PETER J. MESSITTE, District Judge.
This Chapter 13 bankruptcy case is on appeal from an Order of the United States Bankruptcy Court for this District. See Burkhart, et al. v. Community Bank of Tri County, et al. (In re Burkhart, et al.), Ch. 13 Case No. 12-26888, Adv. No. 13-00291 (Bankr. D. Md.). After obtaining a lift-stay order from the Court, Debtor-Appellants Edwin Michael Burkhart and Teresa Stein Burkhart (the "Burkharts") brought an adversary proceeding seeking to avoid wholly unsecured liens attached to their residential real property. Appellee Community Bank of Tri-County ("Tri-County"), which held two of these liens, failed to file timely proofs of claim. When Tri-County did not respond to the Burkharts' adversary Complaint, the Burkharts moved for default judgment. The Bankruptcy Court, however, denied the Burkharts' motion, ruling that Tri-County's liens could not be avoided in the absence of theirs being an "allowed claim"—that is, a claim for which a proof of claim had been filed. The Burkharts have appealed the Bankruptcy Court's order. For the reasons that follow, the decision of the Bankruptcy Court is
The Burkharts, who perform government contract work, have accrued substantial obligations in the form of mortgages and liens against their homestead as well as other unsecured debts. Am. Appellant's Br. 6, ECF No. 8.
On September 14, 2012, they filed a Voluntary Petition for Bankruptcy under Chapter 13 of the Bankruptcy Code. Voluntary Petition, ECF No. 1-1. That same day, the Bankruptcy Court entered a Notice of Commencement of Chapter 13 Bankruptcy Case, Meeting of Creditors, & Deadlines, which informed the Burkharts' creditors that the bar date for claims (the "Bar Date") for non-governmental units was January 23, 2013. Notice of Commencement, ECF No. 1-7.
On May 16, 2013, nearly four months after the Bar Date, the Burkharts, following a liftstay, filed a Complaint (in this Court) to Declare Validity, Scope and Extent of Liens of Community Bank of Tri-County and PNC Bank (the "Complaint"). Compl., ECF No. 1-64. The Complaint sought to remove wholly unsecured liens attached to the Burkharts' real property located at 2060 Barakat Court, Huntingtown, Maryland 20639 (the "Property").
The Complaint was properly served on PNC and Tri-County. Certificate of Service, ECF No. 1-86. On September 23, 2013, after neither creditor responded, the Burkharts moved for a clerk's entry of default and default judgment. Mot. Entry Clerk's Default and Default J., ECF No. 1-89. On the same day, the Clerk entered a default against both PNC and Tri-County. Entry of Default, ECF Nos. 1-91, 1-92.
On September 29, 2013, the Bankruptcy Court entered a default judgment against PNC, which had the effect of the Burkharts avoiding the lien held by PNC. Order Granting Mot. Default as to PNC, ECF No. 1-95. With respect to Tri-County, however, the Bankruptcy Court denied the motion for default judgment without prejudice. Order Denying Mot. Default as to Tri-County, ECF No. 1-96.
In response to the Bankruptcy Court's denial, the Burkharts filed an Amended Motion for Default Judgment against Tri-County. Am. Mot. Default J. as to Tri-County, ECF No. 1-99. They again sought a declaratory ruling to avoid Tri-County's liens as in rem claims because they were purportedly valueless, and thus wholly unsecured.
On October 25, 2013, the Bankruptcy Court issued a Memorandum Opinion with respect to the Amended Motion for Default Judgment ("Bankruptcy Court Memorandum 1"), adopting the reasoning of White v. FIA Card Services, N.A., 494 B.R. 227, 230 (W.D. Va. 2012), and concluding that 11 U.S.C. § 506(d)(2) only voids a lien that secures a claim against the debtor which is not an allowed secured claim, except when that claim is not treated as an allowed secured claim simply because the creditor has elected not to file a proof of claim. Bankr. Ct. Mem. 1 at 2-3, ECF No. 1-101. Thus, as the Bankruptcy Court reasoned, since Tri-County had not filed a proof of claim, its lien could not be avoided by reason of § 506(d)(2). Id. 3. The Bankruptcy Court gave the Burkharts fourteen days to respond. Id.
On November 12, 2013, the Burkharts filed a response, arguing that they were not seeking to "void" Tri-County's lien under 11 U.S.C. § 506(d), but rather to "avoid" the lien under 11 U.S.C. §§ 506(a) and 1322(b). Burkharts' Resp. to Mem. Op. Am. Mot. Default 6-7, ECF No. 1-103. The Burkharts argued that fifteen years of Fourth Circuit law permitted the lien avoidance they sought under 11 U.S.C. §§ 506(a) and 1322(b). Id. 7-11.
