In re Gaylor

• Decision Date: 25 January 1991
• Docket Number: Adv. No. 90-9069.,Bankruptcy No. 90-09271
• Parties: In re Gregory F. GAYLOR and Diana L. Gaylor, Debtors. FIRST OF AMERICA BANK, Plaintiff, v. Gregory F. GAYLOR and Diana L. Gaylor, Defendants.
• Court: United States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — Eastern District of Michigan

123 B.R. 236 (1991)

In re Gregory F. GAYLOR and Diana L. Gaylor, Debtors.

FIRST OF AMERICA BANK, Plaintiff, v. Gregory F. GAYLOR and Diana L. Gaylor, Defendants.

Bankruptcy No. 90-09271, Adv. No. 90-9069.

United States Bankruptcy Court, E.D. Michigan, N.D.

January 25, 1991.

Marshall D. Schultz, James Thomas, for plaintiff.

Jack A. Weinstein, for defendants.

MEMORANDUM OPINION ON PLAINTIFF'S MOTION TO DISMISS COUNTERCLAIM

ARTHUR J. SPECTOR, Bankruptcy Judge.

The issue here is whether a chapter 7 debtor can force a creditor holding a mortgage on real property of the estate to accept less than the full balance owing when the debtor eventually sells the property after the case is closed. To our knowledge, this is the first Chapter 7 "strip down" ever attempted in this district.

Gregory and Diana Gaylor ("Debtors") filed their joint voluntary petition for relief on March 23, 1990. First of America Bank ("Bank") brought an action under 11 U.S.C. § 523(c) for a determination that a particular debt owed to it was nondischargeable. The Debtors filed a counterclaim alleging that the value of a home in Clarkston, Michigan, which they formerly occupied, was worth $163,000. They further alleged the existence of a first mortgage on this property in the amount of $114,633; a second mortgage in the amount of $55,833; and a third mortgage to the Bank with a balance of $45,200. The Debtors requested that the Court "determine under 11 U.S.C. section 506 what portion of Plaintiff's mortgage is secured." The Bank responded with a motion to dismiss the counterclaim for failure to state a claim upon which relief can be granted. Bankruptcy Rule 7012(b), incorporating F.R.Civ.P. 12(b)(6).

Since determining the extent to which the Bank's claim is secured by the property's value is, without more, a pointless endeavor, we assume that what the Debtors are really seeking is avoidance of the unsecured portion of the Bank's lien pursuant to § 506(d).¹ As the district court clearly has jurisdiction over this dispute, 28 U.S.C. § 1334, which is a core proceeding, 28 U.S.C. § 157(b)(2)(A), (B), (K) and (O), and since the district court has referred its bankruptcy jurisdiction to the bankruptcy judges of this district, our conclusions of law pursuant to Bankruptcy Rule 7052 will result in an order dismissing the counterclaim. 28 U.S.C. § 157(a), (b)(1).

In deciding the Bank's motion to dismiss, "we accept as true the factual allegations" contained in the Debtors' counterclaim. Anspec Company v. Johnson Controls, 922 F.2d 1240, 1243 (6th Cir.1991). Dismissal is appropriate only if "it appears beyond doubt" that the Debtors "can prove no set of facts in support of their claim which would entitle them to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-102, 2 L.Ed.2d 80 (1957). For the reasons which follow, we conclude that the "strip down" relief which the Debtors seek is unavailable in chapter 7, and we will accordingly dismiss the Debtors' counterclaim.

Relying primarily on In re Dewsnup, 87 B.R. 676, 17 B.C.D. 1139, 18 C.B.C.2d 1459 (Bankr.D.Utah 1988), aff'd, 908 F.2d 588 (10th Cir.1990) and In re Maitland, 61 B.R. 130, 14 C.B.C.2d 1255 (Bankr.E.D.Va.1986), the Bank argues that a debtor may not utilize § 506 to strip down a mortgage on property in which the estate no longer has an interest. In contrast to those cases, however, the trustee here has not abandoned the property. We must therefore first determine whether the Bank is nonetheless correct in its assertion that the estate has no interest in the property.

With exceptions not relevant here, the filing of a petition in bankruptcy creates an estate consisting of "all legal or equitable interest of the debtor in property as of the commencement of the case." 11 U.S.C. § 541(a)(1). Under the federal exemption scheme elected by the Debtors, however, a debtor may exempt from property of the estate his interest in property identified in § 522(d), subject to the maximum amounts specified therein. If no objection to the claimed exemption is made, then "the property claimed as exempt . . . is exempt." 11 U.S.C. § 522(l). Thus, property claimed as exempt originally comprises a part of the bankruptcy estate, but becomes "exempt" if a timely valid objection is not filed. In re Dembs, 757 F.2d 777 (6th Cir.1985).

In Seifert v. Selby, 125 B.R. 174 (E.D.Mich. 1989), recon'n denied, Mar. 20, 1989, a district judge held that, if no party has timely filed an objection to a claimed exemption, the property in which the exemption is claimed is itself exempted in its entirety, not just the value which the debtor claimed as exempt.² Because the Debtors have claimed a $1 exemption in the property in question here, and no party has objected to the exemption, Seifert would require us to conclude that the Clarkston property is fully exempted. That being the case, the property would no longer be property of the estate, and the analysis in Dewsnup and Maitland would be relevant. For the reasons which follow, however, we believe that Seifert was wrongly decided.

