In re Yi

• Decision Date: 29 April 1998
• Docket Number: CIV. A. No. 97-1729-A.,No. 97-15011-SSM,97-15011-SSM
• Citation: 219 BR 394
• Parties: In re Chong W. YI and Keum J. Yi, Debtors. Chong Woo YI, et al., Appellants, v. CITIBANK (MARYLAND), N.A., Appellee.
• Court: U.S. District Court — Eastern District of Virginia

219 B.R. 394 (1998)

In re Chong W. YI and Keum J. Yi, Debtors.

Chong Woo YI, et al., Appellants, v. CITIBANK (MARYLAND), N.A., Appellee.

No. 97-15011-SSM, CIV. A. No. 97-1729-A.

United States District Court, E.D. Virginia, Alexandria Division.

April 29, 1998.

Daniel M. Press, Russell B. Adams, III, Chung & Press, P.C., McLean, VA, for Appellants.

Michael Looney, CEO Citibank (Maryland) N.A., Hagerstown, MD, for Appellee.

MEMORANDUM OPINION

ELLIS, District Judge.

The matter is before the Court on debtors' appeal from the bankruptcy court's order denying their motion for entry of a default judgment and dismissing the complaint for failure to state a claim. At issue is whether a debtor can avoid a lien on a property that is already encumbered by other, prior liens when the value of those prior liens exceeds the value of the property. In other words, the question is whether such a lien is unsecured under § 506(a) of the Bankruptcy Code and thus void under § 506(d).

I

Debtors Chong W. Yi and Keum J. Yi, husband and wife, filed their Chapter 7 petition on July 8, 1997. Among the assets of their estate, debtors listed 13124 Cross Keys Court, Fairfax, as a parcel of real property they own. As of the date the petition was filed, the value of the property was $183,165.00.¹ At that time the property was subject to three liens: (i) a purchase money deed of trust securing a claim of Mellon Mortgage, Inc., in the amount of $172,572.28; (ii) a second priority deed of trust securing a loan from First Union Home Equity Corp. in the amount of $19,920.61; and (iii) a third deed of trust securing a note held by Citibank (Maryland) N.A. (defendant in this action) in the amount of $11,604.99. As these figures indicate, the value of the first two liens exceeded the value of the property by approximately $9,000.

Therefore, debtors filed this adversary action against Citibank seeking to have the third deed of trust declared void. Debtors contend that because the amount of the claims secured by the first and second deeds of trust exceeds the value of the property, the third deed of trust is wholly unsecured and thus void under § 506(d) of the Bankruptcy Code, which provides that a lien that is not an "allowed secured claim" is void. Thus, debtors claim that Citibank's lien is not "an allowed secured claim."

Citibank did not answer or otherwise respond to debtors' complaint. Accordingly, debtors filed a motion for entry of default judgment. The bankruptcy court denied the motion and further dismissed the complaint for failure to state a claim, relying on Dewsnup v. Timm, 502 U.S. 410, 112 S.Ct. 773, 116 L.Ed.2d 903 (1992), as controlling and dispositive authority. Debtors appealed from the denial of their motion and the dismissal of the complaint, and in connection with that appeal they filed a memorandum and argued the matter orally.² Thus, the matter is now ripe for disposition.

II

Debtors first claim that, once Citibank did not answer or otherwise respond to their complaint, the bankruptcy court was required to enter judgment in their favor. They argue that when "a defendant is in default, its liability to the plaintiff is deemed established and the plaintiff is not required to establish his right to recover." Caribbean Produce Exch. v. Caribe Hydro-Trailer, Inc., 65 F.R.D. 46, 48 (D.P.R.1974). Yet, as the bankruptcy court noted, although it is true that "upon a default, the court is generally required to deem as true the well pleaded allegations of a complaint . . . it is not required to agree that the pleaded facts constitute a valid cause of action. If it finds that no claim is stated, it may, in its discretion, refuse to enter the default judgment." 10 Collier on Bankruptcy ¶ 7055.022, at 7055-5 (Lawrence P. King, ed., 15th ed. rev.1997) hereinafter Collier. This sensible rule requires that before a plaintiff is awarded relief there be a legal basis for doing so. Accordingly, debtors' threshold contention fails, and the analysis proceeds to an examination of the merits.

III

The bankruptcy court's findings of fact are reviewed for clear error, see Fed. R. Bankr.P. 8013, and its legal conclusions are reviewed de novo. See In re Johnson, 960 F.2d 396, 399 (4th Cir.1992). Because the focus of this appeal is the bankruptcy court's conclusion that Dewsnup compels dismissal as a matter of law, review here is de novo. And, given the central role of Dewsnup in the bankruptcy court's decision, analysis here properly begins with a discussion of that case.

