# Amicus Curiae Brief — Dewsnup v. Timm

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URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385013_0041%3A09

## Record

- **Collection:** Supreme Court brief
- **Document type:** Amicus Curiae Brief
- **Published:** January 1, 1992
- **Citation:** 502 U.S. 410

## Text

No. 90-741

Iu the Supreme Court of the United

OCTOBER TERM, 1990

ALETHA DEWSNUP, PETITIONER
Vv.

Louis L. TIMM, ET AL.

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

BRIEF FOR THE UNITED STATES
AS AMICUS CURIAE SUPPORTING RESPONDENTS

KENNETH W. STARR
Solicitor General

STUART M. GERSON
Assistant Attorney General

JOHN G. ROBERTS, JR.
Deputy Solicitor General

RONALD J. MANN
Assistant to the Solicitor General

Department of Justice
Washington, D.C. 20530
ALAN CHARLES RAUL (202) 514-2217
General Counsel
Department of Agriculture

Washington, D.C. 20250-1400

Eric S. BENDERSON
Associate General Counsel for Litigation
Small Business Administration
409 Third Street SW
Washington, D.C. 20416

SSS nneeeeeene ee
——_z{_{_{_—_—_——_——— SE

QUESTION PRESENTED

Section 506(d) of the Bankruptcy Code, 11 U.S.C.
006(d), provides in pertinent part: “To the extent that a
lien secures a claim against the debtor that is not an
allowed secured claim, such lien is void.” The question
presented is whether this provision permits a debtor to
“strip down” a lien to the value of the collateral, when
that value is less than the claim secured by the lien, or
instead whether the provision voids a lien securing a claim
when the claim is not allowed.

TABLE OF CONTENTS

Introduction and summary of argument _............
Argument:

I.

II.

III.

IV.

Close reading of the text of Section 506(d)
shows that its effect is limited to disallowed
SE

The structure of the Code shows that Section
506(d) can apply only to disallowed claims........

A. Section 506 plays an integral role in the
Code’s treatment of disallowed claims...........

B. Application of Section 506(d) to unsecured
claims leads to incongruous results incon-
sistent with other provisions of the Code....

The legisiative history of the Code demonstrates
that Section 506(d) was aimed only at dis-
allowed claims, and that Congress did not con-
template application of the provision to unse-
EE
Petitioner’s reading construes Section 506(d)
to work a dramatic and unexplained change in
pre-Code bankruptcy law .......0...........20..ccccceeeeeeeeeeee

EE SS

Cases:
City of Dallas v. Ryan (In re Brannon), 62 F.2d

TABLE OF AUTHORITIES

959 (5th Cir.), cert. denied, 289 U.S. 742
EELS SES EE

City of Richmond v. Bird, 249 U.S. 174 (1919)....
Emil v. Hanley, 318 U.S. 515 (1943) —.0000000.
Farrey Vv. Sanderfoot, No. 90-350 (May 23, 1991).. 23, 28

(111)

2%

IV
Cases—Continued : Page
Grogan V. Garner, 111 8. Ct. 654 (1991)... ll
Johnson V. Home State Bank, No. 90-693 (June

Ties: SEED scipsiicnaiietadininemainiainsdahiehinaiadtieithiatiaieaeataitiiainaial 6, 24, 25, 29
Kelly v. Robinson, 479 U.S. 36 (1986) —.......--...... 23
Long V. Bullard, 117 U.S. 617 (1886) —.................. 27
Louisville Joint Stock Land Bank v. Radford, 295

RS Ene 26, 27
Midlantic Nat'l Bank v. New Jersey Dep’t of

Envtl. Protection, 474 U.S. 494 (1986) —.......... 23
Oppenheimer v. Oldham, 178 F.2d 386 (5th Cir.

ta ERR ce ESE: pee eA ee eee 24-25
Pennsylvania Dep’t of Public Welfare v. Daven-

*. | So & 8 § eS 9, 23
Swarts v. Hammer, 194 U.S. 441 (1904) 2.0.0... 23
United Savings Ass'n Vv. Timbers of Inwood For-

est Associates, 484 U.S. 365 (1988) —..........-...... 23
United States v. Ron Pair Enterprises, 489 US.

EE ee a 23

Constitution and statutes:
U.S. Const. Amend. V (Takings Clause) ............. 26
Bankruptcy Act of 1898, ch. 541, 30 Stat. 544 23
LETC ASE AUD LTR 23-24
Bankruptcy Act of 1898, ch. 541, 30 Stat. 544 (as

amended by the Chandler Act of 1938, ch. 575,

§ 1, 52 Stat. 895-897) :

§ 216(1), 52 Stat. 895-896 (11 U.S.C. 616(1)
(1976)) ...... tie SA 25

§ 216(7), 52 Stat. 896 mt U.S.C. 616(7)
SUITED chk ocnstbhinduianieeniandeniabeiinniaianaimsaaniiaal 25

§ 216(10), 52 Stat. RIMS OT “dL U. sc. 616
i eee 25

Bankruptcy Aesentmede ond Federal Sudaubie

Act of 1984, Pub. L. No. 98-353, § 448(b), 98

a 22
Bankruptcy Code, 11 U.S.C. 101 et seq.:

Ch. 5, 11 U.S.C. 501 et seq. er a ee 4
I 10
| 4, 6, 11, 12,19

—

Statutes—Continued :

v

Page

ene 10
See 4,5
SE EE ec eee 1l
| ET aa a 11
OS 10, 12
11 U.S.C. 502(b) (6) ......................... nel PETE 1l
ETE TAT IE 11
EE ERS | | ea eeneeene 4
| 10, 20, 21
6 (hE 2, 5, 7, 15, 19, 20, la
11 U.S.C. 506(a)_.... 3, 4, 5, 6, 9, 10, 12, 17, 21, 22
RT EE AR ea 5
a esiasunanaaes 5
I el passim
4), ERE Nn 10, 12
IEE RE 10, 25
ESET Ae ec 12
0 14
RE 13
ih i ef A cliaadaieisial 13
0 28, 29
11 U.S.C. 522 (c) (2) (A) (ii) -..................... 28
I cialis ildnienainsindinintiaiesbibibihat 14, 28
id rtenpepntisemmmnianentiis 16
KR) eee 12
Iii cesntriincaeeniathieaeeearnneineniaiabbte 24
en 24
TIT oi ins niinsiininiettiesinnitenaniatineniielislasdaes 19
| ESERIES HCE 2 4
Ch. 7, 11 U.S.C. 701 et seq. _.............. 2, 3, 15, 16, 18, 19
ie ccisecncsihecsaliiil 4, 7, 13, 14, 21, 27
I i ina ccaahacieciiaaaesibladaaal 18
III issn ncepraniieinabemmnimente 12
EEE EERE 12
I I cicsicicsecsinhenbnciguntddneesdeminadebiatens 11
Ne 6, 11
ts , | 3. En eEreRnreT 21
» BS BR 8. OF Fd a passim
| TER Ree wee nae 18
t 80lUldl”Dl—~— 17

VI VII

Statutes—Continued : Page Miscellaneous—Continued : Page
ET CR 16 ENS cas se es ae 17
hE ll p. 34,914 ........ POUR boa ne oe A RR 22
11 U.S.C. 1129(a) (7) (A) -....-.-.----------------- 16 H.R. 8200, 95th Cong., Ist Sess. (1977) ..........-.-..-. 20
11 U.S.C. 1129(b) (2) (A) -.....---------------e-- 16 H.R. Rep. No. 595, 95th Cong., 1st Sess. (1977) .... 13, 20,
11 U.S.C. 1129(b) (2) (A) (i) (1) ~......... 17 21, 22, 27, 28

11 U.S.C. 1129(b) (2) (A) (i) (IT) 18 . Herbert & Pacitti, Down and Out in Richmond,

11 U.S.C. 1129(b) (2) (A) (iii) —.......... 16 Virginia: The Distribution of Assets in Chap-

ea 17 ter 7 Bankruptcy Proceedings Closed During
11 U.S.C. 1141 (d) (1) (A) (ii) —-............. 12 1984-1987, 22 Rich. L. Rev. 303 (1988) 15

Ch. 13, 11 U.S.C. 1301 et seq. ............... 7, 12, 13, 15, 16, L. LoPucki, Strategies for Creditors in Bank-

17, 18, 19, 25 ruptcy Proceedings (1985) ...0.0.......0.0.000ccc 18
thE ES eae 16, 17, 19 LoPucki & Whitford, Bargaining over Yquity’s
TAT 17 Share in the Bankruptcy Reorganization of
11 U.S.C. 1825 (a) (4) ...---eeeececeececeececeeeeeee 11, 16 Large, Publicly Held Companies, 139 U. Pa. L.

