InRe:Terry Talbert v.

RECOMMENDED FOR FULL-TEXT PUBLICATION Pursuant to Sixth Circuit Rule 206 2 In re Talbert, et al. No. 02-1845 ELECTRONIC CITATION: 2003 FED App. 0343P (6th Cir.) File Name: 03a0343p.06 _________________ COUNSEL UNITED STATES COURT OF APPEALS ON BRIEF: Marshall A. Yee, KEMPF & YEE, Lansing, FOR THE SIXTH CIRCUIT Michigan, for Appellants. _________________ _________________ In re: TERRY R. TALBERT and X OPINION LAHNA L. TALBERT , - _________________ Debtors. - - No. 02-1845 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 TERRY R. TALBERT and - for Chapter 7 bankruptcy may avoid a valueless lien under LAHNA L. TALBERT , - § 506(d) of the Bankruptcy Code, 11 U.S.C. § 506(d). Plaintiffs-Appellants, - Because the Supreme Court’s reasoning in Dewsnup v. Timm, - 502 U.S. 410 (1992), applies with equal force and logic to the v. - 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 CITY MORTGAGE SERVICES, - question. Accordingly, we AFFIRM the judgment of the Defendant-Appellee. - district court. - N I. Appeal from the United States District Court Debtors Terry and Lahna Talbert (the “Talberts”) filed an for the Western District of Michigan at Grand Rapids. adversary proceeding against Defendant City Mortgage No. 01-00795—Richard A. Enslen, District Judge. Services (“City Mortgage”) to avoid City Mortgage’s lien on their residence pursuant to 11 U.S.C. § 506(d). Although Submitted: September 19, 2003 properly served with process, City Mortgage failed to file an answer or other responsive filing in the bankruptcy court, a Decided and Filed: September 24, 2003 strategy to which City Mortgage adhered before the district court, and continues to employ before this court. At the Before: SILER, BATCHELDER, and COOK, Circuit hearing for default judgment, the bankruptcy court raised sua Judges.

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sponte the issue of whether, as a legal matter, § 506(d) II. permits the “strip off” of an allowed unsecured lien.1 A. City Mortgage’s Failure to File an Appellate Brief For purposes of its analysis, the court accepted as true that at the time of the Talberts’ bankruptcy filing, they owned a First, we must determine what consequences, if any, City residence located in Lansing, Michigan, which had a fair Mortgage faces for not filing a brief in this appeal. Although market value of $88,000. The court also accepted that the not a situation we confront often, on a previous occasion, we residence was encumbered by a first mortgage in the amount have addressed the effects of this unhelpful and highly risky of $90,633, and that City Mortgage held a junior mortgage in form of appellate advocacy: the amount of approximately $33,110. It was thus undisputed that City Mortgage held a “valueless” lien since the Talberts’ An initial question presented . . . is the effect of appellee property had a market value that was $2,633 less than the Allgeier’s failure to file a brief on appeal. While Allgeier amount of the lien securing the first mortgage. The did not file a brief, his counsel was present at oral bankruptcy court concluded that § 506(d) does not permit the argument and offered to answer any questions the panel “strip off” of a valueless junior lien from real estate. See might have. Neither the Federal Rules of Appellate Talbert v. City Mortgage Servs. (In re Talbert), 268 B.R. 811, Procedure nor our local rules suggest that an appellee’s 814 (Bankr. W.D. Mich. 2001). In reaching this conclusion, failure to file a brief should be penalized by a decision in the court focused in large part on the claims allowance favor of the appellant. Instead, Fed. R. App. P. 31(c) process, an analytical approach not followed by the district provides in such a case that “the appellee will not be court, which affirmed the bankruptcy court based on the heard at oral argument except by permission of the Supreme Court’s statutory interpretation of § 506 as court.” See, e.g., H.C. by Hewett v. Jarrard, 786 F.2d pronounced in the watershed case of Dewsnup v. Timm. 1080, 1083 n. 1 (11th Cir.1986). Our court rules do not address this issue. . . . While Rule 31(c) also authorizes We have jurisdiction under 28 U.S.C. § 158(d). Of course, us to dismiss the appeal where the appellant fails to file the order by the bankruptcy court, affirmed by the district a brief to support his burden of persuasion, see id., we court, that a junior valueless lien is not voidable by a debtor believe that an appellee's failure to file a brief should under 11 U.S.C. § 506(d) is a conclusion of law, which we normally carry with it only the oral argument sanction review de novo. Wesbanco Bank Barnesville v. Rafoth (In re called for by the Rule. However, we do not address the Baker & Getty Fin. Servs. Inc.), 106 F.3d 1255, 1259 (6th Cir. power of the court to impose additional sanctions should 1997). 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 1 The term “strip off” is used when a junior mortgage is totally decision in favor of the Talberts, or, in the alternative, the unsecured, whereas the term “strip do wn” is used when a m ortgage is imposition of some other sanction against City Mortgage, is partially unsecured and p artially secu red. See In re Fitzmaurice, 248 B.R. not compelled. 356, 357 n.2 (Bankr. W .D. Mo . 2000) (citation omitted).

