Dewsnup v. Timm

Background

A borrower, Aletha Dewsnup, and her late husband took a loan in 1978 secured by a deed of trust on two parcels of Utah farmland. After default and a notice of foreclosure, the borrower filed bankruptcy petitions, eventually seeking Chapter 7 liquidation. She asked the bankruptcy court to reduce the lender’s lien to the land’s market value because the debt exceeded that value. The bankruptcy court valued the land at $39,000 and refused to void the remainder of the lien; lower courts affirmed, and the issue reached the Supreme Court.

Reasoning

The Court addressed whether §506(d) of the Bankruptcy Code allows a Chapter 7 debtor to “strip down” a creditor’s lien on real property to the judicially determined collateral value when the creditor’s claim exceeds that value. The majority held that §506(d) does not permit this when the creditor’s claim is both allowed and secured. The opinion emphasized historical practice that liens on real property survive bankruptcy and noted ambiguity in the statute; given that ambiguity and legislative history, the Court declined to read §506(d) to erase part of an allowed lien.

Real world impact

The decision means undersecured borrowers in Chapter 7 cannot eliminate the portion of a mortgage lien that exceeds the court’s valuation of collateral when the claim has been allowed. Lenders keep their in-rem rights against property and may benefit from postbankruptcy increases in property value. Trustees and debtors must account for surviving liens in sales and distributions.

Dissents or concurrances

Justice Scalia (joined by Justice Souter) dissented, arguing the statute’s text plainly ties “allowed secured claim” to §506(a)’s valuation and would automatically void liens to the extent claims are unsecured under that provision.