37 B.R. 582 (Bkrtcy.C.D.Calif.1984); In re Gaglia, 76 B.R. 82 (Bkrtcy.W.D.Penn.1987); In re Smith, 79 B.R. 650 (Bkrtcy.D.Md.1987). In addition, certain of the courts which have felt compelled by their reading of the language of § 506(d) to follow Tanner have expressed serious reservations about the result. See, In re Lyons, 46 B.R. 604, 606-07 (Bkrtcy.N.D.Ill.1985) ("This problem is a difficult one from a policy perspective because of the apparent divergence here between the law and one's sense of what is equitable. On the one hand, as other courts have noted, the relevant question is what the lienholders' interests would be outside bankruptcy. That is, what each lienholder would receive in a foreclosure should also be the worth of his lien in the bankruptcy setting. On the other hand, it seems manifestly unfair to permit a debtor to retain his house after avoiding liens to the extent they exceed the value of the collateral. As of this time, however, that result seems to be the one which the Code compels."); In re Worrell, 67 B.R. 16, 20 (C.D.Ill.1986) ("Even though the Court is holding that a Chapter 7 debtor may use § 506(d) to avoid the operation of a real estate mortgage lien upon his property to the extent that the lien exceeds the value of the property, the Court finds this result unfair and difficult to accept. As the Court said in Lyons, `It seems manifestly unfair to permit a debtor to retain his house after avoiding liens to the extent they exceed the value of the collateral.' 46 B.R. at 606-07. This is a difficult problem from a policy perspective because of the Court's sense of what is right and equitable. Nevertheless, the bottom line is that this is a question which Congress should address because the Court cannot rewrite this section of the Bankruptcy Code, and the result reached today appears to be the one which the Code compels.").

In In re Mahaner, an undersecured junior mortgage holder moved the court for relief from the automatic stay. In response, the debtors filed a motion under § 506 for a valuation of the real property and indicated their intention to redeem the property by paying the creditor the amount of its interest in the property. In rejecting the debtor's theory, the court articulated three reasons why § 506(d) may not be used by the debtor to avoid a mortgage lien in a Chapter 7 case: "First, it would appear that to permit lien avoidance . . . would render 11 U.S.C. § 722 totally surplus. . . . A fundamental rule of statutory construction is that a specific statute prevails over an ambiguous or even an inconsistent general statute." 34 B.R. at 309. Second, the court observed that it is not good policy to allow a debtor to get in Chapter 7 more than he could in Chapter 11 or 13. In Chapter 13, § 1322(b)(2) prohibits the debtor from modifying a lien on real property if the property is his principal residence. In Chapter 11, the creditor would be able to...