11 U.S.C. 1825 (a) (5) 2.2... .--eceeccececeeeeeeeeeeee 11, 16 TU TE COD accrceccscsecescseeesesennscncescnsusscenccssonnnces 15
lit hl SA RSD 12 S. 2266, 95th Cong., 2d Sess. (1978) 00.0000 21
i ATER 16, 17 S. Rep. No. 989, 95th Cong., 2d Sess. (1978) ...21, 22, 28
a8 Be, See ee) Ls 17 S. Rep. No. 65, 98th Cong., Ist Sess. (1983) .......... 22
TTT 17 T. Sullivan, E. Warren & J. Westbrook, As We
11 U.S.C. 1328 (c) (1) ..--eeceeceeeeceeceoeeceeeeeeeee 17 Forgive Our Debtors (1989) _........--..-.e een 15
Bankruptcy Reform Act of 1978, Pub. L. No. 95- 9 Thompson on Real Property (J. Grimes ed.
I 29 SU UN IIE cilia iestacntnsdaheineindionaeensibions 14
Chandler Act of 1938, ch. 575, 52 Stat. 840 24 E. Warren & J. Westbrook, The Law of Debtors
Frazier-Lemke Act of 1934, ch. 869, 48 Stat. SE SD QED crvccctscnsesiccersvnieninnentinannnisnness 15, 16
ARRAN are ee a ee ee 26, 27
Utah Code Ann. §§ 57-1-20 to 57-1-37 (1990 &
i ediiteianinteninbaiamiaes 2
U.C.C. (1978):
EELS eS ae ae ree 14
Ee a 14
Miscellaneous:
Collier on Bankruptcy :
Vol. 3 (J. Moore 14th ed. 1976) 0.0... 25, 26
Vol. 3 (L. King 15th ed. 1991) 0000. rea 20, 22
Vol. 4B (J. Moore 14th ed. 1979) 0. 24
124 Cong. Rec. (1978) :
SRE eee eee Oe Se eae 17
iat 22

Iu the Supreme Court of the United States

OCTOBER TERM, 1990

No. 90-741
ALETHA DEWSNUP, PETITIONER
Vv.
Louis L. TIMM, ET AL.

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

BRIEF FOR THE UNITED STATES
AS AMICUS CURIAE SUPPORTING RESPONDENTS

INTEREST OF THE UNITED STATES

This case presents the question whether Section 506(d)
of the Bankruptcy Code, 11 U.S.C. 506(d), enables a
debtor to “strip down” a creditor’s lien to the value of the
collateral, when that value is less than the claim secured
by the lien. This question is of great interest to the
United States because its resolution will affect the level
of security of any creditor holding an undersecured claim
against a debtor that goes through bankruptcy, and be-
cause the federal government—whether through the Small
Business Administration, the Farmers Home Adminis-
tration, the Internal Revenue Service, or the Federal De-
posit Insurance Corporation (as administrator of the
properties of a number of failed depository institutions)
—frequently holds such claims.

(1)

2

Because of the United States’ broad perspective on this
question, and because the United States takes a different
view of the statute than either of the parties to the case,
the United States is filing this brief to ensure that the
broadest possible range of views informs this Court’s
evaluation of the question.

STATUTORY PROVISION INVOLVED

The text of 11 U.S.C. 506 is set out in the Appendix to

this brief.
STATEMENT

1. On June 1, 1978, respondents loaned $119,000 to
petitioner and her now-deceased husband. To secure their
obligation to repay the loan, petitioner and her husband
executed a deed of trust, granting a lien on two parcels
of land they owned in Utah, as well as a collateral assign-
ment of a contract to purchase some additional land. In
1979, petitioner defaulted under the terms of the deed of
trust. Pursuant to the deed of trust and Utah law, re-
spondents would have been entitled to accelerate the date
of maturity of the loans (so that the entire amount im-
mediately was due), to issue a notice of default, and
eventually to sell the parcels at a public foreclosure sale
to satisfy the debt and the expenses incurred in attempt-
ing to collect the debt. See J.A. 14, 37-39; Amended Trust
Deed with Assignment of Rents, at 1 & {] 14-15; Utah
Code Ann. §§ 57-1-20 to 57-1-37 (1990 & Supp. 1990).

2. In April 1981, after respondents had issued a notice
of default but before the foreclosure sale occurred, peti-
tioner filed a petition seeking reorganization under Chap-
ter 11 of the Bankruptcy Code. That bankruptcy peti-
tion was dismissed in 1982, as was a second Chapter 11
petition that petitioner filed. Finally, in June 1984, peti-
tioner filed a petition seeking liquidation under Chapter
7 of the Bankruptcy Code, out of which this case arises.
Because of the pendency of these bankruptcy cases, re-
spondents have not been able to conduct their foreclosure
sale. J.A. 15-16.

3

3. In 1987, petitioner commenced this adversary pro-
ceeding, contending that because the debt then held by re-
spondents of approximately $120,000 exceeded the fair
market value of the collateral, the bankruptcy court
should reduce or “strip down” the amount of the lien to
the fair market value of the collateral. In particular,
petitioner argued that, pursuant to Section 506(a), re-
spondents would have an allowed secured claim only to
the extent of the value of their collateral. Petitioner
then argued that Section 506(d)? required the court to
void the lien on the remaining portion of respondents’
claim, which Section 506(a) would treat as an allowed
unsecured claim.

The bankruptcy court refused to grant relief. First, it
valued the collateral at $39,000. The court assumed that
the property had been abandoned, reasoning that peti-
tioner, as the debtor, would not have standing to void
the lien if the bankruptcy trustee still controlled the
property.® Pet. App. 16a-17a. The bankruptcy court then
rejected petitioner’s request, concluding that once prop-
erty is abandoned it no longer falls within the scope of
Section 506(a), which applies only to “property in which
the estate has an interest,” and that it was “inconceiv-
able * * * that Congress could have intended to create an
avoiding power in a Chapter 7 debtor, respecting prop-
erty which is not to be administered through the bank-

1Section 506(a) provides, in pertinent part, that “[a]n 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.”
The entire text of Section 506(a) is set out in the Appendix, infra.

2In pertinent part, Section 506(d) provides: “To the extent that
a lien secures a claim against the debtor that is not an allowed
secured claim, such lien is void.” The entire text of Section 506(d)
is set out in the Appendix, infra.

8In fact, the property had not then been abandoned, but subse-
quently was abandoned on July 11, 1988. See J.A. 24.

4

ruptcy process.” Pet. App. 29a. The district court sum-
marily affirmed. /d. at 12a-13a.

4. The court of appeals also affirmed. The court re-
lied on the effect of the abandonment, which required a
determination by the trustee that the property “is bur-
densome to the estate or * * * of inconsequential value
and benefit to the estate.” Section 554(a); see Pet. App.
5a-6a. The court then determined that the “fundamental
premise” of Section 506(a) was that it applies only when
the estate has an interest in the property. Because “[t]he
estate has no interest in, and does not administer, aban-
doned property,” Section 506(a) should not apply. Id.
at 6a. Finally, the court noted that a contrary result
would be inconsistent with Section 722. In that sec-
tion, Congress specifically granted debtors a limited right
to redeem certain personal property. To hold that Section
506(d) granted a broader right to redeem real prop-
erty, the court reasoned, would be inconsistent with the
narrow language of Section 722. Pet. App. 9a-10a.

INTRODUCTION AND SUMMARY OF ARGUMENT

Chapter 5 of the Bankruptcy Code evaluates and sets
priorities among the claims that creditors hold against
bankrupt debtors. As a general matter, it analyzes
claims pursuant to two criteria: whether they are allow-
able and whether they are secured. Because these cri-
teria are not exclusive, they establish four types of
claims: allowed secured claims, allowed unsecured claims,
disallowed secured claims, and disallowed unsecured
claims. The classification proceeds in two steps. First,
Section 502 determines whether a claim is allowed or dis-
allowed, generally by providing that the claim is al-
lowed unless it falls within one of the exceptions set
forth in the eight subparagraphs of Section 502(b), as
modified by a number of miscellaneous rules set forth
in Sections 502(c) through 502(j). If a claim is not al-
lowed, the creditor will receive no distribution from the
bankrupt’s estate on that claim.