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B. “Strip Off” in Chapter 7 proceeding pursuant to the provisions of 11 U.S.C. §§ 506(a) and (d).”). We agree with the Fourth Circuit. 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 As did the debtors in Ryan, the Talberts argue that the property has divided the bankruptcy and federal district secured status of a claim is determined by the security- courts. Compare Webster v. Key Bank (In re Webster), 287 reducing provision of § 506(a),2 and that pursuant to this B.R. 703 (Bankr. N.D. Ohio 2002); Bessette v. Bank One, provision, their junior lien is completely unsecured, and, thus, Mich. (In re Bessette), 269 B.R. 644 (Bankr. E.D. Mich. according to § 506(d),3 may be “stripped off.”4 See Ryan, 2001); In re Davenport, 266 B.R. 787 (Bankr. W.D. Ky. 253 F.3d at 781. A similar argument was rejected by the 2001); In re Fitzmaurice, 248 B.R. 356 (Bankr. W.D. Mo. Supreme Court in the analogous context of a debtor’s attempt 2000); Cunningham v. Homecomings Fin. Network (In re to “strip down” an under-collateralized creditor’s lien in a Cunningham), 246 B.R. 241 (Bankr. D. Md. 2000), aff’d sub Chapter 7 case. In Dewsnup, the debtors owned farmland nom. Ryan v. Homecomings Fin. Network, 253 F.3d 778 (4th encumbered by deed of trust securing a debt of $120,000. Cir. 2001); Cater v. American Gen. Fin. (In re Cater), 240 The farmland was valued at approximately $39,000. This B.R. 420 (M.D. Ala. 1999); In re Virello, 236 B.R. 199 arrangement left an unsecured deficiency of approximately (Bankr. D.S.C. 1999); Swiatek v. Pagliaro (In re Swiatek), $81,000, which the debtors sought to avoid pursuant to 231 B.R. 26 (Bankr. D. Del. 1999); Laskin v. First Nat’l Bank § 506(d). The lower courts would not grant this relief, and of Keystone (In re Laskin), 222 B.R. 872 (B.A.P. 9th Cir. the Supreme Court affirmed. 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. 2 2000); Warthen v. Smith (In re Smith), 247 B.R. 191 (W.D. Section 50 6(a) provides in relevant part: Va. 2000), aff’d, 1 Fed. Appx. 178 (4th Cir. 2001) An allowed claim of a creditor secure d by a lien on p roperty in which the estate has an interest . . . is a secured claim to the (unpublished decision), overruled by Ryan, 253 F.3d at 782; extent of the value of such creditor’s interest in the estate’s Zempel v. Household Fin. Corp. (In re Zempel), 244 B.R. 625 interest in such p roperty . . . and is an unsecured claim to the (Bankr. W.D. Ky. 1999); Yi v. Citibank (Md.), N.A. (In re Yi), extent that the value of such creditor’s interest . . . is less than the 219 B.R. 394 (E.D. Va. 1998), overruled by Ryan, 253 F.3d amo unt of suc h allowed claim. at 782; Howard v. National Westminister Bank, U.S.A. (In re 11 U .S.C. § 506 (a). Howard), 184 B.R. 644 (Bankr. E.D.N.Y. 1995) (all finding 3 that notwithstanding the Supreme Court’s decision in Section 506(d) provides in pertinent part that “to the extent that a lien secures a claim against the debtor that is not an allowed secured Dewsnup, a Chapter 7 debtor may “strip off” an allowed claim, such lien is void.” 11 U.S.C. § 50 6(d). secured claim if there is no value in the collateral to cover any part of the subject lien). The Fourth Circuit is the only 4 In the T alberts own w ords, “[p]ursuant to the definition of a secured federal appellate court to discuss this debate, and it has sided claim under 11 U.S.C. § 50 6(a), a creditor only has a secured claim to the with those courts that hold that § 506 does not permit the extent of the value of such cred itor’s interest in the estate’s interest in “stripping off” of liens in Chapter 7 proceedings. See Ryan, such property.” They continue, “[i]n the case at bar, because of 253 F.3d at 783 (“[W]e hold that an allowed unsecured Appellee’s default, it is undisputed that the amount of the first mortgage exceeds the value of Appellant’s residence. It therefore cannot be consensual lien may not be stripped off in a Chapter 7 gainsaid that the App ellee does not have a secured claim.”

