UNITED STATES BANKRUPTCY COURT

IN RE: SHAWN M. COURTNEY ANGELA D. COURTNEY CASE NO. 96-51166

EASTERN DISTRICT OF KENTUCKY

LEXINGTON

IN RE:

SHAWN M. COURTNEY

ANGELA D. COURTNEY CASE NO. 96-51166

DEBTORS

MEMORANDUM OPINION

This case is before the court on objection of the debtors, Shawn and Angela Courtney, to the claim of Commercial Credit Corporation in the amount of $12,686.87 filed July 1, 1996.

FINDINGS OF FACT:

The facts are not in dispute. On June 4, 1996 the debtors filed a joint petition for relief under chapter 7 of the United States Bankruptcy Code. In Schedule D to their petition the debtors list as encumbrances on their residence a first mortgage debt to Rural Economic and Community Development ("Rural Development") and a second mortgage debt to Commercial Credit Corporation. The residence is identified as a house and lot located at 5 Garden Park Circle, Nicholasville, Jessamine County, Kentucky. In the schedules to their petition and in subsequent pleadings the debtors estimate the value of their residence as $60,000.

In Schedule C to their petition the debtors claim a homestead exemption in the amount of $10,000 pursuant to KRS 427.060. The debtors filed a statement of intent to retain the house and lot by reaffirming the debt owed to Rural Development and by avoiding the lien of Commercial Credit Corporation.

On July 26, 1996 Mrs. Courtney reaffirmed the debt to the United States Department of Agriculture, Farmers Home Administration, Rural Development.

On July 1, 1996 Commercial Credit Corporation filed its claim as a secured claim in the amount of $12,686.87, inclusive of interest at 18.99 per annum, based on a debt evidenced by a note and mortgage dated June 30, 1995. On July 5, 1996 Rural Development filed its claim as a secured claim in the amount of $60,395.38, inclusive of interest at 6.50 per annum, based on a debt evidenced by a note and mortgage dated April 22, 1994. The latter is a purchase money mortgage; the former is a home equity loan.

On July 25, 1996 the chapter 7 trustee filed a notice of abandonment of property of the estate, including the residence of the debtors. The trustee states as his reason for believing the property valueless to the estate that "[t]he amount of the claims [the first and second mortgages], the Debtors’ homestead exemption plus the costs incurred if sold exceed the value of the property."

On August 2, 1996 the debtors moved to avoid the lien of Commercial Credit Corporation pursuant to 11 U.S.C. ' 506(d). The motion was heard on August 12, 1996 and on August 15, 1996 the court entered an order overruling the motion without prejudice. In its order the court noted that Dewsnup v. Timm, 112 S.Ct. 773 (1992), holds that section 506(d) does not allow a debtor to "strip down" a creditor’s lien when the creditor’s claim is secured by a lien and has been fully allowed pursuant to section 502. The claim of Commercial Credit Corporation stood allowed as filed as a fully secured claim because no objection to the claim had been made at that time.

On November 22, 1996 an order of discharge was entered.

On December 6, 1996 counsel for the debtors filed in their behalf an objection to allowance of the claim of Commercial Credit as a secured claim, citing 11 U.S.C. ' 506(a). The debtors object to the claim on the ground that the first lien of Rural Development encumbers the entire fair market value of their home "resulting in no equity to which Commercial Credit’s mortgage lien can attach" and thus the claim of Commercial Credit should be declared to be unsecured.

A hearing on the debtors’ objection was held December 16, 1997. Since the creditor had been given only ten days’ notice of the hearing, rather than the thirty days required by Rule 3007 of the Federal Rules of Bankruptcy Procedure, the matter was reset for hearing on April 21, 1997. Commercial Credit made no appearance at either hearing. In fact, other than the filing of its proof of claim, Commercial Credit has made no appearance in this case.

CONCLUSIONS OF LAW:

The court is required to determine the amount of the claim of Commercial Credit Corporation and the enforceability of the claim against the debtor and property of the debtor under "applicable law" as of the date of the filing of the debtors’ petition for relief under chapter 7 of the Bankruptcy Code. 11 U.S.C. § 502(b)(1). Thus the fact the debtors’ residence has been abandoned by the trustee and is no longer property of the estate is immaterial. The residence became and was property of the estate on the date of commencement of this case, which is the crucial date for determining the enforceability of the claim of Commercial Credit Corporation. Dewsnup v. Timm, 112 S.Ct. 773, 785 (1992).

The Supreme Court also has held that a discharge in bankruptcy once entered relates back to the date of the commencement of a bankruptcy case and bars collection of a dischargeable debt as a personal liability of the debtor as of that date. Local Loan Co. v. Hunt, 292 U.S. 234, 54 S.Ct. 695, 78 L.Ed. 1230 (1934).

Our analysis turns then to 11 U.S.C. ' 502(a) which states that a claim is "deemed allowed" if there is no objection to it. Once there is an objection the court must determine, after notice and a hearing, whether the claim should be allowed and if so in what amount. 11 U.S.C. ' 502(b). Rules 3007, 3012, Federal Rules of Bankruptcy Procedure. There are 9 grounds upon which the court can determine a claim should be disallowed. The objection applicable here is:

(1) such claim is unenforceable against the debtor and property of the debtor, under any agreement or applicable law for a reason other than because such claim is contingent or unmatured [.]

The phrase "applicable law" includes both state and federal law. Patterson v. Shumate, 112 S.Ct. 2242 (1992). Rule 3012 of the Federal Rules of Bankruptcy Procedure is federal law.

The evidence before the court is that the value of the debtors’ house and lot is $60,000. The claim of Rural Development, the first mortgage holder, is $60,395.38. Consequently, the court determines the value of the claim of Commercial Credit secured by a lien on property in which the estate has an interest to be zero.

