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Undersecured liens may not be avoided in Chapter 7

In re Spears (Bk 08-13988; Judge Bucki decision Dec. 9, 2009): A Chapter 7 debtor attempted to avoid, or remove, a judgment lien and a mechanic's lien against commercial property. The property was worth $167,000 and had a $220,000 first mortgage. The debtor attempted to remove the junior liens under Bankruptcy Code Section 506(a)(1) and (d). Section 506(a)(1) says that a secured claim is an allowed claim to the "to the extent of the value of such creditor's interest in the [bankruptcy] estate's interest in such property. . .". Section 506(d) states that to the extent that "a lien secures a claim against the debtor that is not an allowed claim, such lien is void.. .".

But Judge Buckirejected the argumenty, based on Dewsnup v. Timm, 502 US 410 (1992). The debtor argued that a new provision in Section 506, enacted after Dewsnup, changes the analysis. New provision 506(a)(2) establishes a means of valuing personal property when determining the status of secured claims against such property. Judge Bucki rejected the conclusion that new Section 506(a)(2) merits any reconsideration of Dewsnup.

Note that a bankruptcy judge in the Eastern District of New York came to an opposite conclusing in a Chapter 13 case - see my blog on the 2009 case Lavella, under the topic list of bankruptcy cases outside of WDNY.

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