In the

United States Court of Appeals

For the Seventh Circuit

No. 12-3492

ALEJANDRO PALOMAR, SR., and RAFAELA PALOMAR,

Plaintiffs-Appellants,

v.

FIRST AMERICAN BANK,

Defendant-Appellee.

Appeal from the United States District Court

for the Northern District of Illinois, Eastern Division.

No. 12 C 2418—Gary S. Feinerman, Judge.

ARGUED MAY 21, 2013—DECIDED JULY 11, 2013

Before POSNER, MANION, and ROVNER, Circuit Judges.

POSNER, Circuit Judge. Mr. and Mrs. Palomar filed for

bankruptcy under Chapter 7 of the Bankruptcy Code

in July 2011, and a trustee was appointed. A month

after the filing the trustee reported that the estate in

bankruptcy contained nothing that could be sold and

yield money for the Palomars’ unsecured creditors. So

a discharge of their dischargeable debts was entered and

in December the bankruptcy case was closed.
2 No. 12-3492

The day before the trustee issued his no-asset report

the Palomars had filed in the bankruptcy court an adversary action against First American Bank, which held (and

holds) a second mortgage on their home. The original

amount of the loan secured by the mortgage was

$50,000, but the current balance is unknown and the

bank has not bothered to file an appearance in the adversary action. Another lender, LBPS (IBM Lender

Business Process Services, Inc., recently renamed

Seterus), had and has a first mortgage on the Palomars’

home on which the unpaid balance when the Palomars

filed for bankruptcy was $243,000—yet the home was

valued then, according to an appraisal attached to the

debtors’ complaint, at only $165,000. The Palomars

argue that the second mortgage was worthless and

should therefore be “stripped off”—that is, dissolved by

order of the bankruptcy court. As authority they cite

11 U.S.C. § 506(a). The accuracy of the appraisal has not

been questioned, though the Palomars had an incentive

to obtain a low appraisal in order to bolster their argument for the stripping off of the second mortgage.

By the time the adversary action was ready to be

decided by the bankruptcy judge, the bankruptcy had

been closed. The judge could have reopened it “to accord

relief to the debtor,” 11 U.S.C. § 350(b), as by stripping

off a lien (if that would be proper relief), provided that

the Palomars had not been responsible for a delay in

pressing their suit that would have harmed the creditors

(that is, provided that the Palomars had not been guilty

of laches). In re Bianucci, 4 F.3d 526, 528 (7th Cir. 1993);
No. 12-3492 3

In re Beaty, 306 F.3d 914, 923 (9th Cir. 2002). But deciding

that the adversary action was meritless, the judge

refused to reopen the bankruptcy proceeding and

instead dismissed the adversary action. The district court

affirmed and the Palomars have appealed to us. First

American Bank has not appeared.

So far as relates to the appeal, section 506(a) of the

Bankruptcy Code states that “an allowed claim of a

creditor secured by a lien on property . . . 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.” Section 506(d) states that “to the extent

that a lien secures a claim against the debtor that is not

an allowed secured claim, such lien is void.” In re Tarnow,

749 F.2d 464, 465-66 (7th Cir. 1984), explains that

these provisions are best interpreted as confirming the

venerable principle of Long v. Bullard, 117 U.S. 617, 620-21

(1886), that bankruptcy law permits a lien to pass

through bankruptcy unaffected, provided that it’s a

valid lien and secures a valid claim (“an allowed secured

claim”). The holder of such a claim can if he wants

ignore the bankruptcy proceeding and enforce his

claim by foreclosing the lien. But alternatively he can

file the claim in the bankruptcy proceeding, which will

be an unsecured claim to the extent that it exceeds the

value of the collateral. The upside of this way of proceeding is that if the claim exceeds that value, yet the

debtor has assets sufficient to enable the excess at least or

a portion of it to be paid in satisfaction of an unsecured
4 No. 12-3492

claim, the creditor will be better off than by foreclosing his

lien. The downside is that the claim may be disallowed,

in which event the lien will be avoided; for all a lien is

is security, so if there is nothing to secure, the lien is

down the drain. The bankruptcy court’s invalidation of

a lien, if not reversed, will operate as collateral estoppel

should the creditor later try to foreclose, that is, try

to enforce the lien.

Note however that partial disallowance of a lien creditor’s secured claim doesn’t invalidate the lien, but

merely shrinks it. “If a party in interest requests the

[bankruptcy] 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”—but only “to

the extent that the claim is not allowed.” H.R. Rep. No. 95-

595, 95th Cong., 1st Sess. 357 (1977), reprinted in 1978

U.S.C.C.A.N. 5963, 6313.

If, however, as Tarnow teaches when read alongside

such later decisions as In re Talbert, 344 F.3d 555, 560-61

(6th Cir. 2003), and Ryan v. Homecomings Financial Network,

253 F.3d 778, 781-82 (4th Cir. 2001), the only lien voided

by section 506(d) in whole or part is one securing a claim

rejected in whole or part by the bankruptcy court, the

statute has no application to this case. First American’s

claim was not rejected by the bankruptcy court—it filed

no claim. No one did; this was a no-asset bankruptcy.

And so the bank was free to foreclose its lien outside

of bankruptcy. Nor is there any suggestion that had the

bank filed a claim it would have been rejected. It hasn’t

foreclosed, yet only (we suppose) because at present the
No. 12-3492 5

Palomars’ home is worth less (unless the appraisal is

grossly inaccurate) than the sum of the first and second

liens on it, the bank’s lien being the second. In fact it’s

worth less than the first lien, that of LBPS alone. But

someday the house may be “above water,” at which

point First American may decide to foreclose.

