Carroll et al v. Key Bank
Filing
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MEMORANDUM DECISION and Order-the Bankruptcy Courtdecision is REVERSED. Signed by Judge Clark Waddoups on 12/16/11. (jmr)
IN THE UNITED STATES DISTRICT COURT
DISTRICT OF UTAH, CENTRAL DIVISION
RILEY CARROLL and
JENNIFER CARROLL,
MEMORANDUM DECISION
AND ORDER
Appellants/Plaintiffs,
Case No. 2:10-cv-01055-CW
v.
Judge Clark Waddoups
KEY BANK,
Named non appearing
Defendant.
INTRODUCTION
Plaintiffs have appealed under 28 U.S.C. § 158(a)(1) from the order of Bankruptcy Judge
R. Kimball Mosier denying in part the Plaintiffs’ Motion to Enter Default Judgment Against
Defendant Key Bank in an unopposed, uncontested bankruptcy adversary proceeding. For the
reasons set forth below, the court reverses and remands this matter to the Bankruptcy Court to
strip off and void the Key Bank loan under 11 U.S.C. § 506(d).
JURISDICTION AND STANDARD OF REVIEW
This court has jurisdiction pursuant to 28 U.S.C. §§ 1334 and 157(a). Venue is
appropriate in the Central Division of the District of Utah under 28 U.S.C. §§ 1408 and 1409.
This is a “Core” proceeding under 28 U.S.C. § 157(b)(2)(A), (B), (E), (H), and (O).
There are no contested issues of fact in this appeal, only questions of law. This court
reviews the legal conclusions of the Bankruptcy Court de novo. See In re Albrecht, 233 F.3d
1258, 1260 (10th Cir. 2000); In re Herd, 840 F.2d 757 (10th Cir. 1988).
BACKGROUND
Appellants and Plaintiffs Riley Carroll and Jennifer Carroll (the “Carrolls”) borrowed
money from three financial institutions from January, 2007 to May, 2007. The CitiMortgage,
Inc. loan carries a present balance of $171, 382.83, the Citibank, NA loan a balance of
$42,599.04, and the Key Bank loan a balance of $21,635.98. The Carrolls pledged for the
foregoing loans their principal residence, located in West Jordan, Utah, the fair market value of
which is now no more than $180,000. Therefore, as the Bankruptcy Court found, “Key Bank has
no secured claim in this case.” Memorandum Decision on Plaintiffs’ Motion for Default
Judgment Against Defendant Key Bank (“Memorandum Decision”), at 4 (Dkt. No. 14 in Carroll
v. Key Bank (In re Carroll) Ch. 13, Case No. 10-20642, Adv. No. 10-02259 (Bkrtcy. D. Utah
Oct. 1, 2010)).
The Carrolls filed Adversary Proceeding No. 10-02259 on March 29, 2010 seeking to
have the Key Bank loan declared void and “stripped off” under 11 U.S.C. § 506(d). “Stripping
off” is a process by which a secondary lien is determined to be entirely unsecured by any
collateral and is then treated as unsecured debt during the bankruptcy process. See In re Griffey,
335 B.R. 166, 169 n.1 (B.A.P. 10th Cir. 2005); In re Fitzmaurice, 248 B.R. 356, 357 n.2 (Bankr.
W.D. Mo. 2000). In contrast, a loan might be “stripped down” when it is determined that the
collateral is less than the value of the loan, and the lien is split into two portions: one part, equal
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to the value of the underlying property, is secured, while the remainder of the loan becomes
unsecured debt. See Griffey, 335 B.R. at 169 n.1; Fitzmaurice, 248 B.R. at 357 n. 2. Thus,
“stripping down” applies to undersecured liens, while “stripping off” applies to those which are
wholly unsecured.
The Bankruptcy Court, relying on Dewsnup v. Timm, 502 U.S. 410 (1992), held that
“because § 506(d) does not allow a debtor to ‘strip down’ a creditor’s lien if the creditor has a
claim that is allowed pursuant to § 502, a debtor may not ‘strip off’ a creditor’s lien if the
creditor has a claim that is allowed pursuant to § 502.” Memorandum Decision, at 6 7. The
Carrolls appealed the Bankruptcy Court’s decision pursuant to 28 U.S.C. § 158(a)(1).
ANALYSIS
I.
