Jose Alvarez v. HSBC Bank USA, N.A. , 733 F.3d 136 ( 2013 )

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 12-1156
In Re: JOSE ALFREDO PINEDA ALVAREZ,
Debtor.
-------------------------
JOSE ALFREDO ALVAREZ; MEYBER L. ALVAREZ,
Plaintiffs – Appellants,
v.
HSBC BANK USA, NATIONAL ASSOCIATION,
Defendant – Appellee,
and
NANCY SPENCER GRIGSBY,
Trustee.
------------------------
LARTEASE MARTRELL TIFFITH,
Court-Assigned Amicus Counsel.
Appeal from the United States District Court for the District of
Maryland, at Greenbelt. Marvin J. Garbis, Senior District
Judge. (8:11-cv-02886-MJG; 10-31729; 11-00067)
Argued: September 17, 2013 Decided: October 23, 2013
Before GREGORY, DAVIS, and KEENAN, Circuit Judges.
Affirmed by published opinion. Judge Keenan wrote the opinion,
in which Judge Gregory and Judge Davis joined.
John Douglas Burns, BURNS LAW FIRM, LLC, Greenbelt, Maryland,
for Appellants. Lartease Martrell Tiffith, O'MELVENY & MYERS,
LLP, Washington, D.C., as Court-Assigned Amicus Counsel.
2
BARBARA MILANO KEENAN, Circuit Judge:
In this case, we consider a district court’s judgment
upholding a bankruptcy court’s refusal to “strip off” a
“valueless lien” against certain real property that a debtor
owned with his non-debtor spouse as tenants by the entireties. 1
On appeal, the debtor and his spouse contend that the bankruptcy
court erred in refusing to strip off the lien on the ground that
the spouse’s property interest was not part of the bankruptcy
estate.
Upon our review, we conclude that the statutory provisions
authorizing a strip off, and applicable Maryland property law,
do not permit a bankruptcy court to alter a non-debtor’s
interest in property held in a tenancy by the entirety.
Therefore, we hold that the bankruptcy court correctly
determined that it lacked authority to strip off the debtor’s
valueless lien because only the debtor’s interest in the estate,
rather than the complete entireties estate, was before the
bankruptcy court. We affirm the district court’s judgment.
1
The term “debtor” means a person who has filed a
bankruptcy petition. See 11 U.S.C. § 101(13).
3
I.
A.
We begin by describing the statutory framework for
stripping off a valueless lien in a bankruptcy proceeding.
Generally, a creditor’s lien on real property passes through
bankruptcy unaffected and “stays with the real property until
the foreclosure,” based on the bargained-for agreement between a
mortgagor and mortgagee. Dewsnup v. Timm, 502 U.S. 410, 417
(1992); accord Cen-Pen Corp. v. Hanson, 58 F.3d 89, 92 (4th Cir.
1995). Thus, while a discharge in bankruptcy eliminates a
lienholder’s in personam rights against a debtor, the
lienholder’s in rem rights in the collateral property ordinarily
remain intact despite a discharge. Dewsnup, 502 U.S. at 418
(citing Johnson v. Home State Bank, 501 U.S. 78, 84 (1991));
Cen-Pen Corp., 58 F.3d at 92.
This Court recently determined, however, consistent with
every other circuit to have considered the question, that in a
typical Chapter 13 proceeding, a bankruptcy court has the
authority to strip off a completely valueless lien on a debtor’s
primary residence, thereby eliminating a lienholder’s in rem
rights against the collateral property (strip off or lien
strip). Branigan v. Davis, 716 F.3d 331, 335-36 (4th Cir. 2013)
(citing other circuit cases addressing the issue). We explained
4
that such authority is based on application of 11 U.S.C.
§§ 506(a) and 1322(b)(2). 2 Id. at 335.
To effectuate a lien strip, a bankruptcy court first
considers the valuation provision contained in § 506(a), which
states:
An 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 . . . and is an unsecured claim to the extent
that the value of such creditor’s interest . . . is
less than the amount of such allowed claim.
11 U.S.C. § 506(a)(1). Thus, the status of a lienholder’s claim
“as secured or unsecured depends on the value of the
collateral.” Branigan, 716 F.3d at 335.
