In re Talbert

• Decision Date: 24 September 2003
• Docket Number: No. 02-1845.,02-1845.
• Parties: In re: Terry R. TALBERT and Lahna L. Talbert, Debtors. Terry R. Talbert and Lahna L. Talbert, Plaintiffs-Appellants, v. City Mortgage Services, Defendant-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

344 F.3d 555

In re: Terry R. TALBERT and Lahna L. Talbert, Debtors. Terry R. Talbert and Lahna L. Talbert, Plaintiffs-Appellants, v. City Mortgage Services, Defendant-Appellee.

No. 02-1845.

United States Court of Appeals, Sixth Circuit.

Submitted: September 19, 2003.

Decided and Filed: September 24, 2003. Pursuant to Sixth Circuit Rule 206

Marshall A. Yee, (briefed), Kempf & Yee, Lansing, MI, for Plaintiffs-Appellants.

Before: SILER, BATCHELDER, and COOK, Circuit Judges.

OPINION

SILER, Circuit Judge.

This bankruptcy appeal presents purely a legal question that has split the bankruptcy and federal district courts, namely, whether a debtor who has filed for Chapter 7 bankruptcy may avoid a valueless lien under § 506(d) of the Bankruptcy Code, 11 U.S.C. § 506(d). Because the Supreme Court's reasoning in Dewsnup v. Timm, 502 U.S. 410, 112 S.Ct. 773, 116 L.Ed.2d 903 (1992), applies with equal force and logic to the issue at hand, we hold that a Chapter 7 debtor may not use § 506 to "strip off" an allowed junior lien where the senior lien exceeds the fair market value of the real property in question. Accordingly, we AFFIRM the judgment of the district court.

I.

Debtors Terry and Lahna Talbert (the "Talberts") filed an adversary proceeding against Defendant City Mortgage Services ("City Mortgage") to avoid City Mortgage's lien on their residence pursuant to 11 U.S.C. § 506(d). Although properly served with process, City Mortgage failed to file an answer or other responsive filing in the bankruptcy court, a strategy to which City Mortgage adhered before the district court, and continues to employ before this court. At the hearing for default judgment, the bankruptcy court raised sua sponte the issue of whether, as a legal matter, § 506(d) permits the "strip off" of an allowed unsecured lien.¹

For purposes of its analysis, the court accepted as true that at the time of the Talberts' bankruptcy filing, they owned a residence located in Lansing, Michigan, which had a fair market value of $88,000. The court also accepted that the residence was encumbered by a first mortgage in the amount of $90,633, and that City Mortgage held a junior mortgage in the amount of approximately $33,110. It was thus undisputed that City Mortgage held a "valueless" lien since the Talberts' property had a market value that was $2,633 less than the amount of the lien securing the first mortgage. The bankruptcy court concluded that § 506(d) does not permit the "strip off" of a valueless junior lien from real estate. See Talbert v. City Mortgage Servs. (In re Talbert), 268 B.R. 811, 814 (Bankr.W.D.Mich.2001). In reaching this conclusion, the court focused in large part on the claims allowance process, an analytical approach not followed by the district court, which affirmed the bankruptcy court based on the Supreme Court's statutory interpretation of § 506 as pronounced in the watershed case of Dewsnup v. Timm.

We have jurisdiction under 28 U.S.C. § 158(d). Of course, the order by the bankruptcy court, affirmed by the district court, that a junior valueless lien is not voidable by a debtor under 11 U.S.C. § 506(d) is a conclusion of law, which we review de novo. Wesbanco Bank Barnesville v. Rafoth (In re Baker & Getty Fin. Servs. Inc.), 106 F.3d 1255, 1259 (6th Cir.1997).

II.

A. City Mortgage's Failure to File an Appellate Brief

First, we must determine what consequences, if any, City Mortgage faces for not filing a brief in this appeal. Although not a situation we confront often, on a previous occasion, we have addressed the effects of this unhelpful and highly risky form of appellate advocacy:

An initial question presented ... is the effect of appellee Allgeier's failure to file a brief on appeal. While Allgeier did not file a brief, his counsel was present at oral argument and offered to answer any questions the panel might have. Neither the Federal Rules of Appellate Procedure nor our local rules suggest that an appellee's failure to file a brief should be penalized by a decision in favor of the appellant. Instead, Fed.R.App. P. 31(c) provides in such a case that "the appellee will not be heard at oral argument except by permission of the court." See, e.g., H.C. by Hewett v. Jarrard, 786 F.2d 1080, 1083 n. 1 (11th Cir.1986). Our court rules do not address this issue.... While Rule 31(c) also authorizes us to dismiss the appeal where the appellant fails to file a brief to support his burden of persuasion, see id., we believe that an appellee's failure to file a brief should normally carry with it only the oral argument sanction called for by the Rule. However, we do not address the power of the court to impose additional sanctions should it specifically order the filing of a brief and the appellee without adequate reason fails to comply.