As with any issue involving statutory construction, we turn first to the wording of the statute in question. See United States v. Ron Pair Enterprises, 489 U.S. 235, 241, 109 S.Ct. 1026, 1030, 103 L.Ed.2d 290 (1989). The specific provision upon which the Debtors rely for their claimed exemption is § 522(d)(5), which permits each debtor to exempt her "aggregate interest in any property, not to exceed in value $400 plus up to $3,750 of any unused amount of the exemption provided under paragraph (1) of this subsection." 11 U.S.C. § 522(d)(5). Paragraph (1) of that subsection, the homestead exemption, provides in turn that a debtor may exempt her "aggregate interest, not to exceed $7,500 in value" in homestead property. 11 U.S.C. § 522(d)(1).

It bears emphasizing that the foregoing statutory provisions speak in terms of the debtor's "interest" in property which does not exceed a particular value. The statute therefore seems to contemplate that that portion of the debtor's interest, if any, which exceeds the specified value cannot be claimed as exempt; indeed, to conclude otherwise would render meaningless the value limitations contained in the statute. Thus, the language of the statute itself supports the conclusion that the scope of the debtor's exemption is not necessarily coextensive with the full value of the property in question.

Similarly, the statute's legislative history indicates that the debtor cannot in any event claim an exemption in property to the extent that it is subject to a security interest. The Senate Report explains that "property may be exempted even if it is subject to a lien, but only the unencumbered portion of the property is to be counted in computing the `value' of the property for the purposes of the exemption." S.Rep. No. 95-989, 95th Cong.2d Sess. 76 (1978), 5 U.S.Code Cong. & Admin. News 1978, 5787, 5861-62. The House Judiciary Report provides the following illustration:

Thus, for example, a residence worth $30,000 with a mortgage of $25,000 will be exemptable sic to the extent of $5,000. This follows current law. The remaining value of the property will be dealt with in the bankruptcy case as is any interest in property that is subject to a lien.

H.Rep. No. 95-595, 95th Cong., 1st Sess. 360-61 (1977), 5 U.S.Code Cong. & Admin. News 1978, 6316.³ The "current law" referred to in the House Report is exemplified by In re Cummings, 413 F.2d 1281 (10th Cir.1969), cert. denied, 397 U.S. 915, 90 S.Ct. 918, 25 L.Ed.2d 95 (1970). In Cummings, the court held that, "when mortgaged property is claimed as exempt by a bankrupt, the exemption applies to the equity and not to the specific items of property." 413 F.2d at 1285.

Consistent with pre-Code cases such as Cummings, cases decided under the Code have likewise concluded that property cannot be exempted from the estate to the extent it is encumbered by a security interest. In re Orecchio, 54 B.R. 685, 687 (Bankr.D.N.J.1985); In re Morgan, 6 B.R. 701, 704, 6 B.C.D. 1202 (Bankr.M.D.Tenn. 1980); see also In re Pebsworth, 121 B.R. 600 (Bankr.N.D.Okla.1990) ("Since the Debtor has no equity in the mobile home, his claim of exemption under Oklahoma law will be denied."). The two major treatises on bankruptcy law are in accord with the foregoing cases. 3 Collier on Bankruptcy, ¶¶ 522.10-.11 (15th ed. 1990); 1 Norton Bankruptcy L. & Prac. § 26.12.50.

Courts have also consistently held that the debtor's property remains property of the estate to the extent its value exceeds the statutory amount which the debtor is permitted to exempt. In re Johnson, 30 B.R. 467, 469 (M.D.Tenn.1983); In re Ehr, 116 B.R. 665, 668 (Bankr.E.D.Wis. 1988); In re Wittenwyler, 62 B.R. 479, 481-82, 15 C.B.C.2d 162 (Bankr.W.D.Wis.1986); In re Blakely, 29 B.R. 354, 355 (Bankr.W.D.La. 1983); In re Upright, 1 B.R. 694, 702, 5 B.C.D. 1124, 1 C.B.C.2d 229 (Bankr.N.D.N. Y.1979); see also In re Reich, 54 B.R. 995, 1003, 13 B.C.D. 953, 13 C.B.C.2d 988 (Bankr.E.D.Mich. 1985) (where this Court stated in dictum that the fact that the debtors duly exempted "$15,250 worth of real estate equity . . . did not mean that the building itself was no longer estate property"); In re Smith, 8 B.R. 375, 379 (Bankr. S.D.Cal.1980) (dictum). The same conclusion is reached by a major bankruptcy treatise. Norton, supra.

In a case where the debtor opted for the applicable state law exemptions pursuant to § 522(b), the Sixth Circuit stated that under Ohio law the debtor may "exempt from the bankruptcy proceedings an interest in a residence in an amount not to exceed $5,000." In re Dixon, 885 F.2d 327, 329 (6th Cir.1989) (emphasis added). It would therefore seem that our own circuit of the Court of Appeals agrees with the overwhelming weight of authority that an uncontested claim of exemption is effective to exempt only the exemptible value of the property and not the entire asset.

Support for the conclusion that...