5

Second, Section 506 resolves a number of problems re-
lated to liens and allowed claims. Section 506(a) deals
with allowed claims that exceed the value of the collateral
given to secure repayment; it bifurcates those claims into
an allowed secured claim, in the amount of the value of
the collateral, and an allowed unsecured claim for the
excess, so that the secured creditor can participate in any
distributions to unsecured creditors to the extent of its
unsecured claim. Sections 506(b) and 506(c) then deal
with other situations not at issue here: allowed claims
for less than the value of the collateral given to secure
repayment, and treatment of administrative expenses
related to the collateral.

This case concerns the effect of Section 506(d), which
provides, with certain exceptions: “To the extent that a
lien secures a claim against the debtor that is not an
allowed secured claim, such lien is void.” We think the
meaning of this provision is clear from the statutory text
and structure, the legislative history, and pre-Code prac-
tice. If a creditor has a claim against the debtor secured
by a lien, but that secured claim is not an allowed se-
cured claim, then the creditor’s lien is void. In other
words, if a creditor has a claim secured by a lien and
if the claim is not allowed—typically because it falls
within one of the categories of disallowed claims in Sec-
tion 502(b)—then the lien is also void. This makes
sense, because it would be curious to have a claim dis-
allowed but leave the lien securing that claim unaffected.

Petitioner reads the provision differently, contending
that the key word is not “allowed,” but “secured”—.e.,
the lien is void to the extent that it secures a claim that
is not an allowed secured claim under Section 506(a).
Under this reading, Section 506(d) would operate to re-
duce the creditor’s lien to the value of the allowed se-
cured claim described in Section 506(a). In our view,
this reading makes no sense. It strains the statutory
language, flies in the face of the statute’s structure, and
is flatly inconsistent with the legislative history and pre-
Code practice.

6

The “lien-stripping” allowed under petitioner’s read-
ing would have a dramatic impact on the effect of a sub-
sequent disposition of the property at a price greater
than the bankruptcy court’s valuation. If petitioner is
correct, and the property is foreclosed upon after the
bankruptcy and sells for an amount greater than the
value attributed to the collateral by the bankruptcy court,
the excess will go not to the unpaid creditor who bar-
gained for a lien on the collateral, and not to other cred-
itors who did not receive full payments of their debts
in the bankruptcy, but to the debtor. By contrast, under
our view, the debtor can retain the collateral only by
repaying the entire debt or otherwise settling with the
creditor who bargained for a lien on the collateral. The
bankruptcy, of course, discharged the debtor from in per-
sonam liability, but it should have no effect on the in rem
obligation represented by the lien. See Johnson v. Home
State Bank, No. 90-693 (June 10, 1991), slip op. 3-4.

The text of the main portion of Section 506(d) distin-
guishes between secured claims that are allowed and those
that are not allowed, not, as petitioner would have it,
between allowed claims that are secured and those that
are not secured. Similarly, the two exceptions to the
general rule set forth in the main portion of Section
506(d) are both examples of disallowed claims, not un-
secured claims. Petitioner’s reading transforms the pro-
vision—which makes no specific reference to unsecured
claims at all—into a major vehicle for invalidating liens
based upon the secured or unsecured nature of the related
claim under Section 506(a).

Petitioner’s reading also divorces Section 506(d) from
its integral role in the Code’s treatment of disallowed
claims. To effectuate the disallowance set forth in Sec-
tion 502, the Code discharges the debtor from in per-
sonam liability in Section 727(b). The natural role of
Section 506(d) is to complete this process by preventing
the creditor from gaining any recovery in rem for disal-
lowed claims.

7

The heavy weight that petitioner’s reading places on
Section 506(d) detracts from its focus on allowability
and leads in several ways to anomalous results inconsis-
tent with the structure of incentives throughout the rest
of the Code. First, petitioner’s reading of Section 506
as granting a broad and unlimited right to redeem any
property sets at nought the specific right of redemption
offered by Section 722. That section reflects Congress’s
considered and detailed policy judgment as to the cir-
cumstances under which debtors should be permitted to
retain collateral without paying their debts. By allowing
debtors a broader and less exacting right to redeem prop-
erty under Section 506(d), petitioner would obviate the
need for the right granted in Section 722.

Second, petitioner’s interpretation of Section 506(d)
gives debtors the right to put creditors in a worse situa-
tion than the specifically articulated provisions in Chap-
ters 11 and 13. In those Chapters—where debtors are
agreeing to use their future income to repay their cred-
itors—Congress did specifically determine that it was
appropriate to alter the rights of creditors in their col-
lateral, and included provisions in the Code that make
this unmistakably clear, while protecting the creditor
against adverse treatment that does not further the
policies of the Code. Petitioner’s reading of Section
506(d) grants debtors the same benefits, but gives cred-
itors none of the protections imposed by Chapters 11 and
13. Considering the evident congressional purpose to en-
courage debtors to reorganize and attempt to use their
future income to pay their creditors—rather than liqui-
date and walk away from their debts—it is incongruous
to suppose that the spare language of Section 506 offers
debtors in liquidation proceedings a better deal than the
highly reticulated provisions of Chapters 11 and 13.

The House and Senate Reports accompanying the bills
that became the Code unambiguously reflect the focus
on allowability set forth in the text of Section 506(d)
itself, by describing the operation of the provision as

8

invalidating liens that secure claims disallowed in a bank-
ruptey proceeding. Indeed, the House Report seems to
propose the exact opposite of petitioner’s analysis, by
describing the provision as one that allows “liens to pass
through the bankruptcy case unaffected.” Thus, nothing
in the legislative history suggests the broad role peti-
tioner envisions for Section 506(d); instead, at every
step Congress explained the provision in a manner con-
sistent with the reading we urge.

Finally, as this Court’s cases repeatedly have recog-
nized, Congress in enacting the Baukruptcy Code is un-
likely to have rejected firmly established rules of pre-
Code law without some clear indication of its intent.
Pre-Code law recognized a general rule that liens passed
through bankruptcy unaffected. Bankruptcy law con-
tained no procedure that would allow a debtor in a liqui-
dation proceeding to force a creditor to give up collateral
on which it had received a lien, without paying the full
amount of the debt. Moreover, as this Court has recog-
nized, the legislative history of the Code demonstrates
that Congress was well aware of this prior history and,
indeed, believed that Section 506(d) carried these rules
forward into the Code. This is not the sort of record that
can support the assumption that Congress deprived credi-
tors of rights so well-established.

In sum, petitioner’s reading of Section 506(d) as a
general authorization by Congress to strip down the liens
of secured creditors with allowed claims cannot be
squared with the text, structure, or policies of the Code,
or with the history that led to its enactment. This Court
should reject that reading and affirm the judgment of
the Tenth Circuit.

9
ARGUMENT

I. CLOSE READING OF THE TEXT OF SECTION
506(d) SHOWS THAT ITS EFFECT IS LIMITED
TO DISALLOWED SECURED CLAIMS

The precise language of Section 506(d) is the best
guide to the meaning of the provision. See, e.g., Penn-
sylvania Dep’t of Public Welfare v. Davenport, 110 S. Ct.
2126, 2130 (1990) (applying to the Bankruptcy Code
“the fundamental canon that statutory interpretation be-
gins with the language of the statute itself’). The main
body of the provision states simply: “To the extent that
a lien secures a claim against the debtor that is not an
allowed secured claim, such lien is void.” On its face,
this appears to take one set of circumstances—where “a
lien secures a claim”—and carve out of it a lesser and
included set of cireumstances—where that secured claim
“is not an allowed secured claim.” Liens in the carved-
out set are void. Because both sets of circumstances are
defined by reference to a “claim” that is “secured,” and
because the qualifying additional fact associated with
the carved-out set of circumstances is that the secured
claim is “not * * * allowed,” the most natural under-
standing of the provision is that it operates to void liens
on claims that are secured, but not allowed.

