Dewsnup v. Timm - Oral Argument - October 15, 1991

Dewsnup v. Timm

Media for Dewsnup v. Timm

Audio Transcription for Opinion Announcement - January 15, 1992 in Dewsnup v. Timm

Audio Transcription for Oral Argument - October 15, 1991 in Dewsnup v. Timm

William H. Rehnquist:

We will hear argument next in No. 90-741, Aletha Dewsnup v. Louis Timm.

Spectators are admonished not to talk until they leave the courtroom.

The court is still in session.

Mr. Dyk, you may proceed whenever you are ready.

Timothy B. Dyk:

Mr. Chief Justice and may it please the Court:

This case involves an important question under the bankruptcy code, namely whether liens that exceed the value of property in bankruptcy are to be avoided under section 506.

The present bankruptcy is a Chapter 7 bankruptcy, a liquidation bankruptcy in which the assets of the debtor are generally sold to pay the claims of creditors.

But the interpretation has significance also for the reorganization chapters, Chapters 11 and 13, which deal with business and consumer reorganizations.

Before the 1978 code, the status of secured creditors in bankruptcy was somewhat unclear.

Incredibly enough, Chapters 11 and 13 under the old code did not deal with secured creditors and, even in a liquidation bankruptcy, the effect of the bankruptcy on a lien was unclear.

What Congress did was to enact section 506.

The two sections of 506 that are relevant here today are section 506(a) and section 506(d).

There is really no dispute between the parties as to the interpretation of section 506(a).

section 506(a) deals with allowed claims, that is, claims which are approved or otherwise come into the bankruptcy proceeding and which are not disallowed by the bankruptcy court.

William H. Rehnquist:

Mr. Dyk, did you say a moment ago that under the act of 1898 and the Chandler Act, the pre-code, that it was unclear what happened to liens?

Timothy B. Dyk:

It was unclear.

There were essentially three situations.

This was discussed to some extent in the Chase... this Court's decision in the Chase case, which is cited in the briefs.

Under Long v. Bullard, the creditor... the secured creditor could choose to ignore the bankruptcy proceedings entirely and the lien would survive the bankruptcy.

On the other hand, if the secured creditor went into the bankruptcy proceeding and proved his claim to the full amount, he would have waived his lien.

The situation that was unclear was when under 57(h), for example, a secured creditor went into bankruptcy and tried to prove part of his claim; that is, the claim that exceeded the value of the property.

And I think it was unclear, and none of the cases cited by the respondents or the United States really deals with this situation... unclear in that situation what happened to the excess lien.

Our suggestion is that one of the purposes of section 506 was to deal with that.

What 506(a) does is to divide this claim of a secured creditor into two parts.

Part one is to the extent that there is value in the property.

The creditor has an allowed secured claim in the bankruptcy proceeding and that phrase is not only used in section 506 but in various other sections of the code as well.

Then section 506(a) also says to the extent that the lien exceeds the value of the property, that the creditor has an allowed unsecured claim.

Byron R. White:

Well, Mr. Dyk, does the secured creditor still have the option of staying under the bankruptcy?

Timothy B. Dyk:

Well, the answer is yes and no.

He does have the option to stay out of the bankruptcy, but there is a new provision in the '78 code, section 501(c), which allows the trustee or the debtor to force the secured creditor into bankruptcy and to--