The holdings in Tarnow, Talbert, and Ryan are supported (as noted in Talbert, 344 F.3d at 560, and Ryan,

253 F.3d at 781-82) by the Supreme Court’s post-Tarnow

decision in Dewsnup v. Timm, 502 U.S. 410 (1992), which

holds that section 506(d) does not allow the bankruptcy

court to squeeze down a fully valid lien to the current

value of the property to which it’s attached. See id. at 417-

18. That’s the relief the debtor in this case is seeking.

The only difference between this case and Dewsnup is

that our debtors want to reduce the value of the lien to

zero. They point to section 506(a), which makes a “claim

of a creditor secured by a lien on property” a “secured

claim” only “to the extent of the value of such creditor’s

interest in [the] property.” That value, the Palomars note,

currently is zero. But Dewsnup treated the undersecured

loan in that case as a “secured claim” within the

meaning of section 506(d), and in so doing denied that

“the words ‘allowed secured claim’ must take the same

meaning in § 506(d) as in § 506(a).” Id. at 417. The point

of section 506(a) is not to wipe out liens but to recognize

that if a creditor is owed more than the current value of

his lien, he can by filing a claim in bankruptcy (rather

than bypassing bankruptcy and foreclosing his lien)

obtain, if he’s lucky, some of the debt owed him that he

could not obtain by foreclosure because his lien is worth

less than the debt.
6 No. 12-3492

The Palomars point out that liens on residential

property can be stripped off in bankruptcies under

Chapter 13 of the Bankruptcy Code, the counterpart

for individual debtors of Chapter 11, which governs

corporate reorganizations. A Chapter 13 plan can “modify

the rights of holders of secured claims, other than a

claim secured only by security interest in real property

that is the debtor’s principal residence, or of holders of

unsecured claims.” 11 U.S.C. § 1322(b)(2). And despite

the exception, courts allow a Chapter 13 plan to

eliminate a secured junior claim (such as a claim secured

by a second mortgage) against residential property if

the security interest no longer has value because what

the debtors owe holders of liens senior to this creditor’s

lien (the holder of a first mortgage for example) exceeds

the value of the property. See In re Bartee, 212 F.3d 277, 292-

95 (5th Cir. 2000); In re McDonald, 205 F.3d 606, 615 (3d

Cir. 2000). That is what the Palomars want now, but to get

it they would have had to file for bankruptcy under

Chapter 13 rather than Chapter 7. The strip-off right

in Chapter 13 is a partial offset to the advantages that

Chapter 13, relative to Chapter 7, grants creditors, such

as access to a larger pool of assets because the debtor

must commit all disposable income for three to five years

to repaying his unsecured debts. 11 U.S.C. § 1325(b)(1)(B).

The difference between Chapter 13 (also Chapter 11) and

Chapter 7 is the difference between reorganization

and liquidation. In the latter type of bankruptcy the

debtor surrenders his assets (subject to certain exemptions) and in exchange is relieved of his debts (with

certain exceptions), thus giving him a “fresh start.” But in
No. 12-3492 7

a reorganization the assets are not sold—the enterprise

continues—though ownership is transferred from the

debtor to his creditors. Chapter 13 is only analogous to

a reorganization; the debtor does not become a slave.

But unlike what happens in a Chapter 7 bankruptcy, his

assets are not sold; instead he pays his creditors, over a

three- or five-year period, as much as he can afford. 11

U.S.C. § 1325(b). Often this makes the creditors better off

than they would be in a liquidation, for the assets, though

important to the debtor, may have little market value.

The Palomars point out that liens can sometimes be

stripped off even in Chapter 7 bankruptcies. See 11 U.S.C.

§§ 522(f), 722. The cited provisions relate, however, to

liens on property that is exempt from creditors’ claims.

Section 522(f) allows the debtor to reduce a lien on

exempt property so far as is necessary to preserve the

exemption, while section 722 allows a debtor to redeem

“tangible personal property intended primarily for personal, family, or household use, from a lien securing a

dischargeable consumer debt” by paying the current

value of the lien. Both provisions support the “fresh

start” policy of Chapter 7, consistent with the aim of

bankruptcy law of balancing the bankrupt’s interests

against his creditors’ interests. In any event, sections 522(f)

and 722 are not available to the Palomars—and “fresh

start” is not an ambulatory policy invokable whenever

a debtor makes an appeal to judicial sympathy.

And if there were such a principle it wouldn’t be applicable to this case. Given the gross disparity between

the current market value of the Palomars’ home and the
8 No. 12-3492

claims secured by it, First American Bank is unlikely,

to say the least, to foreclose in the immediate or near

future. For that would entail the bank’s incurring

legal expenses to obtain the ownership of property worth

less than the first mortgage on the property; the bank

would be compounding its loss. So all that failing to

extinguish First American’s lien does from a practical

standpoint is deprive the debtors of the chance to make

some money should the value of their home ever exceed

the balance on LBPS’s first mortgage. It is hard to see

how the deprivation of so speculative a future opportunity could be thought to impair the debtors’ ability to

make a fresh start. The extinction of the lien would

not enable them to obtain a new second mortgage

(unless from a predatory lender) or otherwise improve

their financial situation.

AFFIRMED.

7-11-13