On January 9, 2014, the Bankruptcy Court issued a second opinion and order dealing with the Amended Motion for Default Judgment ("Bankruptcy Court Memorandum 2"), reaffirming its earlier position that, absent an allowed claim filed by Tri-County, the court could not enter an order that would avoid its lien. Bankr. Ct. Mem. 2 at 3, ECF No. 1-104. As the Bankruptcy Court reasoned, since Tri-County did not file a proof of claim, it did not not have an allowed secured claim. Accordingly, its claim could not be evaluated under 11 U.S.C. § 506(a), and its lien could not be avoided pursuant to 11 U.S.C. § 506(d).
This Appeal followed. ECF No 1.
On appeal, the Burkharts contend that the Bankruptcy Court erred in dismissing their adversary proceeding against Tri-County. They submit that their Complaint was a "garden variety" lien avoidance action under 11 U.S.C. §§ 506(a) and 1322(b); that lien avoidances in Chapter 13 cases under § 506(a) and § 1322(b) have a long history in the Fourth Circuit; and that language in 11 U.S.C. § 506(d) — which requires the filing of a proof of claim prior to declaring any lien "void" — is immaterial to the relief they seek.
In response, the Trustee argues that the Bankruptcy Court was correct to rely on §§ 506(a) and 506(d) which, together with § 1322(b)(2), form the basis for value-based lien avoidances in Chapter 13 proceedings. Appellee's Br. 10, ECF No. 12. Although the mechanism for value-based lien avoidances is frequently misunderstood by debtors, the "voiding" component is found in § 506(d). See id. 11-15, 19-20. As the Trustee explains, § 506(d) does not allow lien avoidance when the underlying claim is not "allowed" because a proof of that claim has not been filed. Id. 20-23. According to the Trustee, the Burkharts are effectively seeking to bypass the proof of claim and claim allowance processes with respect to Tri-County. Such a maneuver, says the Trustee, is not only improper under the plain text of the applicable statutory provisions; it also fails to respect the underlying policies of bankruptcy law. Id. 23-24; see also Appellee's Suppl. Br. 2, ECF No. 2. The Trustee also argues that Bankruptcy Rule 3002(c)(3) is irrelevant to the analysis, but if anything, undermines the Burkharts' arguments. Id. 23; see also Appellee's Suppl. Br. 3-7.
The Court has jurisdiction over this Appeal pursuant to 28 U.S.C. § 158(a)(1), which gives "[t]he district courts of the United States . . . jurisdiction to hear appeals (1) from final judgments, orders, and decrees; . . . of bankruptcy judges entered in cases and proceedings referred to the bankruptcy judges under section 157 of this title."
The issue raised in this case — i.e., whether a Chapter 13 debtor can avoid a completely unsecured junior lien when no proof of claim has been filed — is a question of law. Legal questions decided by the bankruptcy court are subject to de novo review in the district court. In re Meredith, 527 F.3d 372, 375 (4th Cir. 2008).
The issue before the Court appears to be one of first impression.
The Court begins with a brief overview of the relevant statutory provisions and case law.
Chapter 13 of the Bankruptcy Code allows individual debtors to "obtain adjustment of their indebtedness through a flexible repayment plan approved by a bankruptcy court." Nobleman v. American Savings Bank, et al., 508 U.S. 324, 327 (1993). The elements of a confirmable Chapter 13 plan are set forth in 11 U.S.C. § 1322, which provides, in part, that a plan may
11 U.S.C. § 1322(b)(2) (emphasis added).
The concept of "lien stripping" refers to one method of modifying the rights of holders of secured claims under § 1322(b)(2) when the value of the underlying collateral is less than the value of the lien. "Lien stripping" turns on another section of the Bankruptcy Code, 11 U.S.C. § 506(a), which allows a bankruptcy court to determine whether a particular claim that is "secured" under commercial law "is, or is not, a `secured claim' in the context of the Bankruptcy Code." See Johnson v. Asset Mgmt. Grp. LLC, 226 B.R. 364, 366 (D. Md. 1998). "Whether a lienholder has a `secured claim' or an `unsecured claim,' in the sense in which those terms are used in the Bankruptcy Code, depends on whether the lienholder's interest in the collateral has economic value." First Mariner Bank v. Johnson, 411 B.R. 221, 224 (D. Md. 2009), aff'd sub nom. In re Johnson, 407 F. App'x 713 (4th Cir. 2011) (quoting In re Lane, 280 F.3d 663, 664 (6th Cir. 2002)).
