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ALETHA DEWSNUP v. LOUIS L. TIMM

decided: January 15, 1992.

ALETHA DEWSNUP, PETITIONER
v.
LOUIS L. TIMM, ET AL.



ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE TENTH CIRCUIT.

Blackmun, J., delivered the opinion of the Court, in which Rehnquist, C. J., and White, Stevens, O'connor, and Kennedy, JJ., joined. Scalia, J., filed a dissenting opinion, in which Souter, J., joined. Thomas, J., took no part in the consideration or decision of the case.

Author: Blackmun

JUSTICE BLACKMUN delivered the opinion of the Court.

We are confronted in this case with an issue concerning § 506(d) of the Bankruptcy Code, 11 U.S.C. § 506(d).*fn1 May a debtor strip down a creditor's lien on real property to the value of the collateral, as judicially determined, when that value is less than the amount of the claim secured by the lien?

I

On June 1, 1978, respondents loaned $119,000 to petitioner Aletha Dewsnup and her husband, T. LaMar Dewsnup, since deceased. The loan was accompanied by a Deed of Trust granting a lien on two parcels of Utah farmland owned by the Dewsnups.

Petitioner defaulted the following year. Under the terms of the Deed of Trust, respondents at that point could have proceeded against the real property collateral by accelerating the maturity of the loan, issuing a notice of default, and selling the land at a public foreclosure sale to satisfy the debt. See also Utah Code Ann. §§ 57-1-20 to 57-1-37 (1990 and Supp. 1991).

Respondents did issue a notice of default in 1981. Before the foreclosure sale took place, however, petitioner sought reorganization under Chapter 11 of the Bankruptcy Code, 11 U.S.C. § 1101 et seq. That bankruptcy petition was dismissed, as was a subsequent Chapter 11 petition. In June 1984, petitioner filed a petition seeking liquidation under Chapter 7 of the Code, 11 U.S.C. § 701 et seq. Because of the pendency of these bankruptcy proceedings, respondents were not able to proceed to the foreclosure sale. See 11 U.S.C. § 362.

In 1987, petitioner filed the present adversary proceeding in the Bankruptcy Court for the District of Utah seeking, pursuant to § 506, to avoid" a portion of respondents' lien. App. 3. Petitioner represented that the debt of approximately $120,000 then owed to respondents exceeded the fair market value of the land and that, therefore, the Bankruptcy Court should reduce the lien to that value. According to petitioner, this was compelled by the interrelationship of the security-reducing provision of § 506(a) and the lien-voiding provision of § 506(d). Under § 506(a) ( 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"), respondents would have an allowed secured claim" only to the extent of the judicially determined value of their collateral. And under § 506(d) ("To the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void"), the court would be required to void the lien as to the remaining portion of respondents' claim, because the remaining portion was not an allowed secured claim" within the meaning of § 506(a).

The Bankruptcy Court refused to grant this relief. In re Dewsnup, 87 B. R. 676 (1988). After a trial, it determined that the then value of the land subject to the Deed of Trust was $39,000. It indulged in the assumption that the property had been abandoned by the trustee pursuant to § 554, and reasoned that once property was abandoned it no longer fell within the reach of § 506(a), which applies only to property in which the estate has an interest," and therefore was not covered by § 506(d).

The United States District Court, without a supporting opinion, summarily affirmed the Bankruptcy Court's judgment of dismissal with prejudice. App. to Pet. for Cert. 12a.

The Court of Appeals for the Tenth Circuit, in its turn, also affirmed. In re Dewsnup, 908 F.2d 588 (1990). Starting from the fundamental premise" of § 506(a) that a claim is subject to reduction in security only when the estate has an interest in the property, the court reasoned that because the estate had no interest in abandoned property, § 506(a) did not apply (nor, by implication, did § 506(d)). 908 F.2d, at 590-591.The court then noted that a contrary result would be inconsistent with § 722 under which a debtor has a limited right to redeem certain personal property. Id., at 592.

Because the result reached by the Court of Appeals was at odds with that reached by the Third Circuit in Gaglia v. First Federal Savings & Loan Assn., 889 F.2d 1304, 1306-1311 (1989), and was expressly recognized by the Tenth Circuit as being in conflict, see 908 F.2d, at 591, we granted certiorari. U.S. (1991).

II

As we read their several submissions, the parties and their amici are not in agreement in their respective approaches to the problem of statutory interpretation that confronts us. Petitioner-debtor takes the position that § 506(a) and § 506(d) are complementary and to be read together. Because, under § 506(a), a claim is secured only to the extent of the judicially determined value of the real property on which the lien is fixed, a debtor can void a lien on the property pursuant to § 506(d) to the extent the claim is no longer secured and thus is not an allowed secured claim. In other words, § 506(a) bifurcates classes of claims allowed under § 502 into secured claims and unsecured claims; any portion of an allowed claim deemed to be unsecured under § 506(a) is not an allowed secured claim" within the lien-voiding scope of § 506(d). Petitioner argues that there is no exception for unsecured property abandoned by the trustee.

Petitioner's amicus argues that the plain language of § 506(d) dictates that the proper portion of an undersecured lien on property in a Chapter 7 case is void whether or not the property is abandoned by the trustee. It further argues that the rationale of the Court of Appeals would lead to evisceration of the debtor's right of redemption and the elimination of an undersecured creditor's ability to participate in the distribution of the estate's assets.

Respondents primarily assert that § 506(d) is not, as petitioner would have it, rigidly tied" to § 506(a), Brief for Respondents 7. They argue that § 506(a) performs the function of classifying claims by true secured status at the time of distribution of the estate to ensure fairness to unsecured claimants. In contrast, the lien-voiding § 506(d) is directed to the time at which foreclosure is to take place, and, where the trustee has abandoned the property, no bankruptcy distributional purpose is served by voiding the lien.

In the alternative, respondents, joined by the United States as amicus curiae, argue more broadly that the words allowed secured claim" in § 506(d) need not be read as an indivisible term of art defined by reference to § 506(a), which by its terms is not a definitional provision. Rather, the words should be read term-by-term to refer to any claim that is, first, allowed, and, second, secured. Because there is no question that the claim at issue here has been allowed" pursuant to § 502 of the Code and is secured by a lien with recourse to the underlying collateral, it does not come within the scope of § 506(d), which voids only liens corresponding to claims that have not been allowed and secured. This reading of § 506(d), according to respondents and the United States, gives the provision the simple and sensible function of voiding a lien whenever a claim secured by the ...


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