Donald E. Ryan; Harley A. Ryan v. Homecomings Financial Network

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
 DONALD E. RYAN; HARLEY A. RYAN,
Plaintiffs-Appellants,
v.
HOMECOMINGS FINANCIAL NETWORK,
Defendant-Appellee, No. 00-2137 
and
SOVEREIGN BANK, successor in
interest to FirstPlus Financial,
Incorporated,
Defendant. 
 DONALD E. RYAN; HARLEY A. RYAN,
Plaintiffs-Appellants,
v.
SOVEREIGN BANK, successor in No. 00-2138 
interest to FirstPlus Financial,
Incorporated; HOMECOMINGS
FINANCIAL NETWORK,
Defendants-Appellees. 
Appeals from the United States District Court
for the District of Maryland, at Greenbelt.
Peter J. Messitte, District Judge.
(CA-00-1443-PJM, CA-00-1444-PJM, BK-99-18568-PM)
Argued: April 2, 2001
Decided: June 1, 2001

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Before LUTTIG and TRAXLER, Circuit Judges, and
Lacy H. THORNBURG, United States District Judge for the
Western District of North Carolina, sitting by designation.
Affirmed by published opinion. Judge Thornburg wrote the opinion,
in which Judge Luttig and Judge Traxler joined.
COUNSEL
ARGUED: Alan David Eisler, PALEY, ROTHMAN, GOLDSTEIN,
ROSENBERG & COOPER, CHTD., Bethesda, Maryland, for Appel-
lants. Michael Thomas Cantrell, FRIEDMAN & MACFADYEN,
P.A., Baltimore, Maryland, for Appellees. ON BRIEF: Wendelin I.
Lipp, PALEY, ROTHMAN, GOLDSTEIN, ROSENBERG & COO-
PER, CHTD., Bethesda, Maryland, for Appellants.
OPINION
THORNBURG, District Judge:
In this appeal we are asked to decide whether a debtor who has
filed for Chapter 7 bankruptcy may "strip off" an allowed unsecured
lien pursuant to 11 U.S.C. § 506(d). Because we find that the
Supreme Court’s reasoning in Dewsnup v. Timm, 502 U.S. 410
(1992), is equally applicable to "strip offs" as to "strip downs", we
hold that a debtor may not strip off an unsecured but allowed lien pur-
suant to Section 506(d).
I. BACKGROUND
Appellants, husband and wife, filed a joint voluntary Chapter 7
bankruptcy petition. Their residence is subject to a valid first deed of
trust having a principal balance due of $181,826. The property has a
current fair market value of $179,000. The property is also subject to
a consensual, bargained-for second deed of trust securing a loan in the
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amount of $47,305, payable to Sovereign Bank, successor in interest
to FirstPlus Financial, Inc. The parties agree that the second deed of
trust is a fully allowed claim, but wholly unsecured as to the property.
Appellants subsequently filed a complaint in the bankruptcy pro-
ceeding pursuant to 11 U.S.C. §§ 506(a) and (d) requesting the bank-
ruptcy court to strip off the second deed of trust as a wholly
unsecured, and therefore void, lien.1 No response to the complaint
having been filed, Appellants filed a timely motion for entry of
default and default judgment. The bankruptcy clerk entered default
against FirstPlus Financial, Inc., on January 27, 2000. On March 20,
2000, however, the bankruptcy court declined to enter a default judg-
ment, and instead, entered an order denying the motion. It also
entered a separate, second order dismissing Appellants’ complaint.
By memorandum of decision filed with the foregoing orders, the
bankruptcy court explained its reasoning concerning the orders and its
refusal to strip off the second deed of trust.2 By timely notice, the
bankruptcy court’s rulings were appealed to the district court. On
August 14, 2000, without further discussion and by adopting the rea-
soning of the bankruptcy court, the district court affirmed both orders
of the bankruptcy court. Timely notice of appeal was filed.
Appellate jurisdiction is based upon the provisions of 28 U.S.C.
§ 158(d), granting courts of appeal jurisdiction of appeals of all final
decisions, judgments, orders, and decrees entered pursuant to 28
U.S.C. §§ 158(a) and (b).