Allgeier v. United States, 909 F.2d 869, 871 n. 3 (6th Cir.1990) (emphasis in original). In this appeal, City Mortgage has not flouted the authority of this court. Accordingly, pursuant to Allgeier, and, like the proceedings below, a decision in favor of the Talberts, or, in the alternative, the imposition of some other sanction against City Mortgage, is not compelled.

B. "Strip Off" in Chapter 7

The question of whether a Chapter 7 debtor may use 11 U.S.C. § 506(d) to "strip off" a valueless junior lien from real property has divided the bankruptcy and federal district courts. Compare Webster v. Key Bank (In re Webster), 287 B.R. 703 (Bankr.N.D.Ohio 2002); Bessette v. Bank One, Mich. (In re Bessette), 269 B.R. 644 (Bankr.E.D.Mich.2001); In re Davenport, 266 B.R. 787 (Bankr.W.D.Ky.2001); In re Fitzmaurice, 248 B.R. 356 (Bankr.W.D.Mo.2000); Cunningham v. Homecomings Fin. Network (In re Cunningham), 246 B.R. 241 (Bankr.D.Md.2000), aff'd sub nom. Ryan v. Homecomings Fin. Network, 253 F.3d 778 (4th Cir.2001); Cater v. American Gen. Fin. (In re Cater), 240 B.R. 420 (M.D.Ala.1999); In re Virello, 236 B.R. 199 (Bankr.D.S.C.1999); Swiatek v. Pagliaro (In re Swiatek), 231 B.R. 26 (Bankr.D.Del.1999); Laskin v. First Nat'l Bank of Keystone (In re Laskin), 222 B.R. 872 (9th Cir.BAP. (Cal.)1998) (all finding that a debtor who has filed Chapter 7 bankruptcy may not "strip off" an allowed valueless junior lien pursuant to 11 U.S.C. § 506(d)), with Farha v. First Am. Title Ins. (In re Farha), 246 B.R. 547 (Bankr.E.D.Mich.2000); Warthen v. Smith (In re Smith), 247 B.R. 191 (W.D.Va.2000), aff'd, 1 Fed. Appx. 178 (4th Cir.2001) (unpublished decision), overruled by Ryan, 253 F.3d at 782; Zempel v. Household Fin. Corp. (In re Zempel), 244 B.R. 625 (Bankr.W.D.Ky.1999); Yi v. Citibank (Md.), N.A. (In re Yi), 219 B.R. 394 (E.D.Va.1998), overruled by Ryan, 253 F.3d at 782; Howard v. National Westminister Bank, U.S.A. (In re Howard), 184 B.R. 644 (Bankr.E.D.N.Y.1995) (all finding that notwithstanding the Supreme Court's decision in Dewsnup, a Chapter 7 debtor may "strip off" an allowed secured claim if there is no value in the collateral to cover any part of the subject lien). The Fourth Circuit is the only federal appellate court to discuss this debate, and it has sided with those courts that hold that § 506 does not permit the "stripping off" of liens in Chapter 7 proceedings. See Ryan, 253 F.3d at 783 ("[W]e hold that an allowed unsecured consensual lien may not be stripped off in a Chapter 7 proceeding pursuant to the provisions of 11 U.S.C. §§ 506(a) and (d)."). We agree with the Fourth Circuit.

As did the debtors in Ryan, the Talberts argue that the secured status of a claim is determined by the security-reducing provision of § 506(a),² and that pursuant to this provision, their junior lien is completely unsecured, and, thus, according to § 506(d),³ may be "stripped off."⁴ See Ryan, 253 F.3d at 781. A similar argument was rejected by the Supreme Court in the analogous context of a debtor's attempt to "strip down" an under-collateralized creditor's lien in a Chapter 7 case. In Dewsnup, the debtors owned farmland encumbered by deed of trust securing a debt of $120,000. The farmland was valued at approximately $39,000. This arrangement left an unsecured deficiency of approximately $81,000, which the debtors sought to avoid pursuant to § 506(d). The lower courts would not grant this relief, and the Supreme Court affirmed.

In its analysis, the Court laid out in detail the different readings that could be given to the thorny statutory interpretation question presented by the perceived interplay of §§ 506(a) and 506(d). See Dewsnup, 502 U.S. at 414-16, 112 S.Ct. 773. One interpretation, which was urged by the debtors, was that "§§ 506(a) and 506(d) are complementary and to be read together." Id. at 414, 112 S.Ct. 773. According to this argument, "[b]ecause, 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 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.'" Id. Although not without merit, see id. at 420-36, 112 S.Ct. 773 (Scalia, J., dissenting) (filing a sharp dissent criticizing the majority for brushing aside the plain language of § 506 and employing an unorthodox method of statutory interpretation), this argument was rejected in favor of an analysis advanced by the creditors, and joined by the United States as amicus curiae, namely, 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), which by its terms is not a definitional provision." Id. at 415, 112 S.Ct. 773.

Under this construction, "allowed secured claim" "should be read term-by-term to refer to any claim that is, first, allowed,⁵ and, second, secured." Id. (footnote added). The Court continued, "[b]ecause there is no question that the claim at issue here has been `allowed' pursuant to § 502 of the Code and is secured by a lien with recourse to the underlying collateral, it does not come...