Petitioner reads this provision as turning not on
whether the secured claim is allowed or not alowed, but
on whether an allowed claim is secured or unsecured.
According to petitioner, what the provision means is that
a lien securing an unsecured claim is void. But the pro-
vision is triggered only “[t]o the extent that a lien se-
cures a claim,” and if a lien secures a claim the claim is
not, at least in common parlance, unsecured. It is true
that under certain circumstances Section 506(a) divides
allowed claims secured by liens into secured claims and
unsecured claims for purposes of distributions in the
bankruptcy proceeding. But if, as petitioner supposes,
the purpose of Section 506(d) was to deal with liens se-

10

curing these unsecured claims, it is implausible that Con-
gress would have signalled such an intent with a general
reference to circumstances in which “a lien secures a
claim,” rather than by a specific reference to Section
50¢(a) or to unsecured claims. Moreover, it is incon-
sistent to say—as petitioner urges—that the prime situa-
tion at which the provision is directed is one where, be-
cause the collateral is worth less than the amount of the
claim, the lien in fact fails to secure the claim. Under
petitioner’s reading, a provision that applies ‘“‘[t)o the
extent that a lien secures a claim” actually applies only
to the extent that the lien does not secure the claim.
This reading is unnatural at best.*

That Section 506(d) turns on allowability is confirmed
by the nature of the two exceptions to the body of Sec-
tion 506(d). If Section 506(d) was concerned with the
treatment of liens on unsecured claims, the exceptions
presumably would address situations in which the unse-
cured status of a claim nevertheless did not trigger the
general rule. By their terms, however, both of the excep-
tions are for disallowed claims. The first exception, Sec-
tion 506(d)(1), protects liens that secure claims dis-
allowed under Sections 502(b) (5) and 502(e). The sec-
ond exception, Section 506(d)(2), protects the liens of
secured creditors who fail to obtain allowed secured claim
status solely because they fail to file a proof of claim
under Section 501. Pursuant to Section 502(a), a claim
is not allowed unless a proof of claim is filed; thus, absent
Section 506(d)(2), liens securing payment of these
claims would be voided by the main body of Section 506.

4 The text argues that the reference in Section 506(d) to claims
that are not allowed secured claims was aimed at disallowed secured
claims rather than at claims that become allowed unsecured claims
by operation of Section 506(a). We note that, under any reading
of the statute, we need not address the fourth type of claim, a
disallowed unsecured claim, because it is not possible for Section
506(a) to produce a disallowed unsecured claim; Section 506(a), by
its terms, applies only to “[a]n allowed claim.”

11

In our view, it is more than a coincidence that there are
no references to allowed unsecured claims in the excep-
tions to Section 506(d); the most likely explanation is
that allowed unsecured claims do not fall within the body
of Section 506(d) in the first place.

Il. THE STRUCTURE OF THE CODE SHOWS THAT
SECTION 506(d) CAN APPLY ONLY TO DISAL-
LOWED CLAIMS

A. Section 506 Plays an Integral Role in the Code’s
Treatment of Disallowed Claims

A broader look at the structure of the Code confirms
the integral role of Section 506(d) in the disposition of
disallowed claims, a role that is completely unrelated to
the status of the claims as secured or unsecured. See,
e.g., Grogan V. Garner, 111 S. Ct. 654, 659 n.13 (1991)
(applying to Bankruptcy Code the teaching that “ijn
determining the meaning of the statute, we look not only
to the particular statutory language but to the design of
the statute as a whole and to its object and policy”)
(quotation omitted). As we mentioned above, Section 502
of the Code sets forth several categories of claims and
subjects them to adverse treatment by excluding them
from the group of claims that are allowed. For example,
Section 502(b)(1) disallows claims that are unenforce-
able under state law, Section 502(b) (4) disallows claims
for fees payable to attorneys or other insiders that exceed
the reasonable value of the services, and Sections
502(b) (6) and 502(b)(7) disallow excessive claims for
compensation for termination of a lease or employment
contract.

In the bankruptcy proceeding itself, the holder of a
disallowed claim receives no distribution for that claim.®
Two provisions address the post-bankruptcy consequences
of disallowed status. First, Section 727(b) grants elig-
ible debtors a discharge “from all debts” that arose be-

5 See Sections 726(a); 1124(3)(A), 1325(a) (4) and (5).

12

fore the bankruptcy, “whether or not a claim based on
any such debt * * * is allowed under section 502”; this
protects the debtor from any subsequent in personam
liability on disallowed claims.* Second, Section 506(d)
deals with in rem liability, voiding liens that secure pay-
ment of the disallowed claims, ensuring that the dis-
favored creditor does not retain any avenue from which
it might seek payment. In the absence of Section 506(d),
a creditor holding a pre-bankruptcy judgment lien se-
curing a disallowed claim could proceed after the bank-
ruptcy to satisfy its claim out of any remaining property
of the debtor, even if the property has been protected
from creditors under the Code.”

In sum, the structure of the Code demonstrates a clear
need and coherent purpose for Section 506(d), which—
contrary to petitioner’s submission—has nothing to do
with allowed unsecured claims. Every definitive use of
the provision points, like its language, to a focus on dis-
allowed status rather than on unsecured status.

B. Application of Section 506(d) to Unsecured Claims
Leads to Incongruous Results Inconsistent with
Other Provisions of the Code

The best confirmation of the accuracy of the natural
reading of the text described above comes from considera-

* Compare Section 1141(d)(1)(A) (ii) (similar treatment in Chap-
ter 11 discharge) ; Section 1328 (similar treatment in Chapter 13
discharge).

7 The coherence of this structure of provisions to effectuate the
purposes of Section 502 is illuminated by the analogous provisions
the drafters used to grant special treatment to unmatured alimony
and child-support obligations. Section 502(b)(5) disallows these
claims to the extent that they are unmatured; accordingly, pursuant
to Sections 507 and 726, these obligations are not liquidated and
prepaid in the bankruptcy. On the other hand, Section 523(a)(5)
protects them from the normal discharge rules of Section 724(b),
and Section 506(d)(1) protects liens that secure these claims from
invalidation under Section 506(d), regardless of the value of the
collateral or the amount of the allowed secured claim, as determined
under Section 506(a).

—_

13

tion of the bizarre results of petitioner’s reading, which
cannot be squared with the specific rights granted debtors
in Section 722 or the detailed creditor-protective provi-
sions set forth in Chapters 11 and 13.

1. Congress recognized the harsh straits debtors would
face under a firm rule that did not allow debtors to alter
any of the rights of secured creditors. Accordingly, in
Section 722 it granted debtors a right in certain limited
circumstances to redeem personal property by paying the
creditor the value of the collateral, even if the value paid
is less than the debt.* The rights granted to the debtor
are limited carefully; they apply only to “tangible per-
sonal property intended primarily for personal, family,
or household use.”* Also, the debtor cannot leave its
creditor in suspense during a long bankruptcy proceed-
ing, because Section 521(2)(A) requires the debtor to
notify the court within 30 days of the filing if it intends
to redeem the collateral, and Section 521(2)(B) requires
the debtor to complete the redemption within 45 days
thereafter.

Under petitioner’s reading Section 722, with its specific
and limiting restrictions, is wholly superfluous, because a
debtor, at any time or from time to time, and without
regard to the nature of the collateral, could come to the

* The history of this provision is particularly damaging to peti-
tioner’s reading, because it demonstrates that Congress well under-
stood that, in the absence of Section 722, the normal provisions of
bankruptcy law would require the debtor to pay the entire amount
of the debt if he wished to retain the collateral, even if the debt
exceeded the value of the collateral. See H.R. Rep. No. 595, 95th
Cong., Ist Sess. 128 (1977) (“fI]t does little good to allow the
debtor an exemption of wearing apparel, household goods, or health
aids subject to an indefeasible security interest * * * if the debtor
must pay more than the property is worth for the privilege of con-
tinuing to use the property.”).

* The legislative history shows that the limitation to certain goods
was intentional, so that the right would apply only to property neces-
sary for the debtor to make a fresh start. See H.R. Rep. No. 595,
95th Cong., Ist Sess. 127-128 (1977).