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In its analysis, the Court laid out in detail the different original). This reading, the Court explained, “gives the readings that could be given to the thorny statutory provision the simple and sensible function of voiding a lien interpretation question presented by the perceived interplay of whenever a claim secured by the lien itself has not been §§ 506(a) and 506(d). See Dewsnup, 502 U.S. at 414-16. allowed.” Id. at 415-16. Thus, although limited to the facts One interpretation, which was urged by the debtors, was that of the case, the Court’s holding was quite clear: “[w]e hold “§§ 506(a) and 506(d) are complementary and to be read that § 506(d) does not allow petitioner to ‘strip down’ together.” Id. at 414. According to this argument, respondent’s lien, because respondents’ claim is secured by “[b]ecause, under § 506(a), a claim is secured only to the a lien and has been fully allowed pursuant to § 502.” Id. at extent of the judicially determined value of the real property 417. 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 Three considerations constituted the analytical longer secured and thus is not ‘an allowed secured claim.’” underpinnings of the Court’s holding, namely, that: (1) any Id. Although not without merit, see id. at 420-36 (Scalia, J., increase in the value of the property from the date of the dissenting) (filing a sharp dissent criticizing the majority for judicially determined valuation to the time of the foreclosure brushing aside the plain language of § 506 and employing an sale should accrue to the creditor; (2) the mortgagor and unorthodox method of statutory interpretation), this argument mortgagee bargained that a consensual lien would remain was rejected in favor of an analysis advanced by the creditors, with the property until foreclosure; and (3) liens on real and joined by the United States as amicus curiae, namely, that property survive bankruptcy unaffected. Id. at 417-18. In the the words “‘allowed secured claim’ in § 506(d) need not be Court’s own words read as an indivisible term of art defined by reference to § 506(a), which by its terms is not a definitional provision.” The practical effect of petitioner’s argument is to freeze Id. at 415. the creditor’s secured interest at the judicially determined valuation. By this approach, the creditor would lose the Under this construction, “allowed secured claim” “should benefit of any increase in the value of the property by the be read term-by-term to refer to any claim that is, first, time of the foreclosure sale. The increase would accrue allowed,5 and, second, secured.” Id. (footnote added). The to the benefit of the debtor, a result some of the parties Court continued, “[b]ecause there is no question that the describe as a “windfall.” claim at issue here has been ‘allowed’ pursuant to § 502 of the Code and is secured by a lien with recourse to the We think . . . that the creditor’s lien stays with the real underlying collateral, it does not come within the scope of property until the foreclosure. That is what was § 506(d), which voids only liens corresponding to claims that bargained for by the mortgagor and the mortgagee. The have not been allowed and secured.” Id. (emphasis in 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 5 of the creditor, not to the benefit of the debtor and not to A claim o r interest is deemed “allowed ” if proof thereof is timely filed pursuant to Code § 501, and (1) no objection is made by a party in the benefit of other unsecured creditors whose claims interest, or (2) the bankruptcy court, after notice and a hearing, determines have been allowed and who had nothing to do with the the validity of the claim, thereby overruling the objection of a pa rty in mortgagor-mortgagee bargain. . . . interest. 11 U.S.C. § 502.

