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In the Matter of: Jeremiah Joseph Cook, Jr., Debtor. v. Indymac Bank

June 6, 2011

IN THE MATTER OF: JEREMIAH JOSEPH COOK, JR., DEBTOR. JEREMIAH JOSEPH COOK, JR., APPELLANT,
v.
INDYMAC BANK, FSB, APPELLEE.



ON APPEAL FROM AN ORDER OF THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF NEW JERSEY [Case No. 09-36729/JHW]

The opinion of the court was delivered by: Hon. Jerome B. Simandle

OPINION

SIMANDLE, District Judge:

I. INTRODUCTION

This matter is before the Court on the appeal of an order of the Bankruptcy Court for the District of New Jersey. Appellant Jeremiah Joseph Cook, Jr., who is a Chapter 7 debtor, moved to void a second mortgage lien on his property. The Bankruptcy Court, by the Honorable Judith H. Wizmur, Chief U.S. Bankruptcy Judge, denied the motion.*fn1 On review of this order, the question before this Court is whether a lien is rendered void under 11 U.S.C. § 506(d) if it is junior to another lien that exceeds the appraised value of the collateral property. Because this Court agrees with the Bankruptcy Court that the controlling precedent interprets § 506(d) as not rendering such a lien void, the Court will affirm the Bankruptcy Court's order denying Appellant's motion.

II. BACKGROUND

Jeremiah Joseph Cook, Jr. owns a home that is encumbered by a first and second mortgage held by the Appellee, IndyMac Bank, FSB. The balance of the first mortgage is $366,216.19, while the home has been appraised at $364,000.00.*fn2 Cook filed for Chapter 7 bankruptcy, and moved to void the second mortgage lien pursuant to 11 U.S.C. § 506(d), a statutory provision related to the validity of certain liens.*fn3 The Bankruptcy Court denied Cook's motion on July 29, 2010, finding that § 506(d) does not permit a debtor to void a junior lien attached to real property just because sale of the property at its current value would not satisfy the entirety of a senior lien.

The Bankruptcy Code divides claims secured by a lien on property, which are otherwise claims generally allowed in bankruptcy proceedings under § 502, into secured and unsecured claims. See 11 U.S.C. § 506(a). A claim secured by a lien on property "is a secured claim to the extent of the value of such creditor's interest in the estate's interest in such property." Id. A claim secured by a lien on property "is an unsecured claim to the extent that the value of such creditor's interest [in the estate's interest in such property] is less than the amount of such allowed claim." Id. The Bankruptcy Code also renders void certain liens, providing in § 506(d) that "[t]o the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void." 11 U.S.C. § 506(d).

In Dewsnup v. Timm, 502 U.S. 410 (1992), the Supreme Court considered whether § 506(d) has the effect of rendering void that portion of a lien securing the part of a claim that exceeds the appraised value of the collateral property - in other words, whether § 506(d) renders void the portion of a lien that secures the part of a claim considered unsecured by § 506(a). The Court held that in a Chapter 7 bankruptcy, § 506(d) does not so operate. Id. at 778.

In so holding, the Court acknowledged that one possible interpretation of § 506(a) and (d) is that these provisions split liens into secured and unsecured portions and render the unsecured liens void. Id. at 776-77. One reading of § 506(d) would understand "allowed secured claim" to mean a claim considered secured under § 506(a), such that §506(d) would mean this: To the extent that a lien secures a portion of a claim against the debtor that is not a secured claim as defined by § 506(a), such portion of the lien is void. See id. But the Supreme Court rejected the interpretation that reads the phrase "allowed secured claim" to mean a claim of a creditor that is considered a "secured claim" under § 506(a). Id. at 778. Instead, the Court interpreted the phrase "allowed secured claim" in § 506(d) to mean a claim secured by a lien which is allowed under § 502. Id. Thus, the Court read § 506(d) like this: To the extent that a lien secures a claim against the debtor that is not an allowed claim, such lien is void.

Dewsnup addressed what has been termed a "strip down" - the reduction of the value of a claim secured by a lien to the value of the collateral. Similar questions arise, as in the present case, when a junior lien is secured by a property that is also the subject of a senior lien that exceeds the value of the property; voiding that kind of lien has been termed a "strip off," since the debtor seeks to void the entirety of the lien because the entirety of the claim it secures exceeds the value of the property. The Debtor urges this Court to distinguish Dewsnup because of the difference between strip offs and strip downs. However, as explained below, the Bankruptcy Court correctly found that the difference between strip downs and strip offs does not provide a basis for distinguishing Dewsnup, and so this Court will affirm.

III. DISCUSSION

A. Standard of Review

This Court has jurisdiction to review the Order of the Bankruptcy Court pursuant to 28 U.S.C. ยง 158(a). The Court's review of bankruptcy courts' conclusions of law is de novo. See In re Top ...


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