Ryan v. Homecomings Fin. Network

• Decision Date: 02 April 2001
• Docket Number: No. 00-2137,No. 00-2138,00-2137,00-2138
• Citation: Ryan v. Homecomings Fin. Network, 253 F.3d 778 (4th Cir. 2001)
• Parties: (4th Cir. 2001) DONALD E. RYAN; HARLEY A. RYAN, Plaintiffs-Appellants, v. HOMECOMINGS FINANCIAL NETWORK, Defendant-Appellee, and SOVEREIGN BANK, successor in interest to FirstPlus Financial, Incorporated, Defendant. DONALD E. RYAN; HARLEY A. RYAN, Plaintiffs-Appellants, v. SOVEREIGN BANK, successor in interest to FirstPlus Financial, Incorporated; HOMECOMINGS FINANCIAL NETWORK, Defendants-Appellees. Argued:
• Court: U.S. Court of Appeals — Fourth Circuit

Page 778

253 F.3d 778 (4th Cir. 2001)

DONALD E. RYAN; HARLEY A. RYAN, Plaintiffs-Appellants, v. HOMECOMINGS FINANCIAL NETWORK, Defendant-Appellee, and SOVEREIGN BANK, successor in interest to FirstPlus Financial, Incorporated, Defendant.

DONALD E. RYAN; HARLEY A. RYAN, Plaintiffs-Appellants, v. SOVEREIGN BANK, successor in interest to FirstPlus Financial, Incorporated; HOMECOMINGS FINANCIAL NETWORK, Defendants-Appellees.

No. 00-2137 No. 00-2138

UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT

Argued: April 2, 2001

Decided: June 1, 2001

Appeals from the United States District Court for the District of Maryland, at Greenbelt. Peter J. Messitte, District Judge. (CA-00-1443-PJM, CA-00-1444-PJM, BK-99-18568-PM)

COUNSEL ARGUED: Alan David Eisler, PALEY, ROTHMAN, GOLDSTEIN, ROSENBERG & COOPER, CHTD., Bethesda, Maryland, for Appel- lants. Michael Thomas Cantrell, FRIEDMAN & MACFADYEN, P.A., Baltimore, Maryland, for Appellees. ON BRIEF: Wendelin I. Lipp, PALEY, ROTHMAN, GOLDSTEIN, ROSENBERG & COO- PER, CHTD., Bethesda, Maryland, for Appellants.

Before LUTTIG and TRAXLER, Circuit Judges, and Lacy H. THORNBURG, United States District Judge for the Western District of North Carolina, sitting by designation.

Affirmed by published opinion. Judge Thornburg wrote the opinion, in which Judge Luttig and Judge Traxler joined.

OPINION

THORNBURG, District Judge:

In this appeal we are asked to decide whether a debtor who has filed for Chapter 7 bankruptcy may "strip off" an allowed unsecured lien pursuant to 11 U.S.C. S 506(d). Because we find that the Supreme Court's reasoning in Dewsnup v. Timm, 502 U.S. 410 (1992), is equally applicable to "strip offs" as to "strip downs", we hold that a debtor may not strip off an unsecured but allowed lien pur- suant to Section 506(d).

I. BACKGROUND

Appellants, husband and wife, filed a joint voluntary Chapter 7 bankruptcy petition. Their residence is subject to a valid first deed of trust having a principal balance due of $181,826. The property has a current fair market value of $179,000. The property is also subject to a consensual, bargained-for second deed of trust securing a loan in the amount of $47,305, payable to Sovereign Bank, successor in interest to FirstPlus Financial, Inc. The parties agree that the second deed of trust is a fully allowed claim, but wholly unsecured as to the property.

Appellants subsequently filed a complaint in the bankruptcy pro- ceeding pursuant to 11 U.S.C. SS 506(a) and (d) requesting the bank- ruptcy court to strip off the second deed of trust as a wholly unsecured, and therefore void, lien.¹ No response to the complaint having been filed, Appellants filed a timely motion for entry of default and default judgment. The bankruptcy clerk entered default against FirstPlus Financial, Inc., on January 27, 2000. On March 20, 2000, however, the bankruptcy court declined to enter a default judg- ment, and instead, entered an order denying the motion. It also entered a separate, second order dismissing Appellants' complaint.

By memorandum of decision filed with the foregoing orders, the bankruptcy court explained its reasoning concerning the orders and its refusal to strip off the second deed of trust.² By timely notice, the bankruptcy court's rulings were appealed to the district court. On August 14, 2000, without further discussion and by adopting the rea- soning of the bankruptcy court, the district court affirmed both orders of the bankruptcy court. Timely notice of appeal was filed.

Appellate jurisdiction is based upon the provisions of 28 U.S.C. S 158(d), granting courts of appeal jurisdiction of appeals of all final decisions, judgments, orders, and decrees entered pursuant to 28 U.S.C. SS 158(a) and (b).

A district court's conclusions of law are reviewed de novo. In re Shearson, 224 F.3d 346, 348-49 (4th Cir. 2000); In re Wilson, 149 F.3d 249, 251 (4th Cir. 1998). For the reasons that follow, we affirm the district court.