1FirstPlus Financial, Inc., was lienholder at the time the complaint was
filed and never responded to the complaint.
2The decision, Cunningham v. Homecomings Financial Network, 246
B.R. 241 (Bankr. D. Md. 2000), was a joint opinion deciding two sepa-
rate adversary proceedings including Appellants’ action and the Cun-
ningham action, both involving the same ultimate "strip off" question
consolidated for disposition by the court. The Cunninghams did not
appeal. However, Homecomings Financial Network, holder of the sec-
ond Cunningham lien, was permitted to intervene by order of the bank-
ruptcy court filed April 18, 2000, and then became an Appellee in this
action.
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A district court’s conclusions of law are reviewed de novo. In re
Shearson, 224 F.3d 346, 348-49 (4th Cir. 2000); In re Wilson, 149
F.3d 249, 251 (4th Cir. 1998). For the reasons that follow, we affirm
the district court.
II. ISSUES
A. Default
We first address Appellants’ contention that the district court erred
in affirming the bankruptcy court’s orders dismissing the complaint
and refusing to enter a default judgment in their favor. The position
is not well taken.
The defendant, by his default, admits the plaintiff’s well-
pleaded allegations of fact, is concluded on those facts by
the judgment, and is barred from contesting on appeal the
facts thus established. . . . As the Supreme Court stated in
the "venerable but still definitive case" of Thomson v. Woos-
ter: a default judgment may be lawfully entered only "ac-
cording to what is proper to be decreed upon the statements
of the bill, assumed to be true," and not "as of course
according to the prayer of the bill." The defendant is not
held . . . to admit conclusions of law. In short, despite occa-
sional statements to the contrary, a default is not treated as
an absolute confession by the defendant of his liability and
of the plaintiff’s right to recover.
Nishimatsu Constr. Co., Ltd. v. Houston Nat’l Bank, 515 F.2d 1200,
1206 (5th Cir. 1975) (quoting Thomson v. Wooster, 114 U.S. 104, 113
(1884)) (internal quotations and other citations omitted). The court
must, therefore, determine whether the well-pleaded allegations in
Appellants’ complaint support the relief sought in this action. Weft,
Inc. v. G.C. Inv. Assocs., 630 F. Supp. 1138, 1141 (E.D.N.C. 1986),
aff’d, 822 F.2d 56 (table), 1987 WL 36124 (4th Cir. 1987). For the
purpose of this decision, the complaint alleges, the default establishes,
and the parties agree that the fair market value of the property is
$179,000, that the amount owed to the holder of the first deed of trust
is $181,876, and that the amount owed to the holder of the second
deed of trust is $47,305.46. The district court correctly concluded that
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acceptance of these undisputed facts does not necessarily entitle the
Appellants to the relief sought; in this case, stripping off the second
deed of trust. Nishimatsu, 515 F.2d at 1206.
B. Strip off
We now address the primary issue before the court: May Chapter
7 debtors strip off an allowed junior lien on their residence where the
senior lien exceeds the agreed fair market value of the real property?3
Appellants contend that 11 U.S.C. § 506(a) determines the secured
status of claims, and that pursuant to its provisions Appellee’s junior
lien is unsecured and therefore may be "stripped off" pursuant to 11
U.S.C. § 506(d). Section 506(a) provides in pertinent part:
An allowed claim of a creditor, secured by a lien on prop-
erty 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 . . . and is an unsecured
claim to the extent that the value of such creditor’s interest
is less than the amount of such allowed claim.
11 U.S.C. § 506(a). Section 506(d) of that Title provides in part that
"to the extent that a lien secures a claim against the debtor that is not
an allowed secured claim, such lien is void."4
In Dewsnup the Supreme Court addressed the question of whether
Chapter 7 debtors could strip down a consensual lien against their real
property. Those debtors’ property was encumbered by a first deed of
trust securing payment of $120,000. The property had an approximate
value of $39,000, leaving an unsecured deficiency of approximately
$81,000. The debtors then sought to have the secured lien "stripped
3"The term ‘strip down’ is used when a mortgage is partially secured
and partially unsecured, while the term ‘strip off’ is used when a junior
mortgage is totally unsecured." In re Fitzmaurice, 248 B.R. 356, 357 n.2
(Bankr. W.D. Mo. 2000).