14

court under Section 506(d) and have the court strip
down a lien to the value of the collateral. Moreover, al-
though Section 722 alters the creditor’s rights only if the
debtor tenders full payment within 45 days, petitioner’s
reading of Section 506(d) would reduce the value of the
lien immediately, and leave the debtor an option—to be
exercised at any time before foreclosure—to tender to
the creditor the amount of the lien and thus retain the
collateral free and clear. This effectively grants the
debtor an opportunity to speculate as to market changes
in the value of the collateral that is utterly inconsistent
with the rigorous deadlines set forth in Section 521.
Moreover, if petitioner is correct, there are no circum-
stances under which Section 722 would grant debtors
more favorable treatment than Section 506(d). It is
highly unlikely that Congress would have limited Section
722 so precisely if it was completely superfluous in light
of Section 506(d).”

1 Basic property principles provide that if a debtor pays a credi-
tor the entire sum secured by the collateral (that is, under petition-
er’s reading, the value of the collateral as determined by the bank-
ruptey court), there would be no remaining debt for the creditor's
lien to secure, and thus the creditor no longer would be able to con-
duct a foreclosure sale. See 9 Thompson on Real Property § 4808
(J. Grimes ed. 1958 & Supp. 1981) (real property); U.C.C. § 9-506
(1978) (personal property). Of course, after a foreclosure is con-
ducted, the entity that purchased at that sale would own the col-
lateral and, absent some state-law right of redemption that con-
tinues after foreclosure, the debtor would be able to regain the
collateral only by purchasing it from the subsequent owner. See
Thompson on Real Property, supra, § 4822 (real property); U.C.C.
§ 9-504(4) (1978) (personal property).

11 The consistently guarded approach that Congress took in decid-
ing to alter the rights of lienholders is also apparent from Section
522(f), which grants the debtor a limited and carefully delineated
right to avoid liens on exempt property. The power applies only to
two particularly disfavored types of liens: (1) judicial liens and
(2) nonpossessory, nonpurchase-money security interests in house-
hold goods, tools of the trade, or health aids. Thus, it never could
apply to purchase-money security interests, any lien in real estate,

15

2. Petitioner’s reading of Section 506(d) also under-
mines the incentives established by the finely reticulated
provisions of Chapters 11 and 13. The distinction be-
tween a Chapter 7 bankruptcy, on the one hand, and a
Chapter 11 or Chapter 13 bankruptcy, on the other hand,
is fundamental. In a liquidation proceeding under Chap-
ter 7, “the debtor gives up all non-exempt assets, the
Trustee in Bankruptcy sells these assets, and the pro-
ceeds are distributed pro rata to creditors.” E. Warren
& J. Westbrook, The Law of Debtors and Creditors 179
(1986). By contrast, in a payout proceeding under
Chapter 11 or 13, “a debtor can propose to keep all assets
in exchange for promising to pay off debts over a period
of time out of future income.” /bid."

To encourage debtors to agree to use their future in-
come to repay their debts in Chapter 11 and 13 proceed-
ings, which theoretically benefit society because a debtor

or, indeed, any bargained-for lien in personal property other than
the especially favored types of property mentioned above. This
provision’s careful delineation of particular types of collateral and
particular types of loans bespeaks an entirely more attentive and
compromising attitude than petitioner’s reading of Section 506,
which suggests a Congress ready to alter creditors’ rights wholesale,
without any concern for the nature of the particular transaction
being affected.

12 It is important to recognize that a debtor’s agreement-to use its
future income to pay its creditors has a dramatic effect on the
amounts received by creditors. In Chapter 7 proceedings, the dis-
proportionate majority of the cases produce nothing for general
unsecured creditors. See, e.g., Herbert & Pacitti, Down and Out in
Richmond, Virginia: The Distribution of Assets in Chapter 7 Bank-
ruptey Proceedings Closed During 1984-1987, 22 U. Rich. L. Rev.
303, 310-211 (1988) (no assets for general unsecured creditors in
97% of Chapter 7 cases). Payout plans typically promise much more
for creditors, see, ¢.g., T. Sullivan, E. Warren & J. Westbrook, As
We Forgive Our Debtors 45 n.27 (1989) (median repayment of
45% promised in confirmed Chapter 13 plans) ; LoPucki & Whitford,
Bargaining over Equity’s Share in the Bankruptcy Reorganization
of Large, Pubiliely Held Companies, 139 U. Pa. L. Rev. 125, 142
(1990) (median repayment of 27% in large Chapter 11 cases),
although it is not clear exactly how much actually is repaid.

16

“can keep assets instead of liquidating them, often at sac-
rifice prices,” E. Warren & J. Westbrook, supra, at 179,
the Code not only allows debtors to keep their assets, it
also provides a number of other benefits not available to
debtors in Chapter 7 bankruptcies. Most important of
these for this case are the specific provisions that au-
thorize Chapter 11 plans that “impair * * * any class of
claims, secured or unsecured,” Section 1123/b)(1), and
Chapter 13 plans that “modify the rights of holders of
secured claims,” Section 1322 (b) (2)."

Not surprisingly, the Code does not trust blindly in the
good will of debtors to ensure that they do not abuse the
power to alter the rights of secured creditors. Thus, this
power is strictly defined, in an attempt to see that it is
exercised only to further legitimate bankruptcy purposes
without unnecessarily harming the secured creditor. Most
importantly, the plan must pay all nonconsenting creditors
at least as much as they would receive in a Chapter 7
liquidation. Sections 1129(a) (7) (A), 1825(a) (4). More-
over, both Chapters prohibit confirmation of any plan in
which the debtor retains collateral over the objection of
a secured creditor unless the creditor retains a lien equal
to the amount of its allowed secured claim, and is sched-
uled to receive under the plan property or payments with
a present value equal to the amount of its allowed secured
claim. See Sections 1129(b)(2)(A), 13825(a)(5)." Be-

13 Perhaps the most notable of the other benefits is the ability of a
consumer debtor to receive a broader discharge in a Chapter 13
bankruptcy than he could in a Chapter 7 bankruptcy. Compare Sec-
tion 1328(a) (exceptions from discharge after successful completion
of a Chapter 13 plan) with Section 523(a) (exceptions from dis-
charge under Chapters 7 and 11, or under Chapter 13, if debtor fails
to complete payments under plan).

1 Technically, it would be possible for a court to confirm a Chap-
ter 11 plan over a creditor’s objections without retaining these pro-
tections for the creditor by determining that the pian granted the
creditor the “indubitable equivalent” of its claims, Section 1129
(b) (2)(A) (iii), but it is unlikely that anything determined to be
the indubitable equivalent would protect the creditor less than the

17

cause obligations under the plan are obligations of the
debtor that continue after bankruptcy," the creditor thus
receives, in return for any reduction of its lien, a per-
sonal and continuing obligation of the debtor to repay the
debt up to the value of the collateral as determined by the
bankruptcy court.

Moreover, both Chapters limit the circumstances under
which debtors can reduce liens. First, a plan under
Chapter 13 cannot alter the rights of a secured creditor

~ holding a mortgage on the debtor’s principal residence.

Section 1322(b)(2). Second, in reorganizations under
Chapter 11, where the greatest amount of money is likely
to be at stake, a secured creditor has the right, by waiv-
ing any unsecured claim against the debtor, to prevent
reduction of the amount of its lien by electing treatment
under Section 1111(b) (2).

protections outlined in the text, as the contemporaneous legislative
explanations of the provision make clear. See 124 Cong. Rec. 32,407,
34,007 (1978).

18 Section 1141(d)(1) accomplishes this for Chapter 11 plans, by
providing for a discharge of pre-petition debts “[e]xcept as other-
wise provided in * * * the plan.” In Chapter 13 plans, this
generally is accomplished by provisions in Sections 1328(a)(1) and
1328(c)(1) that prevent discharge of any debt that does not mature
during the pendency of the plan (which is treated under Section
1322(b)(5)). It is possible, with respect to short-term secured
claims, which do mature during the term of the plan, for a debtor
who fails to complete payments under the plan to secure a discharge
under Section 1328(b) without making all of the payments with
respect to those claims, but the price for that debtor is that it must
forgo the benefits of the broader discharge it would have received
under Section 1328(a), see note 13, supra. Moreover, the creditor
at that point would be entitled to take the collateral in satisfaction
of the unpaid obligation, because, as mentioned in the text, the
Chapter 13 plan must allow the creditor’s lien to continue in effect
securing the obligation of the debtor under the plan.

