Court Opinion

ID: 1086643
Source: CourtListenerOpinion
Date Created: 2013-10-23 18:34:47.856975+00
Date Added: 2024-06-11T13:21:34.875756
License: Public Domain

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

                                          15