Stated another way, 11 U.S.C. ' 506 directs the determination of secured status. Pursuant to subsection (a) of that section a claim may be bifurcated, that is, allowed as a secured cliam to the extent of the value of the creditor's interest in the estate's interest in the collateral and unsecured for the balance of the claim. In this case the estate's interest in the amount of $60,000 in the debtors' residence is encumbered by the first mortgage of Rural Development in excess of that amount. The claim of Commercial Credit, the second mortgage holder, is completely "underwater," is totally unsecured. The value of the "creditor’s interest in the estate’s interest in such property" is zero.

The holding here is not in conflict with that of Dewsnup v. Timm, 112 S.Ct. 773 (1992). Indeed, it is supported by that case. In Dewsnup the court in adopting the alternative position of the respondents joined by the United States as amicus curiae specifically held that liens pass through bankruptcy unaffected where "the claim…has been [deemed] ‘allowed’ pursuant to ' 502 of the Code and is secured by a lien with recourse to the underlying collateral." In Dewsnup the creditor's claim was deemed allowed as fully secured and passed through bankruptcy unaffected because there had been no objection to the allowance of the claim as filed. 11 U.S.C. § 502(a). Section 506(d) "voids only liens corresponding to claims that have not been allowed and secured." Id. at 777.

To the surprise of bankruptcy practitioners the Supreme Court declined to determine an "allowed secured claim" under section 506(d) in the manner specified by section 506(a), and declined to express an opinion on whether the term "allowed secured claim" as used in other sections of the Code should be determined by reference to section 506(a).

Justice Scalia, who filed a caustic dissent, had occasion to twist the knife in Patterson v. Shumate, 112 S.Ct. 2242 (1992), a later decision by the court during the same Term, in which the court held that the phrase "applicable nonbankruptcy law" as used in section 541(c)(2) of the Bankruptcy Code includes federal as well as state law. Contrary to the methodology it had eschewed in Dewsnup, the court relied on other provisions of the Code in ascribing an unrestricted meaning to the phrase "applicable nonbankruptcy law." This caused Justice Scalia to observe:

This application of a normal and obvious principle of statutory construction would not merit comment, except that we explicitly rejected it, in favor of a one-subsection-at-a-time approach, when interpreting another provision of this very statute earlier this Term. See Dewsnup v. Timm, 502 U.S. 410, 416-417, 112 S.Ct. 773, 777-778, 116 L.Ed.2d 903 (1992); id., at 420-423, 112 S.Ct., at 780-783 (SCALIA, J. dissenting). "[W]e express no opinion," our decision said, "as to whether the words [at issue] have different meaning in other provisions of the Bankruptcy Code." Id., at 417, n. 3, 112 S.Ct., at 778, n. 3. I trust that in our search for a neutral and rational interpretative methodology we have now come to rest, so that the symbol of our profession may remain the scales, not the seesaw.

Patterson v. Shumate, 112 S.Ct. 2242, 2251 (1992) (Scalia, J., concurring).

The question presented is how the claim of Commercial Credit shall be allowed.

Rule 3012 of the Federal Rules of Bankruptcy Procedure authorizes the court to determine the value of a claim secured by a lien on property in which the estate has an interest. This rule and Rule 3007, promulgated by the United States Supreme Court on April 25, 1983 and subsequently approved by Congress pursuant to title 28 U.S.C. § 2075, when considered in conjunction with section 506(d), provides substantial evidence that Congress intended to change pre-Code law that liens on real property pass through bankruptcy unaffected. Apparently the debtor in Dewsnup had not invoked Rule 3012 in two prior chapter 11 cases which had been dismissed on in her subsequent chapter 7 case, which had been pending approximately three years before the debtor commenced her adversary proceeding seeking to strip down the lender's mortgage and avoid the mortgage to the extent it was determined to be unsecured. The court concluded the mortgage had passed through bankruptcy (perhaps three times) unaffected.

The facts of this case are different. The court finds Dewsnup is not controlling. In this case the debtors have timely invoked Rules 3007 and 3012 by objecting to the allowance of the claim of Commercial Credit Corporation as a secured claim in any amount.

Having so concluded, the court holds that the claim of Commercial Credit Corporation in the amount of $12,686.87 is unenforceable against the property located at 5 Garden Park Circle, Nicholasville, Kentucky. The claim is allowed in the above amount as an unsecured claim which Commercial Credit Corporation is barred from collecting as a personal liability of the debtors, Shawn and Angela Courtney. The lien of Commercial Credit Corporation on the real property of the debtors is void because it does not secure an allowed secured claim of such

creditor. 11 U.S.C. § 506(d).

Dated:

By the court -

_________________________

JOE LEE

U. S. BANKRUPTCY JUDGE

Copies to:

Ginger C. Knight, attorney for the debtors

Commercial Credit Corporation

Castil Williams, chapter 7 trustee

U. S. Trustee

UNITED STATES BANKRUPTCY COURT

EASTERN DISTRICT OF KENTUCKY

LEXINGTON

IN RE:

SHAWN M. COURTNEY

ANGELA D. COURTNEY CASE NO. 96-51166

DEBTORS

ORDER

In conformity with the Memorandum Opinion of the court this day entered the claim of Commercial Credit Corporation is allowed as an unsecured claim in the amount of $12,686.87 for purposes of distribution in this case. The motion of the debtors, pursuant to title 11 U.S.C. § 506(d), to void the lien of Commercial Credit Corporation as an encumbrance on their residence is sustained. The court finds the consensual mortgage lien of Commercial Credit Corporation on the real property of the debtors described as 5 Garden Park Circle, Nicholasville, Jessamine County, Kentucky is void and does not survive the debtors' bankruptcy case as a lien on said property.