16 Section 1111(b)(2) itself does not directly affect the amount
of the lien, but simply allows the creditor to avoid the operation of
Section 506(a) and treat its entire allowed claim as secured. But
because Section 1129(b)(2)(A)(i) (I) prevents confirmation over a
creditor’s objection of a Chapter 11 plan that does not grant the

esis 18

Petitioner’s reading of Section 506(d) would allow
debtors to shortcut these complicated creditor-protective
provisions and receive a better deal under Section 506(d)
—availab'e in a Chapter 7 liquidation proceeding—than
Congress offered debtors to encourage them to use their
future income to pay off their debts under Chapters 11
and-13. Mest obviously, petitioner’s reading allows the
lien to be stripped without requiring any personal obliga-
tion on the part of the debtor to repay any amount of
the debt; a discharge under Section 724, unlike the dis-
charges available in Chapters 11 and 13, protects the
debtor from any further personal liability. Also, peti-
tioner’s reading makes lien-stripping available at the op-
tion of the debtor, without regard to the creditor’s wishes,
and thus would allow a Chapter 7 debtor to reap a wind-
fall if a bankruptcy court undervalued property, by pur-
chasing the property at the court’s valuation, and immedi-
ately reselling it at a profit. This is difficult to reconcile
with the Section 1111(b) election discussed above, which
allows a creditor, after it can evaluate the value chosen
by the bankruptcy court and the likelihood of recovery on
its unsecured claim, to waive its unsecured claim and

creditor a lien in the amount of its allowed secured claim, the
inevitable effect of an 1111(b) election is to grant the creditor a
lien for the full amount of its claim.

To be sure, the present value of the amounts required to be paid
the creditor under Section=#129(b)(2)(A)(i)(II) is only the value
of the collateral, rather than the total amount of the lien. Thus, a
debtor faced with a Section 1111(b) election by an undersecured
creditor must make payments to the creditor that total the amount
of the claim, with a present value equal to the value of the collateral.
Although many debtors may be able to satisfy this requirement
without incurring any burden beyond the burden of paying the
present value of the collateral (by extending the period over which
payments are made), in many circumstances a Section 1111(b)
election will make it extremely difficult for a debtor to avoid paying
an undersecured creditor amounts with a present value that exceeds
the value placed on the collateral by the bankruptcy court. See gen-
eral uwcki, Strategies for Creditors in Bankruptcy Proceed-
ing’ § 12.7.5 (1985).

i

19

then retain a lien for the full amount of its debt. Fi-
nally, petitioner’s reading allows consumers in Chapter 7
bankruptcies to avoid the specific restrictions Congress
imposed on consumer payout plans, which prevents modifi-
cation of home mortgages, see Section 1322(b) (2). It is
difficult to believe that Congress wrote the specific provi-
sions in Chapters 11 and 13, granting debtors limited
rights to reduce creditor’s liens, with the understanding
that Section 506(d) granted debtors a broad and un-
limited right to do so unrestrained by any of the con-
straints articulated in Chapters 11 and 13.

Petitioner’s approach takes an innocuous, though im-
portant, provision intended to effectuate the policy deci-
sions reflected in the provisions of Section 502 that dis-
allow disfavored claims, and transforms it into a major
disruption of the finely tuned and harmonious scheme of
debtor and creditor protections realized throughout the
Code."”

17 Section 552 of the Code offers yet another example of the
incongruous effects of petitioner’s reading. Under that Section, a
creditor is entitled to enforce provisions of a security agreement
that grant the creditor a lien on proceeds, rents, and profits arising
out of its collateral. It is hard to reconcile this broad protection
of lien rights with the effect petitioner sees in Section 506, which
deprives a creditor of future appreciation in the value of its col-
lateral by locking in the value of a creditor’s lien to a value of the
collateral determined by the bankruptcy court. If Congress would
let a creditor retain proceeds, rents, and profits—which necessarily
increase the value of the security held by the creditor—it is hard
to see why Congress would deprive the creditor of something much
more fundamental to its bargain: the full value of its collateral as
it may exist from time to time.

20

Ill. THE LEGISLATIVE HISTORY OF THE CODE
DEMONSTRATES THAT SECTION 506(d) WAS
AIMED ONLY AT DISALLOWED CLAIMS, AND
THAT CONGRESS DID NOT CONTEMPLATE AP-
PLICATION OF THE PROVISION TO UNSECURED
CLAIMS

The language of Section 506(d) as enacted in 1978
first appeared in the 95th Congress in H.R. 8200.'* The
entire section-by-section analysis of this provision in the
accompanying House Report explained:

~ Subsection (d) permits liens to pass through the
bankruptcy case unaffected. However, if a party in
interest requests the court to determine and allow or
disallow the claim secured by the lien under section
502 and the claim is not allowed, then the lien is void
to the extent that the claim is not allowed. The void-
ing provision does not apply to claims disallowed only
under section 502(e), which requires disallowance
of certain claims against the debtor by a codebtor,
surety, or guarantor for contribution or reimburse-
ment.

H.R. Rep. No. 595, 95th Cong., Ist Sess. 357 (1977)
(emphases added). This passage makes two points im-
portant to this case. First. the first sentence indicates
that the provision generally allows liens to pass through
the bankruptcy unaffected, a concept directly opposed to
petitioner’s contention that the purpose of Section 506(d)
is to strip liens to the judicially determined Value of the
collateral. Second, the passage suggests a single excep-
tion, for cases in which the creditor comes into the bank-
ruptcy and the court disallows its claim. Nothing in this
passage suggests the broad intent petitioner ascribes to
this provision, and her reading makes a mockery of the
Committee’s promise that liens will pass through un-
affected.

18 For a general discussion of the legislative history of Section
506, see 3 Collier on Bankruptcy { 506.03 (L. King 15th ed. 1991).

21

The Senate introduced a comparable bill in the same
Congress, S. 2266. This bill contained a similar version
of Section 506(d), which differed only in the language of
the exceptions. The section-by-section analysis of this bill
displays a similar intent: “Subsection (d) provides that
to the extent a secured claim is not allowed, its lien is
void unless the holder had neither actual notice nor
knowledge of the case, the lien was not listed by the
debtor in a chapter 9 or 11 case or such claim was dis-
allowed only under section 502(e).” S. Rep. No. 989,
95th Cong., 2d Sess. 68 (1978) (emphasis added). Like
the explanation in the House Report, the Senate Report
shows that the purpose of Section 506(d) was to invali-
date liens securing disallowed claims.”

“It is frv-cful to compare the legislative explanation of this
provision to the explanation the Senate offered in the same report
for Section 722, which, as discussed above, granted debtors a limited
right of redemption with respect to certain types of personal prop-
erty. The report explained: “This right to redeem is a very sub-
stantial change from current law.” S. Rep. No. 989, supra, at 95.
If petitioner were correct in reading Section 506(d) as an even
broader weapon effectively granting an unconstrained right to
redeem any type of collateral, surely the explanation for Section
506(d) at least would have alluded to this even more substantial
change from prior law.

The introductory portion of the House Report did note that “[o]ne
of the more significant changes from current law in proposed title
11 is the treatment of secured creditors and secured claims.” H.R.
Rep. No. 595, supra, at 180. But it went on to describe the specific
change to which it was referring: the provisions of the bill that
distinguish between secured and unsecured claims, rather than
between secured and unsecured creditors. That relatively procedural
change, of course, is indubitably clear on the face of Section 506(a).
There is not a hint of the revolutionary import petitioner attaches
to Section 506(d).

20 Although there is no committee report explaining why Congress
chose to enact the House version of Section 506(d), Senator
DeConcini and Representative Edwards each introduced into the
Congressional Record for his respective Chamber detailed comments
explaining in substantially identical terms that the additional ex-
ception contained in the Senate bill (which protected tax authorities

22

In surn, Congress’ contemporaneous explanations of the
purpose of Section 506(d) explicitly describe its effect on
a lien as turning on whether the claim is allowed or dis-
allowed, not—as petitioner would have it—on whether the
claim is secured or unsecured under Section 506(a).
Under Section 506(d), “the lien is void to the extent that
the claim is not allowed” (H.R. Rep. No. 595, supra, at
357)—not, as under petitioner’s reading, to the extent
that the claim is unsecured. Section 506(d) voids a lien
“to the extent a secured claim is not allowed” (S. Rep.
No. 989, supra, at 68)—not, as under petitioner’s read-
ing, to the extent an allowed claim is unsecured. There
is not so much as a snippet of legislative history to sug-
gest any relation between Section 506(d) and the bifurca-
tion established by Section 506(a) or, indeed, any appli-
cation of Section 506(d) to unsecured claims at all. It is
almost unimaginable to believe that this is the kind of
record one would find if Congress intended the provision
to have the meaning urged by petitioner.’

who had no knowledge of the bankruptcy) was deleted because it
was superfluous in light of the general provision in the House bill
that Section 506(d) would not void liens held by creditors that did
not file in the bankruptcy. 124 Cong. Rec. 32,414-32,415, 34,014
(1978). Again, there is not a hint here that the provision should
have any effect on unsecured claims.

