Alejandro Palomar v. First American Bank
722 F.3d 992
7th Cir.2013Background
- Mr. and Mrs. Palomar filed a Chapter 7 bankruptcy in July 2011; trustee reported no assets and the case was closed after discharge.
- While the case was pending the Palomars filed an adversary action to "strip off" a second mortgage held by First American Bank, arguing the lien was unsecured because the home's appraised value ($165,000) was below the senior lien and thus the second mortgage had no value.
- First American did not appear or file a claim in the bankruptcy; the bankruptcy court dismissed the adversary action and refused to reopen the closed Chapter 7 case.
- The Palomars relied on 11 U.S.C. § 506(a)/(d) to seek voiding of the second mortgage; they noted that Chapter 13 allows strip-off of wholly unsecured junior liens on a principal residence but had filed under Chapter 7.
- The bankruptcy and district courts rejected the Palomars’ request; the Seventh Circuit affirmed, concluding § 506(d) does not authorize voiding a valid lien where the lienholder did not have an "allowed secured claim" rejected in bankruptcy.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether § 506(a)/(d) permits voiding a junior mortgage in Chapter 7 when collateral value is zero | Palomar: § 506(a) values the creditor's interest at zero, so § 506(d) voids the lien | First American: Bank filed no claim; § 506(d) only voids liens to extent allowed claim is disallowed, so lien survives | Court: § 506(d) does not void a valid lien absent an "allowed secured claim" that is disallowed; lien may survive if creditor did not file or have its claim rejected |
| Whether bankruptcy court should have reopened the closed Chapter 7 to decide the adversary proceeding | Palomar: Reopening to strip lien is appropriate relief under § 350(b) | Bank/district: No appearance; relief not warranted where § 506(d) inapplicable and reopening would prejudice creditors | Court: Reopening was not required because debtor’s requested relief (strip-off) was legally unavailable in Chapter 7 here |
| Applicability of Dewsnup precedent to undersecured/residential liens | Palomar: Dewsnup distinguishable because they seek total strip-off under § 506(a) | Respondent/Court: Dewsnup holds § 506(d) cannot be used to "squeeze down" a valid lien; extends to this context | Court: Dewsnup and related precedents bar using § 506(d) to extinguish valid junior lien in Chapter 7 |
| Whether Chapter choice (7 v. 13) affects availability of strip-off relief | Palomar: Chapter 13 allows strip-off of wholly unsecured junior residential liens; equity favors same relief in Chapter 7 | Court: Chapter 13’s strip-off is a quid pro quo of Chapter 13’s extra creditor protections; Chapter 7 remedies (e.g., §§ 522(f), 722) do not provide equivalent relief | Court: Choice of Chapter matters; strip-off in Chapter 13 does not imply similar relief in Chapter 7 |
Key Cases Cited
- Long v. Bullard, 117 U.S. 617 (1886) (establishes that valid liens can survive bankruptcy unless claim is allowed/disallowed)
- Dewsnup v. Timm, 502 U.S. 410 (1992) (§ 506(d) cannot be used to reduce a valid lien to the value of collateral)
- In re Tarnow, 749 F.2d 464 (7th Cir. 1984) (interprets §§ 506(a)/(d) and the effect of allowed secured claims on liens)
- In re Talbert, 344 F.3d 555 (6th Cir. 2003) (follows Tarnow: § 506(d) voids only liens securing claims disallowed in bankruptcy)
- Ryan v. Homecomings Financial Network, 253 F.3d 778 (4th Cir. 2001) (interprets § 506(d) consistently with Tarnow and Dewsnup)
- In re Bartee, 212 F.3d 277 (5th Cir. 2000) (Chapter 13 can strip wholly unsecured junior residential liens)
- In re McDonald, 205 F.3d 606 (3d Cir. 2000) (same: Chapter 13 strip-off of junior residential lien allowed)
- In re Bianucci, 4 F.3d 526 (7th Cir. 1993) (discusses reopening closed bankruptcy to afford relief)
- In re Beaty, 306 F.3d 914 (9th Cir. 2002) (addresses laches and reopening bankruptcy proceedings)