A DEBTOR MAY “STRIP OFF” A WHOLLY UNSECURED LOAN UNDER §
506(d) IN THE CHAPTER 13 CONTEXT
The applicable provisions of the Bankruptcy Code at issue are 11 U.S.C. §§ 506(a)(1) and
506(d):
(a)(1) 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, or
to the extent of the amount subject to setoff, as the case may be, and is an
unsecured claim to the extent that the value of such creditor’s interest or
the amount so subject to setoff is less than the amount of such allowed
claim. Such value shall be determined in light of the purpose of the
valuation and of the proposed disposition or use of such property, and in
conjunction with any hearing on such disposition or use or on a plan
affecting such creditor’s interest.
(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
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(1) such claim was disallowed only under section 502(b)(5)
or 502(e) of this title; or
(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.
Because the fair market value of the Carrolls’ residence is less than the total owed on the
CitiMortgage and Citibank loans, Key Bank’s interest in the collateral has no economic value,
and, thus, the loan with Key Bank is completely unsecured pursuant to § 506(a).
§ 506(d) provides that “to the extent that a lien secures a claim against the debtor that is
not an allowed secured claim, such lien is void.” 11 U.S.C. § 506(d). By its terms, § 506(d) does
not void a lien if it is an “allowed secured claim.” Id. If a lien remains even partially secured, it
cannot be avoided under this provision. In contrast, if a claim is wholly unsecured, then there is,
by definition, no allowed secured claim, and § 506(d) declares that such liens are void.
In reaching its holding that §506(d) does not void the Key Bank loan, the Bankruptcy
Court relied upon the holdings of Dewsnup v. Timm, 502 U.S. 410 (1992) and Nobelman v.
American Savings Bank, 508 U.S. 324 (1993). The court, however, did not differentiate between
the strip down of partially secured claims, prohibited by Dewsnup and Nobelman, and the strip
off of a wholly unsecured loan.
In Dewsnup, the Supreme Court held that, in the Chapter 7 context, Ҥ 506(d) does not
allow petitioner to ‘strip down’ respondents’ lien.” 502 U.S. at 417. This holding clarified the
relationship between §§ 506(a) and 506(d), and rested upon a determination that a chapter 7
debtor cannot void a lien under § 506(d) when the lien is undersecured by application of §
506(a). Id. In making its ruling, the Court specifically commented on “the difficulty of
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interpreting the statute [§ 506] in a single opinion that would apply to all possible fact
situations,” and stated it was focusing only on the dispute before it. Dewsnup, 502 U.S. at
416 17 (“We therefore focus upon the case before us and allow other facts to await their legal
resolution on another day.”). The Dewsnup court never addressed the effect of § 506(d) to a
wholly unsecured lien, or to a case in the Chapter 13 context. Id. at 417.
A year later, the Supreme Court again revisited § 506(d), in Nobelman v. American
Savings Bank. This case addressed the effect of the statute in the context of a Chapter 13
bankruptcy. Nobelman, 508 U.S. at 332. Again, the Court determined that one cannot bifurcate,
or strip down, a partially secured loan. Id.
Both Dewsnup and Nobelman address the issue of whether an undersecured claim may be
bifurcated into unsecured and secured portions so that a partial avoidance of a lien may occur.
The holdings of Dewsnup and Nobelman are in accordance with the wording of the statute, as it
does not refer to partial avoidance of a lien. Instead, it states that “to the extent that a lien
secures a claim against the debtor that is not an allowed secured claim, such lien is void.” 11
U.S.C. § 506(d). Although Nobelman extended Dewsnup to the Chapter 13 context, it still dealt
with stripping down an undersecured loan. In the current case, the Bankruptcy Court extended
the holding of Nobelman beyond its original scope, applying it to prohibit the strip off of a wholly
unsecured lien. The court concludes such an extension is not appropriate under present Tenth
Circuit law.