A bankruptcy court next applies § 1322(b)(2), which
addresses the debtor’s reorganization plan and permits debtors
in such plans to modify the rights of holders of unsecured
claims. 3 “The end result is that section 506(a), which
2
In their complaint in the bankruptcy court, the Alvarezes
cited 11 U.S.C. § 506(a) and (d), and § 1322(b)(2), in their
request for a lien strip. However, before the formal briefing
in this appeal began, this Court decided Branigan and held that
the statutory basis for a strip off is found in 11 U.S.C. §§
506(a) and 1322(b), without application of § 506(d). In the
Alvarezes’ brief, they acknowledge our holding in Branigan and
concede that § 506(d) does not provide statutory support to
complete a lien strip.
3
Under 11 U.S.C. § 1322(b)(2), a debtor’s 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
(Continued)
5
classifies [completely] valueless liens as unsecured claims,
operates with section 1322(b)(2) to permit a bankruptcy court,
in a Chapter 13 case, to strip off a lien against a primary
residence with no value.” Branigan, 716 F.3d at 335.
When a bankruptcy court confirms a debtor’s reorganization
plan, the plan binds the debtor and his creditors. 11 U.S.C.
§ 1327(a). A lien strip becomes effective and permanently
eliminates a lienholder’s in rem rights against the collateral
property upon completion of a debtor’s reorganization plan.
Branigan, 716 F.3d at 338.
B.
In the present case, Jose Alvarez (Mr. Alvarez) filed a
Chapter 13 petition in the United States Bankruptcy Court for
the District of Maryland. In that petition, Mr. Alvarez
identified his property, including his interest in his primary
residence located in Maryland (the property or the entireties
property). The property is owned by Mr. Alvarez and his wife,
Meyber L. Alvarez (Mrs. Alvarez), as tenants by the entireties.
Mrs. Alvarez was not a party to Mr. Alvarez’s bankruptcy
petition, nor did she file a separate bankruptcy petition.
debtor’s principal residence, or of holders of unsecured claims,
or leave unaffected the rights of holders of any class of
claims.”
6
At the time Mr. Alvarez’s bankruptcy petition was filed,
the property had a value of $442,400.00 and was encumbered by
two mortgage liens. 4 The first-priority mortgage lien, held by
Chase Home Finance, had a balance of $447,572.84. HSBC Mortgage
Service (HSBC) held the second-priority mortgage lien with a
balance of $75,455.08. Thus, the value of the property when the
petition was filed was less than the full amount owed on the
first-priority lien, rendering the second-priority lien
valueless.
In accordance with the Federal Rules of Bankruptcy
Procedure, Mr. and Mrs. Alvarez jointly filed a complaint in the
bankruptcy court against HSBC. In their complaint, the
Alvarezes maintained that because HSBC’s lien was completely
valueless and, thus, was unsecured under 11 U.S.C. § 506(a),
they were entitled to strip off the lien. 5 The bankruptcy court
denied the requested relief, concluding that the lien on the
4
According to an appraisal completed a few weeks after the
bankruptcy petition was filed, the property had a value of
$440,000.
5
In their complaint, Mr. and Mrs. Alvarez sought entry of
default judgment based on the fact that HSBC had not filed a
response to their action. Although the bankruptcy clerk of
court initially entered a default, the bankruptcy court
ultimately denied the motion to enter default judgment. On
appeal, this Court appointed amicus curiae counsel to present
argument opposing Mr. and Mrs. Alvarez’s position.
7
entireties property could not be stripped because both tenants
by the entireties had not filed a petition for bankruptcy. 6
The district court affirmed the bankruptcy court’s
decision, and the Alvarezes timely filed the present appeal. We
have jurisdiction under 28 U.S.C. § 158(d). See Educ. Credit
Mgmt. Corp. v. Kirkland, 600 F.3d 310, 314 (4th Cir. 2010); Sumy
v. Scholssberg, 777 F.2d 921, 922-23 (4th Cir. 1985).
II.
The question before us is whether a bankruptcy court, in a
Chapter 13 case filed by only one spouse, can strip off a
valueless lien on property that the debtor and his non-debtor
spouse own as tenants by the entireties. This is an issue of
first impression among federal appellate courts, and bankruptcy
courts have reached different conclusions in answering the
question. Compare In re Hunter, 284 B.R. 806 (Bankr. E.D. Va.
2002) (applying Pennsylvania law and concluding that an
individual debtor spouse cannot strip off a lien on entireties
property), and In re Pierre, 468 B.R. 419 (Bankr. M.D. Fla.
2012) (reaching same result under Florida law), with, e.g., In
re Strausbough, 426 B.R. 243 (Bankr. E.D. Mich. 2010) (applying
6
The bankruptcy court later denied the Alvarezes’ motion
for reconsideration.