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This result appears to have been clearly established decided in Dewsnup. The Court’s reasoning in Dewsnup is before the passage of the 1978 Act. Under the equally relevant and convincing in a case like ours where a Bankruptcy Act of 1898, a lien on real property passed debtor attempts to strip off, rather than . . . strip down, an through bankruptcy unaffected. This Court recently approved but unsecured lien.”); In re Webster, 287 B.R. at acknowledged that this was so. See Farrey v. 708 (“Contrary to the Yi court’s reasoning, . . . [the ‘strip- Sanderfoot, 500 U.S. 291, 297, 111 S.Ct. 1825, 1829, down’ versus ‘strip-off’ distinction] is a distinction without a 114 L.Ed.2d 337 (1991) (“Ordinarily, liens and other difference according to the majority of courts post-Dewsnup. secured interests survive bankruptcy”); Johnson v. Home The analysis does not change depending on the available State Bank, 501 U.S. 78, 84, 111 S.Ct. 2150, 2154, 115 equity in the collateral to which the lien attaches.”); In re L.Ed.2d 66 (1991) (“Rather, a bankruptcy discharge Davenport, 266 B.R. at 790 (“We agree with the Fourth extinguishes only one mode of enforcing a claim-- Circuit that Dewsnup’s reasoning is equally applicable in a namely, an action against the debtor in personam--while case where a debtor attempts to strip off a wholly unsecured leaving intact another--namely, an action against the consensual mortgage.”); In re Cater, 240 B.R. at 423 debtor in rem”). . . . (“Although the lien at issue in Dewsnup was secured by at least some equity in the debtor’s property, that factual Congress must have enacted the Code with a full distinction is not relevant. What is relevant is the Supreme understanding of this practice. See H.R.Rep. No. Court’s construction of § 506(d).”); In re Virello, 236 B.R. at 95-595, p. 357 (1977), U.S.Code Cong. & Admin. News 205 (“This Court . . . is of the opinion that for Dewsnup to 1978, pp. 5787, 6313 (“Subsection (d) permits liens to have meaning, it must be applied to instances of ‘strip off’ of pass through the bankruptcy case unaffected”). liens as much as it does to the ‘strip down’ of liens, the difference being primarily one of degree.”); In re Swiatek, When Congress amends the bankruptcy laws, it does not 231 B.R. at 29-30 (“Although in Dewsnup the claim was write “on a clean slate.” See Emil v. Hanley, 318 U.S. undersecured, not totally unsecured, we think the same result 515, 521, 63 S.Ct. 687, 690-691, 87 L.Ed. 954 obtains under the Dewsnup rationale when the claim is (1943). . . . [T]o attribute to Congress the intention to completely unsecured in a chapter 7 and no objection to the grant a debtor the broad new remedy against allowed claim has been filed and sustained.”). In fact, one court has claims to the extent that they become “unsecured” for gone so far as to describe this conclusion as “flawless.” In re purposes of § 506(a) without the new remedy’s being Davenport, 266 B.R. at 790. mentioned somewhere in the Code itself or in the annals of Congress is not plausible, in our view, and is contrary As in the case of a “strip down,” to permit a “strip off” to basic bankruptcy principles. would mark a departure from the pre-Code rule that real property liens emerge from bankruptcy unaffected. Also, as Id. at 417-20. in the case of a “strip down,” a “strip off” would rob the mortgagee of the bargain it struck with the mortgagor, i.e., The Supreme Court’s reasoning for not permitting “strip that the consensual lien would remain with the property until downs” in the Chapter 7 context applies with equal validity to foreclosure. In fact, in Dewsnup, the Court was persuaded by a debtor’s attempt to effectuate a Chapter 7 “strip off.” See the creditors’ argument that “‘the fresh start’ policy cannot Ryan, 253 F.3d at 782 (“[W]e discern no principled justify an impairment of respondents’ property rights, for the distinction to be made between the case sub judice and that fresh start does not extend to an in rem claim against property

