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.

1
No. 02-1845 In re Talbert, et al. 3 4 In re Talbert, et al. No. 02-1845

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).
No. 02-1845 In re Talbert, et al. 5 6 In re Talbert, et al. No. 02-1845

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.”
No. 02-1845 In re Talbert, et al. 7 8 In re Talbert, et al. No. 02-1845

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.
No. 02-1845 In re Talbert, et al. 9 10 In re Talbert, et al. No. 02-1845

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
No. 02-1845 In re Talbert, et al. 11 12 In re Talbert, et al. No. 02-1845

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
No. 02-1845 In re Talbert, et al. 13

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.