8
Michigan law and determining that an individual debtor can strip
a valueless lien on entireties property).
When we review a district court’s judgment affirming a
bankruptcy court’s decision, we employ a de novo standard and
consider directly the bankruptcy court’s findings of fact and
conclusions of law. Branigan, 716 F.3d at 334 (citing Morris v.
Quigley, 673 F.3d 269, 271 (4th Cir. 2012)). We will not
reverse the bankruptcy court’s factual findings absent clear
error and review that court’s legal conclusions de novo. Id.Also, because this appeal involves a debtor’s rights in real
property, we consider established principles of Maryland law
regarding property held in a tenancy by the entirety. See
Butner v. United States, 440 U.S. 48, 54 (1979) (“Congress has
generally left the determination of property rights in the
assets of a bankrupt’s estate to state law.”).
Under Maryland law, a tenancy by the entirety is a joint
tenancy of spouses with rights of survivorship between the
spouses. Schlossberg v. Barney, 380 F.3d 174, 178 (4th Cir.
2004) (citing Bruce v. Dyer, 524 A.2d 777, 780 (Md. 1987)). In
such an estate, the property is not owned by either spouse
individually, but by the marital unit, with each spouse having
an undivided interest in the whole property. Id.; Arbesman v.
Winer, 468 A.2d 633, 640 (Md. 1983).
9
A tenancy by the entirety is created under Maryland law
only when the four essential common law unities co-exist.
Bruce, 524 A.2d at 780 (internal citation omitted). Those
unities require “that the tenants enjoy identical interests;
enjoy identical, undivided possession; and that the tenancy
commence at the same time via the same instrument.” Id.
While both spouses are alive, a tenancy by the entirety can
be severed only by divorce or by the joint action of both
spouses. Id. at 781. One spouse alone cannot alienate, convey,
or encumber his or her interest in the entireties property.
United States v. Gresham, 964 F.2d 1426, 1430 n.7 (4th Cir.
1992) (citing Beall v. Beall, 434 A.2d 1015, 1021 (Md. 1981)).
Also, the tenancy cannot be severed by individual judgment
creditors during the tenants’ joint, married life. Beall, 434
A.2d at 1021.
When an individual files a bankruptcy petition, a
bankruptcy estate is created by operation of law. 11 U.S.C.
§§ 301, 541(a). Subject to some exceptions not relevant here,
11 U.S.C. § 541 mandates that a debtor’s bankruptcy estate
contain “all legal or equitable interests of the debtor in
property as of the commencement of the case.” 11 U.S.C.
§ 541(a)(1). Thus, under this provision, a debtor’s undivided
interest in entireties property is part of that debtor’s
bankruptcy estate. In re Ford, 3 B.R. 559, 571 (Bankr. D. Md.
10
1980), aff’d sub nom. Greenblatt v. Ford, 638 F.2d 14 (4th Cir.
1981).
In the present case, the district court and the bankruptcy
court relied on In re Hunter, a bankruptcy court decision
addressing the issue before us. See 284 B.R. 806. There, as in
this case, only one of the tenants by the entireties had filed a
petition in bankruptcy. Id. at 809. Applying Pennsylvania law
governing tenancy by the entirety, the bankruptcy court
determined that it lacked authority to strip off a valueless
lien on property owned by the debtor and his spouse as tenants
by the entireties because only the debtor’s interest in the
entireties property, rather than the whole of the property, was
before the bankruptcy court. Id. at 813-14.
In addressing a related issue, this Court considered the
special nature of a tenancy by the entirety under Maryland law,
and held that when an individual owning property in such a
tenancy files a bankruptcy petition, thereby creating a
bankruptcy estate, such action “does not sever the estate of
tenancy by the entirety” created under Maryland law.
Greenblatt, 638 F.2d at 14-15. Relying on this reasoning in
Greenblatt, the Alvarezes assert that the whole of their
entireties property necessarily became part of Mr. Alvarez’s
bankruptcy estate, because the entireties estate was not severed
11
by his filing of the individual bankruptcy petition. We
disagree with the Alvarezes’ argument.
Our decision in Greenblatt v. Ford summarily affirmed the
rationale applied by the bankruptcy court in that case. 638
F.2d at 15. In its decision, the bankruptcy court made clear
that when an individual who owns property in a tenancy by the
entirety files for bankruptcy,
[t]he asset which becomes a part of the [bankruptcy]
estate is only [the debtor’s] interest as it existed
immediately before the commencement of the case . . .