11 U.S.C. § 506(a) (emphasis added). This subsection, then, effectively divides a creditor's "allowed claim," as defined under 11 U.S.C. § 502(a),
The core dispute before the Court at this time pertains to the precise mechanism for "stripping off" or avoiding a valueless junior lien in a Chapter 13 case. The Bankruptcy Court concluded that it is imperative to refer to another subsection of 11 U.S.C. § 506 — § 506(d) — and consider it in tandem with §§ 506(a) and 1322(b)(2) to effectuate the strip off. See Bankr. Ct. Mem. 1 at 2-3; Bankr. Ct. Mem. 2 at 3. Subsection 506(d) provides:
11 U.S.C. § 506(d) (emphasis added). As the Bankruptcy Court reasoned, § 506(a) sets forth the manner in which a lien against real property is evaluated (in terms of being secured or unsecured), but § 506(d) is the vehicle by which a lien, along with § 1322(b)(2) (and other Bankruptcy Code provisions) — if it is not an allowed secured claim — may actually be avoided. See Bankr. Ct. Mem. 1 at 2-3. This distinction is important because § 506(d)(2) expressly precludes avoiding a lien that is "not an allowed secured claim" if that lien is not an allowed secured claim "due only to the failure of any entity to file a proof of such claim."
In the present case, Tri-County did not file proof of claims for its junior liens on the Property, nor did the Burkharts or the Trustee do so with respect to Tri-County's liens.
Three Bankruptcy Code provisions form the basis for the Bankruptcy Court's conclusion that the Burkharts may not avoid Tri-County's liens for which no proof of claim had been filed: 11 U.S.C. §§ 502(a), 506(a), and 506(d). The Court agrees that these provisions bar avoiding Tri-County's liens.
As discussed above, § 506(d) provides that a lien cannot be declared "void" if such claim "is not an allowed secured claim due only to an entity's failure to file proof of claim." See 11 U.S.C. § 506(d). If this section is a necessary component of lien avoidance, as the Trustee contends, then it expressly forecloses avoiding those liens which are "not allowed" because there are no filed "proof[s] of such claim[s]," which is the case with Tri-County's liens in this proceeding.
The role of § 506(d) in Chapter 13 lien avoidance actions is not entirely illuminated by Fourth Circuit and District of Maryland decisions. In Davis, the Fourth Circuit discusses "strip down[s]" and "strip off[s]" in a Chapter 13 proceeding, citing only §§ 506(a) and 1322(b)(2), 716 F.3d at 335-36, as does the District of Maryland in Johnson, 226 B.R. at 365-66 and First Mariner Bank, 411 B.R. at 223. But in those cases, the courts were addressing a broader issue — namely, whether a court may, as a matter of law, strip off a completely unsecured junior homestead lien in a Chapter 13 case. The courts did not address the role and effect of § 506(d) in a lien avoidance action, nor did they consider whether language in § 506(d) precluded lien avoidance in certain circumstances.
The Court finds certain considerations persuasive.
First, Supreme Court precedent, albeit in the Chapter 7 context, suggests that § 506(d) is necessary to effectuate a lien "strip down" or "strip off." In Dewsnup v. Timm, the Court concluded that a lien that is at least partially secured by collateral, following a § 506(a) valuation, is not avoidable under § 506(d). 506 U.S. 410, 418 (1992). The Court's analysis thus implies that § 506(d) was the specific provision through which avoidance should occur after valuation under § 506(a). See id. The Supreme Court recently affirmed this view in Bank of America v. Caulkett,
Second, despite the fact that specific reference to § 506(d)'s voiding powers does not always appear in legal discussion post-Dewsnup, the failure to reference the provision does not mean that it has no relevance to lien avoidance actions. Indeed, several courts have concluded to the contrary. See, e.g., In re Woolsey, 696 F.3d 1266, 1272-73 (10th Cir. 2012) (discussing the mechanisms for Chapter 13 lien avoidance actions under §§ 506(a) and 506(d) after Dewsnup); In re Kressler, 40 Fed. App'x 712, at *1 (3d Cir. 2002) (citing the voiding powers of § 506(d) in addressing whether a lien had been avoided despite the fact that the lien had not obtained "allowed secured status" for failure of a proper party to file timely proof of claim); White v. Fia Card Services, 494 B.R. at 230-31 (discussing the impact of § 506(d) in a Chapter 13 lien avoidance action); In re Scantling, 465 B.R. 671, 676 (S.D. Fla. 2012) (noting that "§ 506(d) does not operate by itself to strip a lien; it must operate in tandem with another provision to strip a lien"); Keith M. Lundin & Williams H. Brown, Chapter 13 Bankruptcy, 4thEdition § 128.1, at ¶ 40 ("On its face, § 506(d), combined with § 506(a), automatically voids a lien to the extent the allowed claim secured by that lien is unsupported by value in the collateral."); see also Matter of Lindsey, 823 F.2d 189, 189-90 (7th Cir. 1987) (explaining, in the context of a Chapter 7 case, that lien stripping results from the "combined effect" of §§ 506(a) and 506(d)).
