Dewsnup v. Timm
502 U.S. 410 (1992)
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Rule of Law:
Section 506(d) of the Bankruptcy Code does not permit a Chapter 7 debtor to 'strip down' a creditor's lien on real property to the judicially determined value of the collateral. An allowed claim secured by a lien survives bankruptcy and remains attached to the property in its full amount until foreclosure.
Facts:
- On June 1, 1978, Aletha Dewsnup and her husband borrowed $119,000 from respondents.
- The loan was secured by a Deed of Trust, which created a lien on two parcels of farmland the Dewsnups owned in Utah.
- In 1979, the Dewsnups defaulted on their loan payments.
- Under the terms of the deed, the default gave respondents the right to foreclose on the property to satisfy the debt.
- In 1981, respondents issued a notice of default, though foreclosure was halted by subsequent bankruptcy proceedings.
- At the time of the dispute, the debt had grown to approximately $120,000, while the fair market value of the farmland was determined to be only $39,000.
Procedural Posture:
- Aletha Dewsnup filed a petition for liquidation under Chapter 7 of the Bankruptcy Code in the U.S. Bankruptcy Court for the District of Utah.
- Dewsnup then filed an adversary proceeding in that court seeking to void the portion of respondents' lien that exceeded the fair market value of the collateral, pursuant to § 506(d).
- The Bankruptcy Court, a court of first instance, refused to void the lien and dismissed Dewsnup's action.
- Dewsnup appealed to the U.S. District Court for the District of Utah, which summarily affirmed the Bankruptcy Court's judgment.
- Dewsnup (appellant) then appealed to the U.S. Court of Appeals for the Tenth Circuit, with the creditors as appellees.
- The Court of Appeals affirmed the lower courts' decisions, holding that lien stripping was not permissible.
- The U.S. Supreme Court granted certiorari to resolve a split among the Circuit Courts of Appeals on this issue.
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Issue:
Does § 506(d) of the Bankruptcy Code permit a Chapter 7 debtor to void the portion of a creditor's lien on real property that exceeds the judicially determined value of that property?
Opinions:
Majority - Justice Blackmun
No. Section 506(d) of the Bankruptcy Code does not allow a Chapter 7 debtor to void the portion of a lien that is undersecured. The Court holds that the term 'allowed secured claim' in § 506(d) should not be interpreted by reference to the valuation in § 506(a), but rather refers to any claim that is both 'allowed' under § 502 and 'secured' by a lien. Because the respondents' claim was allowed and secured by a valid lien, § 506(d) does not apply. The Court reasons that Congress did not intend to depart from the well-established pre-Code rule that liens pass through bankruptcy unaffected. Allowing a debtor to 'strip down' the lien would provide a windfall to the debtor from any post-valuation appreciation in the property, which should rightly accrue to the creditor who bargained for the lien as security.
Dissenting - Justice Scalia
Yes. The plain language of § 506(d) permits a debtor to void the portion of a creditor's lien that exceeds the value of the collateral. The dissent argues that the phrase 'allowed secured claim' is a term of art defined in § 506(a) and must be interpreted consistently throughout the statute. Under § 506(a), a claim is 'secured' only to the extent of the collateral's value, with the remainder being an 'unsecured claim.' Therefore, the plain meaning of § 506(d) is to void the lien to the extent it secures the 'unsecured' portion of the claim. The majority, by ignoring this plain text in favor of pre-Code practice and its own policy judgments, disregards established principles of statutory construction and creates unpredictability in the law.
Analysis:
This decision established the controversial principle that liens 'ride through' a Chapter 7 bankruptcy, preventing debtors from using the valuation process in § 506(a) to reduce the amount of a secured creditor's lien. It preserved the creditor's full in rem right to any future appreciation in the collateral's value. The Court's interpretive methodology, which prioritized pre-Code practice and legislative silence over what the dissent viewed as plain statutory text, created a significant and contentious precedent. This ruling drew a sharp distinction between liquidation under Chapter 7 and reorganization under Chapters 11 and 13, where lien modification is more broadly permitted.
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