United States District Court, D. Maryland
J. MESSITTE UNITED STATES DISTRICT JUDGE
Chapter 13 bankruptcy case is on appeal from an Order of the
United States Bankruptcy Court for this District. See
Burkhart, et al. v. Community Bank of Tri County, et al.
(In re Burkhart, et al.), Ch. 13 Case No. 12-26888,
Adv. No. 13-00291 (Bankr. D. Md.). After obtaining a
lift-stay order from the Court, Debtor-Appellants Edwin
Michael Burkhart and Teresa Stein Burkhart (the
“Burkharts”) brought an adversary proceeding
seeking to avoid wholly unsecured liens attached to their
residential real property. Appellee Community Bank of
Tri-County (“Tri-County”), which held two of
these liens, failed to file timely proofs of claim. When
Tri-County did not respond to the Burkharts’ adversary
Complaint, the Burkharts moved for default judgment. The
Bankruptcy Court, however, denied the Burkharts’
motion, ruling that Tri-County’s liens could not be
avoided in the absence of theirs being an “allowed
claim”-that is, a claim for which a proof of claim had
been filed. The Burkharts have appealed the Bankruptcy
Court’s order. For the reasons that follow, the
decision of the Bankruptcy Court is
Burkharts, who perform government contract work, have accrued
substantial obligations in the form of mortgages and liens
against their homestead as well as other unsecured debts. Am.
Appellant’s Br. 6, ECF No. 8.
September 14, 2012, they filed a Voluntary Petition for
Bankruptcy under Chapter 13 of the Bankruptcy Code. Voluntary
Petition, ECF No. 1-1. That same day, the Bankruptcy Court
entered a Notice of Commencement of Chapter 13 Bankruptcy
Case, Meeting of Creditors, & Deadlines, which informed
the Burkharts’ creditors that the bar date for claims
(the “Bar Date”) for non-governmental units was
January 23, 2013. Notice of Commencement, ECF No. 1-7.
16, 2013, nearly four months after the Bar Date, the
Burkharts, following a lift-stay, filed a Complaint (in this
Court) to Declare Validity, Scope and Extent of Liens of
Community Bank of Tri-County and PNC Bank (the
“Complaint”). Compl., ECF No. 1-64. The Complaint
sought to remove wholly unsecured liens attached to the
Burkharts’ real property located at 2060 Barakat Court,
Huntingtown, Maryland 20639 (the
“Property”). See generally Id. The Property
was valued at $435, 000.00. Compl., Ex. 1, ECF No. 1-65. The
Burkharts alleged that the following claims were secured by
the Property: (1) a first priority lien in favor of Chase
Bank in the amount of approximately $609,
500.00; (2) a junior lien in favor of PNC
Mortgage (“PNC”) in the amount of $105, 995.75;
(3) a junior lien in favor of Tri-County in the amount of
$78, 289.71; and (4) a junior lien in favor of Tri-County in
the amount of $49, 411.80. Compl. ¶¶ 7-8. The
Burkharts alleged that while PNC had filed a timely proof of
claim, Tri-County had not, and thus “forfeit[ed] any
distributions under a plan in this case.” Id.
Complaint was properly served on PNC and Tri-County.
Certificate of Service, ECF No. 1-86. On September 23, 2013,
after neither creditor responded, the Burkharts moved for a
clerk’s entry of default and default judgment. Mot.
Entry Clerk’s Default and Default J., ECF No. 1-89. On
the same day, the Clerk entered a default against both PNC
and Tri-County. Entry of Default, ECF Nos. 1-91, 1-92.
September 29, 2013, the Bankruptcy Court entered a default
judgment against PNC, which had the effect of the Burkharts
avoiding the lien held by PNC. Order Granting Mot. Default as
to PNC, ECF No. 1-95. With respect to Tri-County, however,
the Bankruptcy Court denied the motion for default judgment
without prejudice. Order Denying Mot. Default as to
Tri-County, ECF No. 1-96.
response to the Bankruptcy Court’s denial, the
Burkharts filed an Amended Motion for Default Judgment
against Tri-County. Am. Mot. Default J. as to Tri-County, ECF
No. 1-99. They again sought a declaratory ruling to avoid
Tri-County’s liens as in rem claims because
they were purportedly valueless, and thus wholly
unsecured. Id. This time, the Burkharts also
pointed to Federal Rule of Bankruptcy Procedure 3002(c)(3),
which allows an entity to file a proof of claim “30
days after the judgment becomes final if judgment . . .
avoids the entity’s interest in property.”
Id. ¶ 5. (quoting Fed.R.Bankr.P. 3002(c)(3)).
The Burkharts suggested that, if the Bankruptcy Court were to
grant the Burkharts’ Amended Motion for Default
Judgment, Tri-County would still be able to file its lien as
an unsecured claim and thus participate in the bankruptcy
process. See id.