Third, it is hard to imagine what other purpose § 506(d) would serve in the broader context of the Bankruptcy Code if it did not play a role in lien avoidance actions. "In interpreting a statute, we should strive to give effect to every word that Congress has used" to avoid surplusage. Healthkeepers, Inc. v. Richmond Ambulance Auth., 642 F.3d 466, 472 (4th Cir. 2011) (quoting Clinchfield Coal Co. v. Harris, 149 F.3d 307, 313 (4th Cir. 1998)). If a Chapter 13 lien could be "stripped off" or avoided solely through §§ 506(a) and 1322(b)(2), as the Burkharts contend, what would be the function of the language in § 506(d), which 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" (emphasis added)? Unless § 506(d) is relevant to lien avoidance, the Court would be constrained to conclude that the provision is mere surplusage.
For these reasons, the Court concludes that § 506(d), working in tandem with §§ 506(a) and 1322(b), constitutes the statutory mechanism for stripping off a wholly unsecured junior lien in a Chapter 13 case. Since § 506(d)(2) does not permit declaring a lien void when that lien is not an "allowed secured claim" "simply because the creditor has elected not to file a proof of claim," Cen-Pen Corp. v. Hanson, 58 F.3d 89, 93 (4th Cir. 1995), Tri-County's liens, for which no proof of claim was filed, cannot be avoided. See Kressler, 40 Fed. App'x at *1-3; White, 494 B.R. at 230-31. This result, moreover, makes sense in light the legislative history of § 506(d)(2). As the court explained in White:
494 B.R. at 230 (emphasis added).
Even excluding § 506(d) from the statutory analysis — and assuming that lien avoidance in Chapter 13 cases could be accomplished solely through §§ 506(a) and 1322(b)(2), as the Burkharts suggest — the Court would arrive at the same conclusion.
The plain language of § 506(a) requires that, in order to value a claim against property into secured and unsecured components, that claim must be "allowed." See 11 U.S.C. § 506(a) "An allowed claim of a creditor secured by a lien on property . . .") (emphasis added). The concept of an "allowed claim" is a term of art in the Bankruptcy Code, requiring the court to turn to another provision, 11 U.S.C. § 502, to further assess its meaning. Under § 502(a), "A claim or interest, proof of which is filed under section 501 of this title, is deemed allowed, unless a party in interest, including a creditor of a general partner in a partnership that is a debtor in a case under chapter of this title, objects." In other words, this subsection provides that, once a party files a proof of claim, that claim will be considered "allowed" so long as no interested party lodges an objection. Generally speaking, if no party begins this process by filing a proof of claim for a particular lien (pursuant to 11 U.S.C. § 501), that lien does not enter the claims allowance process,
Reading §§ 506(a) and 502(a) together, then, the logical conclusion is that a filed proof of claim is a prerequisite to establishing the value of a security. See In re Brisco, 486 B.R. 422, 426 (Bankr. N.D. Ill. 2013) (holding that filing a proof of claim is a necessary prerequisite to establishing the value of a security under § 506(a)); In re Callahan, 251 B.R. 170, 172-73 (Bankr. S.D. Fla. 2000) (same); In re King, 165 B.R. 296, 299 (Bankr. M.D. Fla. 1994) (same).
Still, the Burkharts point to Federal Rule of Bankruptcy Procedure 3002, which sets forth the time limits, the form, and the procedure for filing proofs of claim. With respect to timing, subsection (c) of the Rule states, in part:
Fed. R. Bankr. P. 3002(c). The Burkharts argue that Tri-County's liens fall within the exception for filing proofs of claim under Rule 3002(c)(3), which extends the applicable claims-filing deadline to thirty days after an avoidance judgment is final. Appellants' Suppl. Br. 9. As such, they suggest that no proof of claim could have been filed for Tri-County, since the Bankruptcy Court had not entered judgment declaring Tri-County's lien void. Am. Appellants' Br. 19-20. This, the Burkharts reason, means that a filed proof of claim cannot be a condition precedent to avoiding Tri-County's lien.
The Court disagrees. While the Burkharts are correct that Rule 3002(c)(3) is an exception to the ordinary timeline for filing proofs of claim, this exception applies only to "unsecured claims which arise[] in favor of an entity or become[] allowable as a result of a judgment." (emphasis added). But here, as noted by the Trustee, Tri-County's claims predated the avoidance action and arose from pre-existing contracts and equity security interests in real property, not by reason of a judgment. Tri-County's liens thus do not fit under Rule 3002(c)(3); they should have been filed by Tri-County, if at all, within 90 days of the meeting of creditors.
Again, Tri-County did not file a proof of claim under § 501, nor did the Trustee or the Burkharts.
For the foregoing reasons, the decision of the Bankruptcy Court is
A separate Order will
