In Re: RICHARD HAMLETT, Debtor. RICHARD HAMLETT, Debtor-Appellant, v. AMSOUTH BANK, Defendant-Appellee.
No. 02-1642
UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT
March 6, 2003
PUBLISHED. Argued: January 21, 2003. Appeal from the United States District Court for the Western District of Virginia, at Roanoke. James C. Turk, Senior District Judge. (CA-02-463-7, BK-98-2653). Before WILKINS, Chief Judge, and WILKINSON and MOTZ, Circuit Judges. Affirmed by published opinion. Judge Motz wrote the opinion, in which Chief Judge Wilkins and Judge Wilkinson joined.
ARGUED: Gary Michael Bowman, Roanoke, Virginia, for Appellant. Matthew Douglas Huebschman, JEFFREY A. FLEISCHHAUER, P.C., Roanoke, Virginia, for Appellee.
DIANA GRIBBON MOTZ, Circuit Judge:
Richard Hamlett appeals the district court judgment affirming two orders of the bankruptcy court — one vacating a prior default judgment against his creditor, Amsouth Bank, and one denying his motion to avoid liens held by Amsouth. The bankruptcy court did not abuse its discretion in vacating Hamlett‘s default judgment on the ground that he had not properly served Amsouth. Nor did the bankruptcy court err in holding that its disallowance of Amsouth‘s claims as untimely did not void Amsouth‘s underlying liens. Accordingly, we affirm.
I.
The parties have stipulated to all relevant facts. In 1983, Hamlett conveyed deeds of trust on several parcels of real property located in Salem, Virginia to secure loans serviced by Dovenmuehle Mortgage, Inc. for Amsouth Bank. At some point (neither the record nor the briefs indicate exactly when), Hamlett filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code. See
On October 23, 2000, Hamlett filed an adversary proceeding requesting, pursuant to
In response, on January 30, 2001, Amsouth filed an answer to the complaint and moved that the court set aside the default judgment on
The bankruptcy court then proceeded to determine the merits of the adversary proceeding, i.e., whether Amsouth‘s liens were void under
Hamlett appealed both orders to the district court. After full briefing and oral argument, the district court affirmed, adopting as its “findings and opinions” the rationale of the bankruptcy court. Hamlett then noted a timely appeal to this court.
Because a district court sits as an appellate court in bankruptcy matters, we apply the same standard of review that the district court applied. In this case, we review the bankruptcy court‘s order vacating Hamlett‘s default judgment for abuse of discretion. See Park Corp. v. Lexington Ins. Co., 812 F.2d 894, 895 (4th Cir. 1987). We review de novo its order denying Hamlett‘s motion to avoid Amsouth‘s liens. See In re Bunker, 312 F.3d 145, 150 (4th Cir. 2002); see also In re Southeast Hotel Props. Ltd. P‘ship, 99 F.3d 151, 154 (4th Cir. 1996).
II.
The bankruptcy court vacated Hamlett‘s default judgment against Amsouth, finding that Hamlett‘s service of process on Amsouth did not comply with the requirement under Federal Rule of Bankruptcy Procedure 7004(h) that service of process be made on an officer of the institution. Hamlett argues that service on Amsouth‘s registered agent satisfied the requirements of the rule.
With exceptions not relevant here, Rule 7004(h) provides:
Service on an insured depository institution (as defined in section 3 of the Federal Deposit Insurance Act) in a contested matter or adversary proceeding shall be made by certified mail addressed to an officer of the institution.
In support of his contention that service on Amsouth‘s registered agent satisfied Rule 7004(h), Hamlett focuses initially not on the language of the rule, which was enacted as part of the Bankruptcy Reform Act of 1994, but on its legislative history. In fact, neither the plain language of Rule 7004(h) nor its history support Hamlett‘s position.
A comparison of Rule 7004(h)‘s language with that of other federal rules governing service of process on non-governmental entities and corporations clearly evidences a Congressional intent to fashion more rigorous service of process requirements for adversary proceedings initiated against insured depository institutions. For example, Rules
The Rule‘s legislative history bears this out. Contrary to Hamlett‘s suggestion that the “only” purpose of the Rule was “to require that service of process on a bank be accomplished by certified mail,” the legislative history indicates that Congress added Rule 7004(h) largely in response to the perceived need to grant additional safeguards to depository institutions involved in adversary proceedings. See 139 Cong. Rec. S707-10 (daily ed. Jan. 26, 1993) (discussing bill to
Hamlett also seeks to rely on Virginia law for his contention that service on Amsouth‘s registered agent was proper. He first maintains that under Virginia law “a corporation is not required to appoint a registered agent, but if it does appoint a registered agent,” as Amsouth did, then service on that agent satisfies Virginia law and, by extension, Rule 7004(h). Alternatively, Hamlett contends that in designating a registered agent, Amsouth effectively waived its entitlement to service of process on “an officer of the institution.” Both of these arguments fail.
First, Hamlett misreads Virginia law. Under the law of Virginia, Amsouth, a foreign corporation doing business in Virginia, must designate a registered agent, but service on that agent is “not . . . necessarily the required means of serving a corporation.” See
Moreover, even if Hamlett had not misread Virginia law, he could not prevail because, as Amsouth notes, “state law should not and does not preempt federal procedural law” in this context. See
Accordingly, we agree with the district court that the bankruptcy court did not abuse its discretion in vacating the default judgment. Rule 7004(h) clearly requires service on an “officer” of an insured depository institution, and we see no basis for concluding that a registered agent should be treated as an “officer” of the institution under the Rule.
