Lindsey, Matter of, s. 86-2658
| Citation | 823 F.2d 189 |
| Decision Date | 06 July 1987 |
| Docket Number | 86-2659,Nos. 86-2658,s. 86-2658 |
| Parties | 17 Collier Bankr.Cas.2d 363, Bankr. L. Rep. P 71,898 In the Matter of Wayne Rodney LINDSEY and Margaret A. Lindsey, Debtors: Wayne Rodney LINDSEY and Margaret A. Lindsey, Plaintiffs-Appellants, v. FEDERAL LAND BANK OF ST. LOUIS; and United States of America acting through Farmers Home Administration, a division of the United States Department of Agriculture, Defendants- Appellees. In the Matter of Louis Patrick KNESS, Debtor: Louis Patrick KNESS, Plaintiff-Appellant, v. FEDERAL LAND BANK OF ST. LOUIS and Bank of Viola, Defendants-Appellees. |
| Court | United States Courts of Appeals. United States Court of Appeals (7th Circuit) |
Carl F. Reardon, Reardon & Orr Ltd., East Peoria, Ill., for plaintiffs-appellants.
Gerald D. Fines, U.S. Atty., Springfield, Ill., Douglas R. Lindstrom, West Neagle & Williamson, Galesburg, Ill., for defendants-appellees.
Before CUMMINGS, CUDAHY, and POSNER, Circuit Judges.
Section 506(a) of the Bankruptcy Code, 11 U.S.C. Sec. 506(a), provides that "an allowed claim of a creditor secured by a lien on property in which the [bankrupt] 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 beyond that is an unsecured claim. Section 506(d) provides (with immaterial exceptions) that a lien which is not an allowed secured claim is void. The combined effect of these subsections is to "strip down" a lien to the value of the security. The question for decision (one of first impression at the appellate level) is whether these provisions can be used to prevent the creditor from foreclosing his "stripped down" lien.
The appeals are from decisions by the district court affirming the denial of two adversary claims arising from the Chapter 7 bankruptcies of Mr. Kness and of Mr. and Mrs. Lindsey, respectively. The facts of the Lindseys' claim are illustrative. The Lindseys were hog farmers who owned real estate that was subject to a first mortgage of $209,000 held by the Federal Land Bank of St. Louis and a second mortgage of $341,000 held by the Farmers Home Administration. The loan by the Farmers Home Administration was secured primarily by the Lindseys' farm equipment, the second mortgage on the real estate merely providing some additional collateral.
Hog prices fell drastically in the early 1980s. The Lindseys couldn't make ends meet. They defaulted on the mortgages (which thereby became due and payable in full, by their terms), and shortly afterward filed for bankruptcy under Chapter 7 of the Bankruptcy Code (liquidation), 11 U.S.C. Secs. 701 et seq. A trustee was appointed, but he abandoned the bankrupt estate when it became evident that there would be nothing for the unsecured creditors. The Lindseys asked the bankruptcy judge to "strip down" the mortgages to the current market value of the real estate. The banks argued, unavailingly, that 11 U.S.C. Sec. 506 does not apply to liens on real estate; they have wisely abandoned the argument. See 3 Collier on Bankruptcy p 506.07, at p. 506-71 (15th ed., King ed., 1987). The bankruptcy judge found the current market value of the real estate to be $233,000, so that all of the Federal Land Bank's first mortgage but only $24,000 of the Farmers Home Administration's second mortgage was secured. The judge gave the Lindseys 30 days to redeem their property by paying the two lenders $233,000, failing which the lenders would be entitled to enforce their liens (up to the new valuation) by foreclosure proceedings. Instead of redeeming, the Lindseys appealed the judge's order to the district court. When they failed to post the appeal bond set by the bankruptcy judge, he lifted the automatic stay which was protecting the bankrupt estate from suit. The lenders then began foreclosure proceedings, which were still in progress when the appeal was argued to us. In their appeal to the district court the Lindseys contended that the bankruptcy judge should have let them continue making the monthly payments specified in the first mortgage and should have established a payment schedule for the stripped-down second mortgage. The district court disagreed with them and affirmed the bankruptcy judge.
The presence of the mortgagees in the bankruptcy proceeding requires comment, in view of the old saw (which, as this case shows, is no better than a half-truth) that liens pass through bankruptcy unaffected. See, e.g., In re Tarnow, 749 F.2d 464, 466 (7th Cir.1984). A lienor need not, in order to enforce his lien, file a claim in his debtor's bankruptcy proceeding, though if he does not he loses the chance of enforcing any deficiency judgment against the assets of the bankrupt estate. Since the Lindseys had no assets other than those secured by the mortgages, the mortgagees had no incentive to seek a deficiency judgment, hence no incentive to file a claim in bankruptcy. If, therefore, liens truly passed through bankruptcy unaffected, the mortgagees would not have been dragged into the bankruptcy proceeding at all, since they were content to foreclose on their liens. But then how are sections 506(a) and (d)--provisions that apply only to liens, and hurt the lienor--ever brought into play? One possibility is that they are brought into play only when the lienor, wanting to have an unsecured claim against the bankrupt estate to the extent of any difference between the value of his lien and the amount of money owed him by the debtor, has voluntarily filed a claim in bankruptcy. This interpretation, which makes section 506 merely an optional creditor's remedy, is consistent with the notion that liens pass through bankruptcy unaffected, but overlooks the significance of section 506(d) when read together with section 501, which governs proof of claims. Section 501(c) authorizes the debtor as well as the creditor to file...
To continue reading
Request your trial
-
James Wilson Associates, Matter of
...773, 778, 116 L.Ed.2d 903 (1992); In re Official Committee of Unsecured Creditors, 943 F.2d 752, 754 (7th Cir.1991); In re Lindsey, 823 F.2d 189, 190 (7th Cir.1987). Bankruptcy, when viewed from the standpoint of creditors, is intended for the protection of unsecured creditors from the bank......
-
IN RE REGIONAL BLDG. SYSTEMS, INC.
...an interest in maximizing the creditor\'s recovery, may file a claim on the creditor\'s behalf. 11 U.S.C. § 501(b), (c); In re Lindsey, 823 F.2d 189, 191 (7th Cir.1987).... The secured creditor does not, by participating in the bankruptcy proceeding through filing a claim, surrender his lie......
-
U.S. v. Alfano
...the axiom that valid liens that have not been disallowed or avoided survive the discharge of the underlying debt. See, e.g. In re Lindsey, 823 F.2d 189 (7th Cir.1987); Matter of Tarnow, 749 F.2d 464 (7th Cir.1984); In re Ryan, 100 B.R. 411 By obtaining a tax lien, the IRS became a secured c......
-
Hoskins, Matter of
...7.8, and p. 400 (2d ed. 1991), and he may even find himself dragged into the bankruptcy proceeding against his will. In re Lindsey, 823 F.2d 189, 191 (7th Cir.1987). The price obtained in a liquidation is usually a wholesale rather than a retail price. Retail value is simply wholesale value......
-
Trustee Abandonment of Property: Effect on Pre- and Postpetition Tax Planning
...Regulations. 17. The bankruptcy estate can only receive the interest of the debtor. 11 U.S.C. § 541(a) (1). 18. See, In re Lindsey, 823 F.2d 189 (7th Cir. 1987). 19. 11 U.S.C. § 506(a). 20. Yarboro v. Comm'r, 737 F.2d 479 (5th Cir. 1984); Middleton v. Comm'r, 77 T.C. 310 (1981). 21. Under I......