Some circuit courts have extended Dewsnup to prohibit a lien being stripped off in
Chapter 7 bankruptcies. See In re Haberman, 516 F.3d 1207, 1213 (10th Cir. 2008) (discussing
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case law from the Fourth and Sixth Circuits). Nevertheless, most circuits permit such loan
stripping in the context of Chapter 13. See In re Thompson, 352 F.3d 519 (2d Cir. 2003); In re
Lane, 280 F.3d 663 (6th Cir. 2002); In re McDonald, 205 F.3d 606 (3d Cir. 2000); In re Bartee,
212 F.3d 277 (5th Cir. 2000); In re Tanner, 217 F.3d 1357 (11th Cir. 2000); In re Mann, 249
B.R. 831 (B.A.P. 1st Cir. 2000); In re Lam, 211 B.R. 36 (B.A.P. 9th Cir. 1997). The Tenth
Circuit has not directly addressed the question of whether a wholly unsecured loan can be
stripped off in a Chapter 13 proceeding, yet it has stated in dicta that it is inclined to follow other
courts of appeal who have declined to extend Dewsnup “well outside the statutory context in
which it was decided.” Haberman, 516 F.3d at 1213 (citations omitted). In Haberman, the court
agreed with the reasoning of other circuit courts that “to prohibit lien stripping in reorganization
cases would be inconsistent with pre-Code law, with key statutory provisions and principles
applicable in the reorganization chapters, and with Dewnsup’s own admonition that it should be
read narrowly.” Id.; see also In re Geyer, 203 B.R. 726 (Bankr. S.D. Cal. 1996) (“There is
neither a logical or rational basis for a creditor holding a completely unsecured claim to be
protected from claim modification in a bankruptcy case simply because the creditor had obtained
a lien on the homestead prepetition.”).
Moreover, the Bankruptcy Court in this District has previously permitted lien stripping in
the Chapter 13 context where the creditor’s claim is wholly unsecured. In one decision, the
Bankruptcy Court held that, in a Chapter 13 bankruptcy, “when there is no equity in the property
. . . then the claim is an unsecured claim and the lien is voidable under § 506(d) and can be
‘stripped’ from the residence.” In re Pierce, 282 B.R. 26, 29 (Bankr. D. Utah 2002). Other
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bankruptcy courts within the Tenth Circuit have agreed. See In re Samala, 295 B.R. 380, 382
(Bankr. D.N.M. 2003); In re German, 258 B.R. 468 (Bankr. E.D. Okla. 2001); In re Lee, 161
B.R. 271 (Bankr. W.D. Okla. 1993). Accordingly, the court concludes the Bankruptcy Court
erred in holding that strip off of a lien in the Chapter 13 context is prohibited in this Circuit.
II.
THE ANTI-MODIFICATION CLAUSE FOR RESIDENTIAL MORTGAGES IN
11 U.S.C. § 1322(b)(2) DOES NOT PREVENT MODIFICATION OF THE KEY
BANK LOAN
The Bankruptcy Code permits a Chapter 13 debtor to “modify the rights of holders of
secured claims, other than a claim secured only by a security interest in real property that is the
debtor’s principal residence.” 11 U.S.C. § 1322(b)(2) (emphasis added). The Carrolls pledged
their home as collateral for the three loans discussed above, including that of Key Bank.
In Nobelman, the Supreme Court held that Ҥ1322(b)(2) prohibits a Chapter 13 debtor
from relying on § 506(a) to reduce an undersecured homestead mortgage to the fair market value
of the mortgage residence.” 508 U.S. at 325 (emphasis added). In other words, debtors cannot
“strip down” liens attached to their home. Subsequent to the Nobelman decision, a split of
authority has arisen among courts as to whether or not the anti-modification clause applies to
wholly unsecured mortgages or liens, as opposed to those partially secured.
Following the majority of courts, the Tenth Circuit Bankruptcy Appellate Panel has held
that the statute dictates that “the antimodification clause of § 1322(b)(2) does not apply to the
holder of a wholly unsecured claim.” In re Griffey, 335 B.R. 166, 169 70 (B.A.P. 10th Cir. 2005)
(citing and agreeing with case law from the Second, Third, Fifth, Sixth, Ninth, and Eleventh
Circuit Courts of Appeals, as well as bankruptcy court decisions from the First, Seventh, and
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Tenth Circuits). In accordance with the Tenth Circuit’s opinion in Griffey, the anti-modification
clause for residential mortgages in 11 U.S.C. §1322(b)(2) is not applicable here because the Key
Bank loan is wholly unsecured, and thus, the loan may be voided under § 506(d).
CONCLUSION
The equity value of the Carrolls’ property does not exceed the secured claims of the
CitiMortgage and Citibank loans, and therefore, Key Bank’s claim is wholly unsecured under
section 506(a). Because the claim is wholly unsecured, Key Bank’s loan is void under section
506(d) and should be “stripped off.” Although the Carrolls’ home originally served as collateral
for the Key Bank loan, the loan is no longer secured by a security interest in the residence, and
section 1322(b)(2) does not apply to prevent this result. Consequently, the Bankruptcy Court
decision is REVERSED.
DATED this 16th day of December, 2011.
BY THE COURT:
____________________________________
Clark Waddoups
United States District Judge
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