III.
As to the merits of the adversary proceeding, Hamlett argues that the district court erred in refusing to conclude that the “disallowance” of Amsouth‘s claims in the bankruptcy proceedings voided the liens held by Amsouth on Hamlett‘s property. The parties agree that Amsouth did not timely file its claims and that this provided the only basis for the bankruptcy court‘s initial decision to void the liens.
Section 506(d)(2) of the Bankruptcy Code provides:
(d) To the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void, unless —
(2) such claim is not an allowed secured claim due only to the failure of any entity to file a proof of such claim under section 501 of this title.
More than a century ago, the Supreme Court held that a bankruptcy discharge of a secured creditor‘s claim does not affect the status of the creditor‘s underlying lien on the debtor‘s property. See Long v. Bullard, 117 U.S. 617, 620-21 (1886) (“Here the creditor neither proved his debt in bankruptcy nor released his lien. Consequently his security was preserved notwithstanding the bankruptcy of his debtor.“). Over the years, the Court reiterated this holding. See, e.g., Louisville Joint Stock Land Bank v. Radford, 295 U.S. 555, 582-83 (1935) (holding that mortgage was not disturbed by bankruptcy proceedings); United States Nat‘l Bank v. Chase Nat‘l Bank, 331 U.S. 28, 33 (1947) (stating that a secured creditor “may disregard bankruptcy proceedings, decline to file a claim, and rely solely upon his security if that security is properly and solely in his possession“).
Congress‘s overhaul of the Bankruptcy Code in 1978 raised some questions as to whether this well-established pre-Code principle survived. See Bankruptcy Reform Act of 1978, Pub. L. 95-598, 92 Stat. 2549. The new Code itself did not expressly articulate this principle, and the language of the Code, including
The case at hand, of course, does not involve the precise issue resolved in Dewsnup. See id. at 412 (holding that
Moreover, in a pre-Dewsnup case, the Seventh Circuit employed the same principle in rejecting an argument identical to Hamlett‘s. See In re Tarnow, 749 F.2d 464, 466 (7th Cir. 1984). In that case, the creditor had a valid security interest on the debtor‘s crops and equipment. The debtor filed for bankruptcy, and two months after the bar date for filing proofs of claim, the creditor filed its proof of claim. Because of the late filing, the bankruptcy court not only disallowed the claim, but also extinguished the creditor‘s lien. Id. at 464. The creditor appealed only the judgment avoiding its lien. The Seventh Circuit reversed, holding that the failure of the creditor to timely file its claims in the bankruptcy proceedings did not extinguish the underlying lien. Id. at 466-67.
Although the Tarnow court recognized that “read literally”
The destruction of a lien is a disproportionately severe sanction for a default that can hurt only the defaulter. . . . While no one wants bankruptcy proceedings to be cluttered up by tardy claims, the simple and effective means of discouraging them is to dismiss the claim (that is, the claim against the bankrupt estate, as distinct from the claim against the collateral itself), out of hand, because it is untimely. . . . If an ordinary plaintiff files a suit barred by the statute of limitations, the sanction is dismissal; it is not to take away his property. And a lien is property.
Tarnow has been cited and followed by numerous courts. The Eighth Circuit, for example, has relied on it in similarly interpreting
Section 506(d) voids a lien that secures a claim against the debtor, unless the claim is not treated as an allowed secured claim simply because the creditor has elected not to file a proof of claim. . . . Subsection (2) was intended “to make clear that the failure of the secured creditor to file a proof claim is not a basis for avoiding the lien on the secured creditor.”
Cen-Pen Corp. v. Hanson, 58 F.3d 89, 93-4 (4th Cir. 1995) (quoting In re Tarnow, 749 F.2d at 467) (footnote omitted) (emphasis in original). We there explained that “[a] bankruptcy discharge extinguishes only in personam claims against the debtor(s), but generally has no effect on an in rem claim against the debtor‘s property.” Cen-Pen, 58 F.3d at 92. Thus, even though a secured creditor may lose its right to participate in the distribution of the bankrupt estate (by virtue of having its claims against the bankrupt estate disallowed), the disallowance of its claim does not necessarily void its lien.
Hamlett acknowledges that “[u]nder 506(d)(2) . . . Amsouth‘s lien[s] would have passed through bankruptcy if Amsouth had not filed a claim,” but insists that “the facts of this case establish that Amsouth filed a claim which was disallowed and, if the plain language of
Accepting Hamlett‘s argument would mean that although a lien remains intact despite a creditor‘s total failure to file a claim, a lien would be extinguished whenever a creditor filed a valid claim after the bar date; i.e., attempted compliance with the Bankruptcy Code‘s procedure for filing a claim would place an underlying lien at risk, while complete refusal to participate in the bankruptcy proceedings does not. Given the Supreme Court‘s holding in Dewsnup, 502 U.S. at 417, that “liens pass through bankruptcy unaffected,” even if
Accordingly, like the district court, we conclude that the bankruptcy court correctly found that Amsouth‘s liens were not extinguished by its failure to timely file its claims against the bankrupt estate.
IV.
For the foregoing reasons, the judgment of the district court is
AFFIRMED.