4"A claim or interest, proof of which is filed under section 501 of this
title, is deemed allowed unless a party in interest . . . objects." 11 U.S.C.
§ 502(a).
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down" to $39,000, the claimed fair market value of the property, pur-
suant to the provisions of § 506(d). The relief sought by debtors was
denied by the lower courts. The Supreme Court affirmed.
[W]e hold that § 506(d) does not allow petitioner to "strip
down" respondents’ lien, because respondents’ claim is
secured by a lien and has been fully allowed pursuant to
§ 502. Were we writing on a clean slate, we might be
inclined to agree with petitioner that the words "allowed
secured claim" must take the same meaning in § 506(d) as
in § 506(a). But, given the ambiguity in the text, we are not
convinced that Congress intended to depart from the pre-
Code rule that liens pass through bankruptcy unaffected.
502 U.S. at 778 (internal footnote omitted).
Appellants contend however, that Dewsnup controls only a "strip
down" of a partially secured lien, not a "strip off" of a wholly unse-
cured lien, citing Howard v. Nat’l Westminster Bank, 184 B.R. 644,
646 (Bankr. E.D.N.Y. 1995), and other bankruptcy court decisions.
We are not persuaded.
The reasoning in Dewsnup is not ambiguous.
The practical effect of [Appellants’] argument is to freeze
the creditor’s secured interest at the judicially determined
valuation. By this approach, the creditor would lose the ben-
efit of any increase in the value of the property by the time
of the foreclosure sale. The increase would accrue to the
benefit of the debtor . . . as a "windfall."
[T]he creditor’s lien stays with the real property until the
foreclosure. That is what was bargained for by the mortga-
gor and the mortgagee. The voidness language sensibly
applies only to the security aspect of the lien and then only
to the real deficiency in the security. Any increase over the
judicially determined valuation during bankruptcy rightly
accrues to the benefit of the creditor . . . .
. . .
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Under the Bankruptcy Act of 1898, a lien on real property
passed through bankruptcy unaffected. This Court recently
acknowledged that this was so. See Farrey v. Sanderfoot,
500 U.S. 291, 297 [ ] (1991) ("Ordinarily, liens and other
secured interests survive bankruptcy"); Johnson v. Home
State Bank, 501 U.S. 78, 84 [ ] (1991) ("Rather, a bank-
ruptcy discharge extinguishes only one mode of enforcing a
claim — namely, an action against the debtor in personam
— while leaving intact another — namely, an action against
the debtor in rem").
Dewsnup, 502 U.S. at 417-18 (internal footnote omitted).
[T]o attribute to Congress the intention to grant a debtor the
broad new remedy against allowed claims to the extent that
they become "unsecured" for purposes of § 506(a) without
the new remedy’s being mentioned somewhere in the Code
itself or in the annals of Congress is not plausible, in our
view, and is contrary to basic bankruptcy principles.
Id., at 420. Following the Supreme Court’s teachings in Dewsnup, as
we must, we discern no principled distinction to be made between the
case sub judice and that decided in Dewsnup. The Court’s reasoning
in Dewsnup is equally relevant and convincing in a case like ours
where a debtor attempts to strip off, rather than merely strip down, an
approved but unsecured lien.
Appellants next contend that the Supreme Court’s decision in
Nobelman v. American Savings Bank, 508 U.S. 324 (1993), permits
the stripping off of wholly unsecured liens. We disagree. Nobelman
represented a debtor’s effort under Chapter 13 (Bankruptcy Code, 11
U.S.C. §§ 506(a) and 1322(b)(2)) to bifurcate an undersecured home-
stead claim into a secured claim and an unsecured claim, thereby
reducing the amount of the mortgage to the judicially determined fair
market value of the property. A unanimous court denied the relief
sought. The decision in no way affects the Court’s ruling in Dewsnup,
a Chapter 7 proceeding interpreting the relationship between 11
U.S.C. §§ 506(a) and 506(d). Nobelman’s only reference to Dewsnup
is to affirm its language as to rights that were "bargained for by the
mortgagor and the mortgagee." Nobelman, 508 U.S. at 329-30 (citing
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Dewsnup, 502 U.S. at 417). Indeed, the Nobelman Court made no ref-
erence to (much less discussed) § 506(d), the code provision at issue
here and in Dewsnup. We find no basis for divining language in
Nobelman that contradicts or modifies in any respect the clear holding
of Dewsnup.
