Donald E. Ryan Harley A. Ryan v. Homecomings Financial Network, and Sovereign Bank, Successor in Interest to Firstplus Financial, Incorporated, Donald E. Ryan Harley A. Ryan v. Sovereign Bank, Successor in Interest to Firstplus Financial, Incorporated Homecomings Financial NetworkDonald E. Ryan Harley A. Ryan v. Homecomings Financial Network, and Sovereign Bank, Successor in Interest to Firstplus Financial, Incorporated, Donald E. Ryan Harley A. Ryan v. Sovereign Bank, Successor in Interest to Firstplus Financial, Incorporated Homecomings Financial Network
COUNSEL ARGUED: Alan David Eisler, PALEY, ROTHMAN, GOLDSTEIN, ROSENBERG & COOPER, CHTD., Bethesda, Maryland, for Appellants. Michael Thomas Cantrell, FRIEDMAN & MACFADYEN, P.A., Baltimore, Maryland, for Appellees. ON BRIEF: Wendelin I. Lipp, PALEY, ROTHMAN, GOLDSTEIN, ROSENBERG & COOPER, CHTD., Bethesda, Maryland, for Appellants.
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
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 proceeding pursuant to
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 reasoning 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
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. Wooster: a default judgment may be lawfully entered only “according 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 occasional 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
An allowed claim of a creditor, secured by a lien on property 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.
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, pursuant to the provisions of
[W]e hold that § 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 § 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 in § 506(d) as in § 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 417 (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 unsecured 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 benefit 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 mortgagor 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 bankruptcy 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 allowed claims to the extent that they become “unsecured” for purposes of § 506(a) without the new remedy‘s being mentioned somewhere in the Code itself or in the annals of Congress is not plausible, in our view, and is contrary to basic bankruptcy principles.
Id. at 420. Following the Supreme Court‘s teachings in Dewsnup, as we must, we discern no principled distinction to be made between the case sub judice and that decided in Dewsnup. The Court‘s reasoning in Dewsnup is equally relevant and convincing in a case like ours where a debtor attempts to strip off, rather than merely strip down, an approved but unsecured lien.
Appellants next contend that the Supreme Court‘s decision in Nobelman v. American Savings Bank, 508 U.S. 324 (1993), permits the stripping off of wholly unsecured liens. We disagree. Nobelman represented a debtor‘s effort under Chapter 13 (
We are aware, as Appellants argue, that some courts are not in agreement with this analysis of Dewsnup. See Yi v. Citibank, 219 B.R. 394, 319 (E.D. Va. 1998) (Chapter 7 debtor‘s proceeding--“Because Citibank‘s lien is wholly unsecured, by definition it cannot be an ‘allowed secured claim.’ From this it inexorably follows that the lien is void.” (citing Howard, 184 B.R. at 644)); In re Smith, 247 B.R. 191 (W.D. Va. 2000); Farha v. First American Title Ins., 246 B.R. 547, 549 (Bankr. E.D. Mich. 2000) (where claim is unsecured rather than undersecured “there is no allowed secured claim under
Other courts have concluded, as do we, that a Chapter 7 debtor may not use
In Laskin v. First Nat‘l Bank of Keystone, 222 B.R. 872 (9th Cir. 1998), Chapter 7 debtors sought to use
[W]hether the lien is wholly unsecured or merely undersecured, the reasons articulated by the Supreme Court for its holding in Dewsnup--that liens pass through bankruptcy unaffected, that mortgagee and mortgagor bargained for a consensual lien which would stay with real property until foreclosure, and that any increase in value of the real property should accrue to the benefit of the creditor, not the debtor or other unsecured creditors--are equally pertinent. Neither Laskin nor the courts in Yi and Howard propound any rationale for distinguishing. . . . Section 506 was intended to facilitate valuation and disposition of property in the reorganization chapters of the Code, not to confer an additional avoiding power on a Chapter 7 debtor.
Id. at 876 (citation omitted). See also In re Fitzmaurice, 248 B.R. at 361-63 (Chapter 7 debtors may not use
The majority opinion did not escape criticism from numerous scholars, see Cunningham, 246 B.R. at 246, or an erudite dissent by Justice Scalia, Dewsnup, 502 U.S. at 420. Even so, “[w]hile the opinion may be the subject of scholarly criticism, it remains the law of the land.” Cunningham, at 246.
We accept the fact that in many cases junior lien holders may have little or no opportunity to recover all or even a part of their unsecured claims. Nevertheless, the parties bargained for their positions with knowledge that a superior lien existed. Under this Chapter 7 proceeding, they are entitled to their lien position until foreclosure or other permissible final disposition is had. Likewise, we are acutely aware that in the volatile, modern real estate market, substantial price variations occur with weekly or monthly regularity.
In conclusion, we hold that an allowed unsecured consensual lien may not be stripped off in a Chapter 7 proceeding pursuant to the provisions of
AFFIRMED