October 25, 2013, the Bankruptcy Court issued a Memorandum
Opinion with respect to the Amended Motion for Default
Judgment (“Bankruptcy Court Memorandum 1”),
adopting the reasoning of White v. FIA Card Services,
N.A., 494 B.R. 227, 230 (W.D. Va. 2012), and concluding
that 11 U.S.C. § 506(d)(2) only voids a lien that
secures a claim against the debtor which is not an allowed
secured claim, except when that claim is not treated as an
allowed secured claim simply because the creditor has elected
not to file a proof of claim. Bankr. Ct. Mem. 1 at 2-3, ECF
No. 1-101. Thus, as the Bankruptcy Court reasoned, since
Tri-County had not filed a proof of claim, its lien could not
be avoided by reason of § 506(d)(2). Id. 3. The
Bankruptcy Court gave the Burkharts fourteen days to respond.
November 12, 2013, the Burkharts filed a response, arguing
that they were not seeking to “void”
Tri-County’s lien under 11 U.S.C. § 506(d), but
rather to “avoid” the lien under 11
U.S.C. §§ 506(a) and 1322(b). Burkharts’
Resp. to Mem. Op. Am. Mot. Default 6-7, ECF No. 1-103. The
Burkharts argued that fifteen years of Fourth Circuit law
permitted the lien avoidance they sought under 11 U.S.C.
§§ 506(a) and 1322(b). Id. 7-11.
January 9, 2014, the Bankruptcy Court issued a second opinion
and order dealing with the Amended Motion for Default
Judgment (“Bankruptcy Court Memorandum 2”),
reaffirming its earlier position that, absent an allowed
claim filed by Tri-County, the court could not enter an order
that would avoid its lien. Bankr. Ct. Mem. 2 at 3, ECF No.
1-104. As the Bankruptcy Court reasoned, since Tri-County did
not file a proof of claim, it did not not have an allowed
secured claim. Accordingly, its claim could not be evaluated
under 11 U.S.C. § 506(a), and its lien could not be
avoided pursuant to 11 U.S.C. § 506(d). Id. In
consequence, the Bankruptcy Court issued an order dismissing
the Burkharts’ Complaint without prejudice as to
Tri-County. Order Dismissing Compl. ECF No. 1-105. This
Appeal followed. ECF No 1.
appeal, the Burkharts contend that the Bankruptcy Court erred
in dismissing their adversary proceeding against Tri-County.
They submit that their Complaint was a “garden
variety” lien avoidance action under 11 U.S.C.
§§ 506(a) and 1322(b); that lien avoidances in
Chapter 13 cases under § 506(a) and § 1322(b) have
a long history in the Fourth Circuit; and that language in 11
U.S.C. § 506(d) - which requires the filing of a proof
of claim prior to declaring any lien “void” - is
immaterial to the relief they seek. Am. Appellants’ Br.
11, 13-17. They also suggest that Federal Rule of Bankruptcy
Procedure 3002(c)(3), which governs the process for filing
proofs of claim, supports their position because it would
allow Tri-County to file a proof of its unsecured claim after
default judgment. See Id. 17-19; see also
Appellants’ Suppl. Br. 6-11.
response, the Trustee argues that the Bankruptcy Court was
correct to rely on §§ 506(a) and 506(d) which,
together with § 1322(b)(2), form the basis for
value-based lien avoidances in Chapter 13 proceedings.
Appellee’s Br. 10, ECF No. 12. Although the mechanism
for value-based lien avoidances is frequently misunderstood
by debtors, the “voiding” component is found in
§ 506(d). See Id. 11-15, 19-20. As the Trustee
explains, § 506(d) does not allow lien avoidance when
the underlying claim is not “allowed” because a
proof of that claim has not been filed. Id. 20-23.
According to the Trustee, the Burkharts are effectively
seeking to bypass the proof of claim and claim allowance
processes with respect to Tri-County. Such a maneuver, says
the Trustee, is not only improper under the plain text of the
applicable statutory provisions; it also fails to respect the
underlying policies of bankruptcy law. Id. 23-24;
see also Appellee’s Suppl. Br. 2, ECF No. 2.
The Trustee also argues that Bankruptcy Rule 3002(c)(3) is
irrelevant to the analysis, but if anything, undermines the
Burkharts’ arguments. Id. 23; see
also Appellee’s Suppl. Br. 3-7.
Court has jurisdiction over this Appeal pursuant to 28 U.S.C.
§ 158(a)(1), which gives “[t]he district courts of
the United States . . . jurisdiction to hear appeals (1) from
final judgments, orders, and decrees; . . . of bankruptcy
judges entered in cases and proceedings referred to the
bankruptcy judges under section 157 of this title.” The
issue raised in this case - i.e., whether a Chapter 13 debtor
can avoid a completely unsecured junior lien when no proof of
claim has been filed - is a question of law. Legal questions
decided by the bankruptcy court are subject to de
novo review in the district court. In re
Meredith, 527 F.3d 372, 375 (4th Cir. 2008).
issue before the Court appears to be one of first impression.
Court begins with a brief overview of the relevant statutory
provisions and case law.
13 of the Bankruptcy Code allows individual debtors to
“obtain adjustment of their indebtedness through a
flexible repayment plan approved by a bankruptcy
court.” Nobleman v. American Savings Bank, et
al., 508 U.S. 324, 327 (1993). The elements of a
confirmable Chapter 13 plan are set forth in 11 U.S.C. §
1322, which provides, in part, that a plan may
modify the rights of holders of secured claims,
other than a claim secured only by a security interest in
real property that is the debtor’s principal residence,
or of holders of unsecured claims, or leave unaffected ...