II. ISSUES

A. Default

We first address Appellants' contention that the district court erred in affirming the bankruptcy court's orders dismissing the complaint and refusing to enter a default judgment in their favor. The position is not well taken.

The defendant, by his default, admits the plaintiff's well- pleaded allegations of fact, is concluded on those facts by the judgment, and is barred from contesting on appeal the facts thus established. . . . As the Supreme Court stated in the "venerable but still definitive case" of Thomson v. Woos- ter: a default judgment may be lawfully entered only "ac- cording to what is proper to be decreed upon the statements of the bill, assumed to be true," and not "as of course according to the prayer of the bill." The defendant is not held . . . to admit conclusions of law. In short, despite occa- sional statements to the contrary, a default is not treated as an absolute confession by the defendant of his liability and of the plaintiff's right to recover.

Nishimatsu Constr. Co., Ltd. v. Houston Nat'l Bank, 515 F.2d 1200, 1206 (5th Cir. 1975) (quoting Thomson v. Wooster , 114 U.S. 104, 113 (1884)) (internal quotations and other citations omitted). The court must, therefore, determine whether the well-pleaded allegations in Appellants' complaint support the relief sought in this action. Weft, Inc. v. G.C. Inv. Assocs., 630 F. Supp. 1138, 1141 (E.D.N.C. 1986), aff'd, 822 F.2d 56 (table), 1987 WL 36124 (4th Cir. 1987). For the purpose of this decision, the complaint alleges, the default establishes, and the parties agree that the fair market value of the property is $179,000, that the amount owed to the holder of the first deed of trust is $181,876, and that the amount owed to the holder of the second deed of trust is $47,305.46. The district court correctly concluded that acceptance of these undisputed facts does not necessarily entitle the Appellants to the relief sought; in this case, stripping off the second deed of trust. Nishimatsu, 515 F.2d at 1206.

B. Strip off

We now address the primary issue before the court: May Chapter 7 debtors strip off an allowed junior lien on their residence where the senior lien exceeds the agreed fair market value of the real property?³

Appellants contend that 11 U.S.C. S 506(a) determines the secured status of claims, and that pursuant to its provisions Appellee's junior lien is unsecured and therefore may be "stripped off" pursuant to 11 U.S.C. S 506(d). Section 506(a) provides in pertinent part:

An allowed claim of a creditor, secured by a lien on prop- erty 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.

11 U.S.C. S 506(a). Section 506(d) of that Title provides in part that "to the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void." ⁴

In Dewsnup the Supreme Court addressed the question of whether Chapter 7 debtors could strip down a consensual lien against their real property. Those debtors' property was encumbered by a first deed of trust securing payment of $120,000. The property had an approximate value of $39,000, leaving an unsecured deficiency of approximately $81,000. The debtors then sought to have the secured lien "stripped down" to $39,000, the claimed fair market value of the property, pur- suant to the provisions of S 506(d). The relief sought by debtors was denied by the lower courts. The Supreme Court affirmed.

[W]e hold that S 506(d) does not allow petitioner to "strip down" respondents' lien, because respondents' claim is secured by a lien and has been fully allowed pursuant to S 502. Were we writing on a clean slate, we might be inclined to agree with petitioner that the words"allowed secured claim" must take the same meaning inS 506(d) as in S 506(a). But, given the ambiguity in the text, we are not convinced that Congress intended to depart from the pre- Code rule that liens pass through bankruptcy unaffected.

502 U.S. at 778 (internal footnote omitted).

Appellants contend however, that Dewsnup controls only a "strip down" of a partially secured lien, not a "strip off" of a wholly unse- cured lien, citing Howard v. Nat'l Westminster Bank, 184 B.R. 644, 646 (Bankr. E.D.N.Y. 1995), and other bankruptcy court decisions. We are not persuaded.

The reasoning in Dewsnup is not ambiguous.

The practical effect of [Appellants'] argument is to freeze the creditor's secured interest at the judicially determined valuation. By this approach, the creditor would lose the ben- efit of any increase in the value of the property by the time of the foreclosure sale. The increase would accrue to the benefit of the debtor . . . as a "windfall."

[T]he creditor's lien stays with the real property until the foreclosure. That is what was bargained for by the mortga- gor and the mortgagee. The voidness language sensibly applies only to the security aspect of the lien and then only to the real deficiency in the security. Any increase over the judicially determined valuation during bankruptcy rightly accrues to the benefit of the creditor . . . .

. . .

Under the Bankruptcy Act of 1898, a lien on real property passed through bankruptcy unaffected. This Court recently acknowledged that this was so. See Farrey v. Sanderfoot, 500 U.S. 291, 297 [ ] (1991) ("Ordinarily, liens and other secured interests survive bankruptcy"); Johnson v. Home State Bank, 501 U.S. 78, 84 [ ] (1991) ("Rather, a bank- ruptcy discharge extinguishes only one mode of enforcing a claim -- namely, an action against the debtor in personam -- while leaving intact another -- namely, an action against the debtor in rem").

Dewsnup, 502 U.S. at 417-18 (internal footnote omitted).

[T]o attribute to Congress the intention to grant a debtor the broad new remedy against...