21 Section 506(d) was amended by the Bankruptcy Amendments
and Federal Judgeship Act of 1984, Pub. L. No. 98-353, § 448(b),
98 Stat. 374. The amendments did not affect the main portion of
the provision, but only made technical correcting changes to the
exceptions, and revised the language of the existing exceptions “to
make clear that the failure of the secured creditor to file a proof
of claim is not a basis for avoiding the lien of the secured credi-
tor.” S. Rep. No. 65, 98th Cong., Ist Sess. 79 (1983); see 3 Collier
on Bankrvptey © 506.03, at 506-14 (L. King 15th ed. 1991) (dis-
cussing the history of the amendment); id. © 506.07, at 506-68 to
506-70, 506-72 to 506-73 (discussing problems in interpretation that
led to the amendment).

23

IV. PETITIONER’S READING CONSTRUES SECTION
506(d4) TO WORK A DRAMATIC AND UNEX-
PLAINED CHANGE IN PRE-CODE BANKRUPTCY
LAW

As this Court has recognized for decades, Congress is
“not writing on a clean slate” when it amends the bank-
ruptey laws. Emil v. Hanley, 318 U.S. 515, 521 (1948).
Consequently, this Court has shown a considerable reluct-
ance to accept arguments that would interpret vague or
innocuous provisions of the Code to wreak major changes
in pre-Code practice that are not discussed in the legisla-
tive history. “[A] major change in the existing rules
would not likely have been made without specific provi-
sion in the text of the statute; it is most improbable that
it would have been made without even any mention in
the legislative history.” United Savings Ass’n v. Timbers
of Inwood Forest Associates, 484 U.S. 365, 380 (1988)
(citation omitted). Examination of pre-Code practice
shows that the rule petitioner seeks would conflict with
the meaning of prior law, as interpreted by this Court
and understood by the Congress that drafted the Code.

Although many tiings may have been unclear about
the treatment of secured creditors under the Bankruptcy
Act of 1898, one bedrock principle was beyond dispute:
absent some policy consideration specifically reflected in
the Code, liens passed through bankruptcy unaffected.**
Indeed, Section 67d of the Act made this explicit:

2 See, e.g., Pennsylvania Dep't of Public Welfare v. Davenport,
110 S. Ct. at 2133 (“We will not read the Bankruptcy Code to erode
past bankruptcy practice absent a clear indication that Congress
intended such a departure.”); United States v. Ron Pair Enter-
prises, 489 U.S. 235, 245 (1989); Kelly v. Robinson, 479 U.S. 36,
47 (1986); Midlantie Nat'l Bank v. New Jersey Dep’t of Envtl.
Protection, 474 U.S. 494, 501 (1986). For cases applying this rule
to interpret bankruptcy statutes predating the Code, see Emil v.
Hanley, 318 U.S. at 521; Swarts v. Hammer, 194 U.S. 441, 444
(1904).

“8 This Court recently acknowledged this general pre-Code rule
in Farrey V. Sanderfoot, No. 90-350 (May 23, 1991), slip op. 6

Liens given or accepted in good faith and not in
contemplation of or in fraud upon this Act, and for
a present consideration, which have been recorded ac-
cording to law, if record thereof was necessary in
order to impart notice, shall not be affected by this

Act.

30 Stat. 564.%* Nor can it be said that the strong lan-
guage of the statute was undermined by judicial excep-
tions. As this Court recognized, “Section 67d * * * de-
clares that liens given or accepted in good faith and not
in contemplation of or in fraud upon this act, shall not
be affected by it.” City of Richmond v. Bird, 249 US.
174, 177 (1919).*

(“Ordinarily, liens and other secured interests survive bank-
ruptey.”); see Johnson Vv. Home State Bank, No. 90-693 (June 10,
1991), slip op. 5 (“a bankruptcy 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”).

24 The animus against liens incurred under questionable circum-
stances continues in the new Code. See Sections 547, 548.

25 See also, e.g., City of Dallas v. Ryan (In re Brannon), 62 F.2d
959, 961 (5th Cir.) (“[T]rue liens, however arising, which are not
expressly invalidated by the Bankruptcy Act, remain good, and
the trustee takes his title * * * subject to them.”), cert. denied,
289 U.S. 742 (1933). See generally 4B Collier on Bankruptcy
" 70.70 (J. Moore 14th ed. 1979).

To be sure, the specific phrase regarding the continuing validity
of liens was removed in a reorganization of this Section in 1938,
but this seems to have been done not to remove the rule of validity,
but instead because “the draftsmen of the 1938 Act desired gen-
erally to specify only what should be invalid.” 4B Collier on Bank-
ruptey © 70.70, at 771 (J. Moore 14th ed. 1979) (emphasis in
original). There is no doubt that the alteration of the language
had no substantive effect. As the Fifth Circuit explained:

It is true that * * * the Chandler Act did not retain the old
language saying expressly that liens valid in bankruptcy shall
‘not be affected by anything herein,’ but that provision was
simply declaratory of the obvious import reflected, and still

06. nner

Examination of the Act’s treatment of undersecured
creditors confirms this understanding in the precise con-
text relevant to the case at hand: outside of reorganiza-
tion proceedings,** no provision of the Act countenanced
involuntary reduction of the amount of a creditor’s lien
for any reason other than payment of the debt; the Act
generally dealt only with in personam liabilities. Cf.
Johnson Vv. Home State Bank, No. 90-693 (June 10, 1991),
slip op. 5-6 (drawing a similar distinction in treatment of
mortgages under the Code). Practice under the Act gave
an undersecured creditor three options: “(1) to prove
his claim as an unsecured claim and surrender his secu-
rity; or (2) to prove his claim as a secured claim and
give the bankrupt credit for the value of the security; or
(3) not to prove at all and rely solely on the security.”
3 Collier on Bankruptcy { 57.07[3], at 169 (J. Moore
14th ed. 1976). The first option is irrelevant to our in-
quiry; if the creditor waives its lien, the effect on its
rights is not involuntary. The third option grants the
creditor rights analogous to the result under Section
506(d)(2): the lien passes through the bankruptcy un-
affected. See 3 Collier on Bankruptcy { 57.20(3] (J.
Moore 14th ed. 1976). The second option most closely
resembles the present facts, where the secured creditor
attempts to receive a share of the bankrupt’s estate to

reflected, frequently in the substantive terms of the law, and
the omission of such redundancy is not significant.

Oppenheimer Vv. Oldham, 178 F.2d 386, 389 (1949).

26 Chapter X of the Act did permit modification of liens in con-
nection with a plan of reorganization. 11 U.S.C. 616(1), 616(10)
(1976). But this provision, like the analogous provisions in the
new Chapters 11 and 13 discussed above, included a variety of
mechanisms to protect the unconsenting creditor. See Section
616(7). The existence of this narrow provision, a precursor of
the provisions of Chapters 11 and 13 discussed above, undermines
petitioner’s reading of Section 506(d) as a wide-ranging lien-
stripping provision, by showing the longstanding tradition of allow-
ing such a remedy only in connection with a reorganization pro-
ceeding that affords substantial protections to affected creditors.