The petitioner-debtor in Dewsnup owned a parcel of land that secured a loan the respondent-creditor had made to petitioner for approximately $120,000. After petitioner defaulted on the loan, but before any foreclosure sale, petitioner filed for bankruptcy under Chapter 7. Petitioner then instituted an adversary proceeding, seeking to avoid that portion of the $120,000 loan that exceeded the $39,000 value of the property. Petitioner based her argument on §§ 506(a)³ and 506(d)⁴ of the Bankruptcy Code, claiming that these two sections, read together, required that the value of the lender's lien be reduced to the value of the property securing the loan. Specifically, she argued that (i) because § 506(a) states that an allowed claim is secured only up to the value of the property, it followed that any part of the claim that exceeded the value of the property was unsecured, and (ii) because § 506(d) states that a claim that is not an allowed secured claim is void, it further followed that the excess portion of the claim was not an "allowed secured claim" and was therefore void. Put in more colloquial terms, petitioner in Dewsnup argued that §§ 506(a) and 506(d) permitted, indeed compelled, "stripping down" a lien, which occurs when "a partially secured lien is bifurcated and only the unsecured portion is avoided." Lam v. Investors Thrift (In re Lam), 211 B.R. 36, 37 n. 2 (9th Cir. BAP 1997).

The Supreme Court rejected this argument, holding instead that the two Code sections need not be read as "rigidly tied" to each other, as petitioner had argued. See 502 U.S. at 415, 417, 112 S.Ct. at 777, 778. "Rather, the words in § 506(d) should be read term-by-term to refer to any claim that is, first, allowed, and, second, secured." Dewsnup, 502 U.S. at 415, 112 S.Ct. at 777. Given this, the Supreme Court held that petitioner could not avoid the unsecured portion of the lien because the lien was (i) allowed under § 502 and (ii) secured by the collateral. Nor did it matter, according to the Supreme Court, that the value of the collateral was less than the value of the lien. In the Supreme Court's view, the existence of some collateral sufficed to render the lien a secured claim. In more colloquial terms, then, Dewsnup held that § 506(d) does not permit a Chapter 7 debtor to strip down a creditor's lien to the judicially determined value of the underlying collateral.⁵

Given this holding, it is not difficult to discern why the bankruptcy court concluded that Dewsnup compelled dismissal of this case: Dewsnup forbids stripping down, which is only different in degree from "stripping off,"⁶ the issue in this case. The question, then, is whether stripping off and stripping down are not only different in degree, but also different in kind, such that Dewsnup should not apply to the instant facts.

IV

A. The Lien is Unsecured Under § 506(a)

Although Dewsnup is the Supreme Court decision most analogous to this appeal, it is not dispositive; the facts of Dewsnup are significantly distinguishable from the facts of the case at bar such that the bankruptcy court's reliance on Dewsnup is ultimately misplaced.⁷

In Dewsnup; only a portion of the value of the loan exceeded the value of the property. Here, the full value of Citibank's lien exceeds the value of the collateral that is not already pledged to secure other loans. Indeed, that latter value is $0; there is no collateral not secured by prior deeds. In other words, Citibank's lien is wholly unsecured. This conclusion is compelled by § 506(a)'s plain language, which dictates that Citibank's lien "is a secured claim to the extent of the value of its interest in the estate's interest in the property." Debtors, however, have no equity in the property. The first two deeds of trust have "eaten up" all the value of that property. In this regard, "the amount of debt secured by senior liens must be deducted in determining the extent to which the creditor holds an interest in the estate's interest in the collateral and, hence, the extent to which the secured creditor holds a secured claim." 4 Collier ¶ 506.035b, at 506-34. Here, if the amount of debt secured by liens senior to Citibank's lien (approximately $192,000) is deducted from the value of the collateral (approximately $183,000), it is apparent that the value of Citibank's interest in the collateral is zero. As such, Citibank's claim is not secured.

This conclusion is further supported by the second part of § 506(a), which states that an allowed claim "is an unsecured claim to the extent that the value of such creditor's interest . . . is less than the amount of such allowed claim." As shown above, the value of Citibank's interest is zero, which is of course less than eleven thousand dollars, the amount of the claim. From this, too, it follows that the full extent of the value of Citibank's lien is an unsecured claim. See In re Geyer, 203 B.R. 726, 728 (Bankr.S.D.Cal.1996) ("Since the value of the first priority deed of trust exceeds the value of the Residence, the value of the estate's interest in the Residence is zero. The junior creditor's interest in the estate's interest can be no greater than zero. Under section 506(a), the junior creditor would not have an allowed secured claim."); cf. In re Lam, 211 B.R. at 40 ("If a lien has no `security' interest in the property of a debtor, its status as a lien is questionable."). Several leading texts support this analysis and result. See 8 Collier...