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but is limited to a discharge of personal liability.” 502 U.S. all that is required; the Talberts may not utilize § 506(a) and at 416. Finally, as was true in the context of “strip downs,” (d) to “strip off” City Mortgage’s lien. See Dewsnup, 502 Chapter 7 “strip offs” also carry the risk of a “windfall” to U.S. at 415 (“Because there is no question that the claim at the debtors should the value of the encumbered property issue here has been ‘allowed’ pursuant to § 502 of the Code increase by the time of the foreclosure sale. As one court and is secured by a lien with recourse to the underlying observed, “[w]ho knows what the real estate market will be collateral, it does not come within the scope of § 506(d), tomorrow? By the time of sale in the future, a piece of real which voids only liens corresponding to claims that have not estate may have increased in value to cover a second- been allowed and secured.”) (emphasis removed); see also mortgage lien not covered by the property’s value today.” In Cater, 240 B.R. at 423 (“[B]ecause [the creditor’s] claim is re Cater, 240 B.R. at 424; see also Ryan, 253 F.3d at 783 allowed under § 502 and is secured by a valid lien, the same (“[W]e are acutely aware that in the volatile, modern real result obtains. The fact that the value of the property is estate market, substantial price variations occur with weekly insufficient to cover the debt does not warrant a different or monthly regularities.”). result.”). It is true that the Court’s opinion has not escaped scholarly “Section 506 was intended to facilitate valuation and criticism, see Cunningham, 246 B.R. at 246 (compiling law disposition of property in the reorganization chapters of the review articles that have criticized the Dewsnup decision), Code, not to confer an additional avoiding power on a and that some courts have been unwilling to extend Dewsnup Chapter 7 debtor.” Ryan 253 F.3d at 783 (quoting Laskin, to its logical conclusion, see, e.g., In re Yi, 219 B.R. at 397; 222 B.R. at 876). When a debtor proceeds under Chapter 7, In re Howard, 184 B.R. at 646. However, notwithstanding creditors are “entitled to their lien position until foreclosure the dissatisfaction of some, we are not at liberty to ignore the or other permissible final disposition is had.” Id. Thus, we Supreme Court’s reasoning, which Congress has made no conclude that a Chapter 7 debtor may not use 11 U.S.C. § 506 apparent attempt to modify or correct through legislative to “strip off” an allowed junior lien where the senior lien action. See Virello, 236 B.R. at 204-05 (The “Supreme Court exceeds the fair market value of the real property. 6 has interpreted the statute . . . and Congress has made no apparent attempt to correct that interpretation or clarify the statute. Under the doctrine of stare decisis, this Court is 6 constrained to follow . . . Dewsnup. [To do otherwise] . . . The bankruptcy court reached this same conclusion, although by different reasoning. According to the bankruptcy co urt, 11 U.S.C. § 506 would effectively render the Supreme Court’s reasoning in is meaningless in Chapter 7 proceed ings unless the debtor is redeeming Dewsnup meaningless.”). property and needs § 506(d) to avoid any residual lien the creditor might claim in the property once the allowed secured claim has been paid. In the instant case, the Talberts do not challenge that City Because the Talberts were not redeeming the property, the court reasoned Mortgage’s claim is allowed pursuant to § 502. Also, that they could no t use § 506(d) to “strip off” City Mortgage’s lien on the property. The ban kruptcy court noted that § 506 (d) is need ed in regardless of the fact that the current value of the real reorganization proceedings to classify secured claims as allowed or property is insufficient to recover City Mortgage’s junior lien, disallowed in order to determine who gets paid. Acco rding to the co urt, the claim is nonetheless “secured in the ordinary sense, that however, there is no need for such a determination in a Chapter 7 is, . . . [it] is backed up by a security interest in property, proceeding because the trustee’s job does not include making distributions whether or not the value of the property suffices to cover the to holders o f secured claim s; a trustee’s job in a Chapter 7 pro ceed ing is to distribute pro perty o f the estate, d efined as the legal or eq uitable claim.” Cater, 240 B.R. at 422. As Dewsnup teaches, that is interests of the debtor in the property. 11 U.S.C. § 5 41. F rom this

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AFFIRMED.

definition, the bankruptcy court found that secured claims do not qu alify as property of the estate, thus avoiding the need to classify the claims as allowed or disallowed. After reviewing this question of law de novo , we agree with the district cour t that the more prudent analytical approach to resolving the “strip-off” question presented in this matter is to affirm on the basis of the statutory interpretation analysis contained in Dewsnup–and on that basis only. W e thus express no opinion o n the bankrup tcy court’s analysis.