26

compensate for a shortfall between the value of its col-
lateral and the amount of its claim. In this situation, it
is clear that the creditor was entit’ed to pursue the col-
lateral to the full extent of its debt. even if the “security
proved subsequently to be more valuable than estimated”
in the bankruptey court. Jd. 9 57.20[6.2], at 359.27

The best illustration of the clear understanding of the
inviolability of liens in bankruptey proceedings is this
Court’s response to the Frazier-Lemke Act, a statute that
indisputably did a'ter the richts of lienholders. As this
Court explained. the “avowed object” of that Act—like
petitioner’s reading of Section 506(d)—“is to take from
the mortgagee rights in the specific property held as secu-
rity; and to that end ‘to scale down the indebtedness’ to
the present value of the property.” Lovisville Joint Stock
Land Bank v. Radford. 295 U.S. 555, 594 (1935). Under
the Act, if the holder of a mortgage on a farm owned by
a bankrupt consented, the debtor could buy the farm for
its then appraised value by a series of payments over
six years. If the creditor did not consent, the bankruptcy
court would stay proceedinvs for five years, at which
point the debtor could purchase the property for its ap-
praised value, whether or not the creditor consented. /d.
at 575-576.

In the course of invalidating this statute under the
Takings Clause, this Court undertook a comprehensive
examination of the rights of secured creditors against
bankrupt debtors. It repeatedly rejected any notion that
existing law forced creditors to suffer the intrusions peti-
tioner finds in Section 506(d) of the Code. With respect

*? There was some question as to what would happen if the
creditor received more from the collateral than the amount of its
outstanding debt. Apparently, “in this rare case,” where the credi-
tor had collected more than its full claim, the valuation of the
collateral might be reconsidered, apparently so that the creditor
could be forced to return any distribution it had received from the
estate. See 3 Collier on Bankruptcy © 57.20[6.2), at 358-359 (J.
Moore 14th ed. 1976).

27

to the general law of creditor’s rights, the Court ex-
plained: “No instance has been found, except under the
Frazier-Leinke Act, of either a statute or decision com-
pelling the mortgagee to relinquish the property to the
mortgagor free of the lien unless the debt was paid in
full.” Radford, 295 U.S. at 579. With respect to national
bankruptcy laws, the Court concluded that “none had,
prior to the Frazier-Lemke amendment, sought to compel
the holder of a mortgage to surrender to the bankrupt
either the possession of the mortgaged property or the
title, so long as any part of the debt thereby secured
remained unpaid.” Jd. at 581-582. It noted that the fed-
eral bankruptcy laws had permitted certain property to
be exempted from general creditors, but explained, by
reference to the rule in Long v. Bullard, 117 U.S. 617,
620-621 (1886), that this had only a limited effect, be-
cause “unless the mortgagee released his security, in or-
der to prove in bankruptcy for the full amount of the
debt, a mortgage even of exempt property was not dis-
turbed by bankruptcy proceedings.” Radford, 295 U.S.
at 582-583.

Finally, it is clear that Congress drafted and passed
the Code with full understanding of this practice. As we
mentioned above, the House Report accompanying Section
506(d) explicitly stated its understanding that the gen-
eral import of Section 506(d) was to permit “liens to
pass through the bankruptcy case unaffected.” H.K. Rep.
No. 595, supra, at 357. We submit that it passes belief
that the House would have described a provision working
the dramatic change petitioner sees in Section 506(d) by
reference to the pre-Code maxim that liens pass through
bankruptcy unaffected.

Congress’ understanding of the law on this point ap-
pears even more clearly from the history of related pro-
visions. For example, as mentioned above, when Congress
drafted Section 722—the one provision in the Code that
does allow a debtor in a liquidation case to retain collat-
eral without paying the debts that encumber that col-

28

lateral—it noted that under the existing law, a debtor
faced with an undersecured creditor “must pay more than
the property is worth for the privilege of continuing to
use the property.” H.R. Rep. No. 595, supra, at 128. Con-
gress could not have thought this statement to be correct
if it had thought that the pre-Code law provided for the
lien-stripping petitioner seeks to read into Section 506(d).

Finally, as this Court has recognized, a similar under-
standing is evident from the history of Section 522(c)
(2) (A) (ii), which provides that a bankruptcy does not
affect liens on exempt property unless the liens are voided
under Section 506(d). If petitioner is correct, this pro-
vision would mean that liens on exempt property are un-
affected only in the rare case in which the creditor is
fully secured; under our reading, of course, the liens
would be affected only if the claim was disallowed. The
latter reading is the only one consistent with Congress’
intent. Citing Radford and Long v. Bullard, both the
House and the Senate Reports explained that Section
506(d) (as incorporated by reference into Section 522(c) )
followed the rule that the “bankruptcy discharge does not
prevent enforcement of valid liens,” and that by enact-
ment of Section 522(c) the Code was accepting this rule
“with respect to the enforcement of valid liens on non-
exempt property as well as on exempt property.” H.R.
Rep. No. 595, supra, at 361; S. Rep. No. 989, supra, at
76. This passage demonstrates two things. First, Con-
gress clearly understood that existing law did not pro-
vide for any reduction in liens of undersecured creditors
with allowed claims because of a bankruptcy of their
debtors. Second, it thought that Section 506(d) carried
that rule forward in the Code. See Farrey v. Sander-
foot, No. 90-350 (May 23, 1991), slip op. 6 (citations
omitted) (“[I]t was well settled when § 522(f) was
enacted that valid liens obtained before bankruptcy could
be enforced on exempt property, including otherwise ex-
empt homestead property. Congress generally preserved
this principle when it comprehensively revised bankruptcy

29

law with the Bankruptcy Reform Act of 1978.”).2° Con-
gress could not rationally have explained Section 522(c)
in this manner if petitioner’s reading of Section 506(d)
was correct.

In sum, the text of Section 506(d) strongiy indicates
that the provision affeets only a secured claim that is not
allowed. The structure of the Code shows that this is a
sensible reading, and that petitioner’s reading is incon-
sistent with the painstaking approach Congress took in
the provisions that affected the rights of lienholding cred-
itors. Finally, the legislative history and pre-Code prac-
tice show a consistent history of protection for the rights
of secured creditors that petitioner would have stripped
by Section 506(d), and not a snippet of a suggestion that
Congress intended to intrude on those rights here. At
bettom, it is just not plausible that Congress could have
granted debtors the broad new remedy against allowed
unsecured claims that petitioner sees in Section 506(d)
without specifically mentioning this powerful remedy
someplace in the Code or in its legislative history.

—

** See also Johnson v. Home State Bank, No. 90-693 (June 10,
1991), slip op. 4 (“Codifying the rule of Long v. Bullard, 117 U.S.
617 (1886), the Code provides that a creditor's right to foreclose
on the mortgage survives or passes through the bankruptcy.”).

30
CONCLUSION

The judgment of the court of appeals should be affirmed.

Respectfully submitted.

KENNETH W, STARR
Solicitor General

STUART M. GERSON
Assistant Attorney General

JOHN G. ROBERTS, JR.
Deputy Solicitor General

RONALD J. MANN
Assistant to the Solicitor General
ALAN CHARLES RAUL
General Counsel
Department of Agriculture

ErIc S. BENDERSON
Associate General Counsel for Litigation
Small Business Administration

JUNE 1991

APPENDIX

§ 506. Determination of secured status

(a) An allowed claim of a creditor secured by a lien
on property in which the estate has an interest, or that
is subject to setoff under section 553 of this title, is a
secured claim to the extent of the value of such creditor’s
interest in the estate’s interest in such property, or to
the extent of the amount subject to setoff, as the case
may be, and is an unsecured claim to the extent that the
value of such creditor’s interest or the amount so sub-
ject to setoff is less than the amount of such allowed
claim. Such value shall be determined in light of the
purpose of the valuation and of the proposed disposition
or use of such property, and in conjunction with any
hearing on such disposition or use or on a plan affecting
such creditor’s interest.

(b) To the extent that an allowed secured claim is se-
cured by property the value of which, after any recovery
under subsection (c) of this section, is greater than the
amount of such claim, there siiall be allowed to the holder
of such claim, interest on such claim, and any reasonable
fees, costs, or charges provided for under the agreement
under which such claim arose.

(c) The trustee may recover from property securing
an allowed secured claim the reasonable, necessary costs
and expenses of preserving, or disposing of, such property
to the extent of any benefit to the holder of such claim.

(d) To the extent that a lien secures a claim against
the debtor that is not an allowed secured claim, such
lien is void, unless—

{1) such claim was disallowed only under section
502(b) (5) or 502(e) of this title; or

(2) such claim is not an allowed secured claim
due only to the failure of any entity to file a proof
of such claim under section 501 of this title.

(la)

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385013_0041%3A09. Public record. Not legal advice.