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Keywords

appealtrustbankruptcyrespondentliens
trustbankruptcyrespondentliens

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Dewsnup v. Timm, 502 U.S. 410, 112 S.Ct. 773, 116 L.Ed.2d 903, 60 USLW 4111, 25 Collier Bankr.Cas.2d 1297, 22 Bankr.Ct.Dec. 750, Bankr. L. Rep. P 74361A

Facts

Petitioner Aletha Dewsnup and her deceased husband borrowed $119,000 from respondents, secured by a Deed of Trust on two parcels of Utah farmland. After defaulting on the loan, Dewsnup filed for bankruptcy under Chapter 7, claiming that the debt exceeded the fair market value of the land. The Bankruptcy Court determined the land's value to be $39,000 but denied Dewsnup's request to reduce the lien to that value, leading to appeals through the District Court and the Court of Appeals, both of which affirmed the Bankruptcy Court's decision.

Petitioner Aletha Dewsnup and her deceased husband borrowed $119,000 from respondents, secured by a Deed of Trust on two parcels of Utah farmland. After defaulting on the loan, Dewsnup filed for bankruptcy under Chapter 7, claiming that the debt exceeded the fair market value of the land.

Issue

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?

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?

Rule

Section 506(d) of the Bankruptcy Code states that a lien is void to the extent that it secures a claim against the debtor that is not an allowed secured claim.

Section 506(d) of the Bankruptcy Code states that a lien is void to the extent that it secures a claim against the debtor that is not an allowed secured claim.

Analysis

The Court analyzed the relationship between Sections 506(a) and 506(d) of the Bankruptcy Code, concluding that Dewsnup's argument to reduce the lien based on the judicially determined value of the property was inconsistent with the pre-Code rule that liens on real property pass through bankruptcy unaffected. The Court found that since the creditor's claim was fully allowed and secured, it could not be classified as 'not an allowed secured claim' under Section 506(d).

The Court analyzed the relationship between Sections 506(a) and 506(d) of the Bankruptcy Code, concluding that Dewsnup's argument to reduce the lien based on the judicially determined value of the property was inconsistent with the pre-Code rule that liens on real property pass through bankruptcy unaffected.

Conclusion

The Supreme Court affirmed the decisions of the lower courts, holding that Section 506(d) does not permit the debtor to 'strip down' the creditor's lien to the value of the collateral.

The Supreme Court affirmed the decisions of the lower courts, holding that Section 506(d) does not permit the debtor to 'strip down' the creditor's lien to the value of the collateral.

Who won?

Respondents prevailed in the case because the Supreme Court upheld the lower courts' rulings that the creditor's lien could not be reduced based on the property's judicially determined value.

Respondents prevailed in the case because the Supreme Court upheld the lower courts' rulings that the creditor's lien could not be reduced based on the property's judicially determined value.

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