[his] individual undivided interest as a tenant by the
entirety.
In re Ford, 3 B.R. at 575.
The bankruptcy court in that case further explained that
because a bankruptcy trustee obtains only custody of a debtor’s
interest in entireties property, the filing of an individual
bankruptcy petition and the creation of an individual bankruptcy
estate do not sever the unities of a tenancy by the entirety.
See id. at 570. Therefore, under our precedent and in
accordance with principles of Maryland law, only Mr. Alvarez’s
interest in the entireties property, and not the whole of the
entireties property owned by the marital unit, became part of
his bankruptcy estate. See Greenblatt, 638 F.2d at 14-15.
Additionally, as we have explained, to achieve a lien
strip, a Chapter 13 debtor’s reorganization plan ultimately
modifies the unsecured creditor’s rights and removes the in rem
12
component of the lien. 11 U.S.C. § 1322(b)(2); Branigan, 716
F.3d at 335, 338. A debtor’s reorganization plan, upon
confirmation by the bankruptcy court, binds only the debtor and
that debtor’s creditors. 11 U.S.C. § 1327(a). Therefore, the
bankruptcy court is without authority to modify a lienholder’s
rights with respect to a non-debtor’s interest in a property
held in a tenancy by the entirety.
The Alvarezes nevertheless contend that Mrs. Alvarez and
her interest in the entireties property are properly before the
bankruptcy court, because Mr. and Mrs. Alvarez filed a joint
complaint seeking to strip off the lien. The Alvarezes maintain
that their act of jointly filing the complaint satisfied the
requirement of Maryland law that tenants by the entireties act
together to alter their interests in their entireties property.
See Beall, 434 A.2d at 1021.
We find no merit in this argument. By filing their
complaint, the Alvarezes asked the bankruptcy court to determine
that HSBC’s lien was valueless and unsecured, and to permit a
lien strip. Indeed, this Court has held that a debtor must take
affirmative action to strip a lien. Cen-Pen Corp., 58 F.3d at
92-93.
Here, however, the Alvarezes’ complaint did not bring Mrs.
Alvarez’s interest in the property before the court. The filing
of the complaint did not alter the property rights contained in
13
Mr. Alvarez’s bankruptcy estate or the power of the court to
bind only the debtor and his creditors in any reorganization
plan. See 11 U.S.C. § 1327(a). Thus, the Alvarezes were not
entitled to obtain the removal of the lien against their
entireties property without submitting both parties to the
burden of a bankruptcy filing. See In re Hunter, 284 B.R. at
813.
Our conclusion is not altered by the Alvarezes’ reliance on
11 U.S.C. § 363(h), 7 which permits a bankruptcy trustee in
limited circumstances to dispose of a non-debtor spouse’s
7
This provision states:
[T]he trustee may sell both the estate’s interest,
under subsection (b) or (c) of this section, and the
interest of any co-owner in property in which the
debtor had, at the time of the commencement of the
case, an undivided interest as a tenant in common,
joint tenant, or tenant by the entirety, only if—
(1) partition in kind of such property among the
estate and such co-owners is impracticable;
(2) sale of the estate’s undivided interest in such
property would realize significantly less for the
estate than sale of such property free of the
interests of such co-owners;
(3) the benefit to the estate of a sale of such
property free of the interests of co-owners outweighs
the detriment, if any, to such co-owners; and
(4) such property is not used in the production,
transmission, or distribution, for sale, of electric
energy or of natural or synthetic gas for heat, light,
or power.
11 U.S.C. § 363(h).
14
interest in entireties property. Under § 363(h), a trustee can
sell a bankruptcy petitioner’s interest in entireties property
as well as the interest of a non-debtor spouse under specified
circumstances. This provision represents a narrow legislative
exception to the general common-law rule prohibiting any
unilateral severance of an entireties estate. See In re Hunter,
284 B.R. at 812. Moreover, the Bankruptcy Code does not
authorize a bankruptcy court to eliminate a lienholder’s rights
with respect to a non-debtor’s interest in property or to
contravene state law regarding entireties property to eliminate
an in rem component of a lien.
We therefore hold that the bankruptcy court did not err in
concluding that it lacked authority in a Chapter 13 proceeding
to strip off a valueless lien on Maryland property held in a
tenancy by the entirety, when only one tenant spouse had filed a
bankruptcy petition. Accordingly, we affirm the district
court’s judgment upholding the bankruptcy court decision.
AFFIRMED
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