We are aware, as Appellants argue, that some courts are not in
agreement with this analysis of Dewsnup. See Yi v. Citibank, 219 B.R.
394, 319 (E.D. Va. 1998) (Chapter 7 debtor’s proceeding—"Because
Citibank’s lien is wholly unsecured, by definition it cannot be an
‘allowed secured claim.’ From this it inexorably follows that the lien
is void." (citing Howard, 184 B.R. at 644)); In re Smith, 247 B.R. 191
(W.D. Va. 2000); Farha v. First American Title Ins., 246 B.R. 547,
549 (Bankr. E.D. Mich. 2000) (where claim is unsecured rather than
undersecured "there is no allowed secured claim under § 506(a));
Zemple v. Household Finance Corp., 244 B.R. 625 (Bankr. W.D. Ky.
1999) (same).
Other courts have concluded, as do we, that a Chapter 7 debtor may
not use § 506(d) to strip off an allowed, wholly unsecured consensual
junior lien from real property.
In Laskin v. First Nat’l Bank of Keystone, 222 B.R. 872 (9th Cir.
1998), Chapter 7 debtors sought to use § 506(d) to strip off a junior
lien on their residence where the senior lien exceeded the fair market
value of the real property.
[W]hether the lien is wholly unsecured or merely underse-
cured, the reasons articulated by the Supreme Court for its
holding in Dewsnup [ ]—that liens pass through bankruptcy
unaffected, that mortgagee and mortgagor bargained for a
consensual lien which would stay with real property until
foreclosure, and that any increase in value of the real prop-
erty should accrue to the benefit of the creditor, not the
debtor or other unsecured creditors—are equally pertinent.
Neither Laskin nor the courts in Yi and Howard propound
any rationale for distinguishing. . . . Section 506 was
intended to facilitate valuation and disposition of property in
the reorganization chapters of the Code, not to confer an
additional avoiding power on a Chapter 7 debtor.
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Id., at 876 (citation omitted). See also In re Fitzmaurice, 248 B.R. at
361-63 (Chapter 7 debtors may not use 11 U.S.C. § 506(d) to "strip
off" completely unsecured junior mortgage liens from their property);
In re Swiatek, 231 B.R. 26 (Bankr. D. Del. 1999) (Dewsnup reasoning
applies whether lien is partially or wholly unsecured and extending
Dewsnup rationale to judgment liens which are wholly unsecured); In
re Virello, 236 B.R. 199 (Bankr. D.S.C. 1999) (refers to doctrine of
stare decisis and prohibits use by Chapter 7 debtors of § 506(d) to
strip off wholly unsecured consensual liens from real property).
The majority opinion did not escape criticism from numerous
scholars, see Cunningham, 246 B.R. at 246, or an erudite dissent by
Justice Scalia, Dewsnup, 502 U.S. at 420. Even so, "[w]hile the opin-
ion may be the subject of scholarly criticism, it remains the law of the
land." Cunningham, at 246.
We accept the fact that in many cases junior lien holders may have
little or no opportunity to recover all or even a part of their unsecured
claims. Nevertheless, the parties bargained for their positions with
knowledge that a superior lien existed. Under this Chapter 7 proceed-
ing, they are entitled to their lien position until foreclosure or other
permissible final disposition is had. Likewise, we are acutely aware
that in the volatile, modern real estate market, substantial price varia-
tions occur with weekly or monthly regularity.
In conclusion, we hold that an allowed unsecured consensual lien
may not be stripped off in a Chapter 7 proceeding pursuant to the pro-
visions of 11 U.S.C. §§ 506(a) and (d).
AFFIRMED
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