Dewsnup Rears its Ugly Head in Seventh Circuit Chapter 13 Case

Posted by NCBRC - July 9, 2013

In Ryan v. U.S.A., No. 12-3398 (7th Cir. July 8, 2013), the IRS had a tax lien on debtor’s property as security for delinquent taxes of more than $136,000.00. At the time debtor filed his chapter 13 petition the value of his estate property totaled approximately $1,600.00. He moved the court to value the IRS’s lien under section 506(a), to treat the secured portion of the lien in the bankruptcy, and to strip the unsecured portion under section 506(d). The bankruptcy court agreed with the IRS that section 506(d) does not authorize a court to strip a wholly unsecured lien.

The Seventh Circuit granted the debtor’s petition for direct appeal and affirmed.

Section 506(a) provides that “’[a]n allowed claim . . is a secured claim to the extent of the value of such creditor’s interest in the estate’s interest in such property.” Section 506(d) provides that “[t]o the extent that lien secures a claim against the debtor that is not an allowed secured claim, such lien is void.” Like many debtors, Ryan interpreted these provisions as creating a two-step process under which a lien is valued under section 506(a) and the unsecured portion stripped under section 506(d). Also, like many debtors, Ryan found himself pressed up against the brick wall put up by the Supreme Court in the case of Dewsnup v. Timms, 502 U.S. 410 (1992), where, in a cringe-worthy opinion, the Court found “that §§ 506(a) and 506(d) did not have to be read together, and that the term ‘allowed secured claim’ in § 506(d) was not defined by reference to § 506(a).” Ryan, at * 3.

In Dewsnup the Court interpreted section 506(d)’s “allowed secured claim” as a claim which is first allowed, and second, secured within the meaning of state law rather than by the valuation performed under section 506(a). Dewsnup went on to find that section 506(d) does not permit a lien to be stripped down to its secured value in chapter 7. Courts have extended this finding to preclude strip-offs of wholly unsecured liens in chapter 7.  See Wachovia Mortgage v. Smoot, 478 B.R. 555 (E.D. N.Y. 2012) (joining majority of courts in finding that Dewsnup precludes strip off of wholly unsecured lien).

Ryan attempted to distinguish Dewsnup as involving a chapter 7 bankruptcy while his case is in chapter 13. The court found, however, that section 103(a), which provides that chapter 5 applies equally to chapters 7 and 13 precluded that distinction and that section 506(d) cannot be interpreted differently in chapter 13 than it is in chapter 7 merely in an effort to maximize the underlying benefits of chapter 13 bankruptcy where there is no statutory language to support such an interpretation.

This decision mirrors the recent conclusion by the Tenth Circuit in In re Woolsey, 696 F.3d 1266, 1273 (2012), in which that court rejected the debtor’s attempt to strip a lien under the authority of section 506(d) finding that the mechanism for stripping must be found elsewhere in the Code, such as in section 1322(b). See also Brinson v. U.S.A., 485 B.R. 890 (Bankr. N.D. Ill. 2013) (chapter 13 debtor cannot strip unsecured lien based solely upon section 506(d)); Cusato v. Springleaf Financial, 485 B.R. 824 (Bankr. E.D. Pa. 2013) (506(d) does not provide necessary mechanism for strip-off of wholly unsecured lien in chapter 13). But see National Capital Management v. Gammage-Lewis, No. 12-2286 (4th Cir. June 6, 2013) (finding that Rule 7001(2) provides the mechanism for stripping off a disallowed claim under section 506(d)).
The Ryan court concluded that “We agree with Woolsey, and join it in holding that the Court’s interpretation of § 506(d) in Dewsnup applies in Chapter 13 cases as well.”

Ryan opinion


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