                                    PUBLISHED

                      UNITED STATES COURT OF APPEALS
                          FOR THE FOURTH CIRCUIT


                                     No. 16-1971


EDWIN MICHAEL BURKHART; TERESA STEIN BURKHART, f/k/a Teresa S.
Barham,

                    Debtors − Appellants,

             v.

NANCY SPENCER GRIGSBY,

                    Trustee − Appellee,

             and

COMMUNITY BANK OF TRI-COUNTY,

                    Defendant.


Appeal from the United States District Court for the District of Maryland, at Greenbelt.
Peter J. Messitte, Senior District Judge. (8:14-cv-00315-PJM)


Argued: October 24, 2017                                      Decided: March 29, 2018


Before KING and DIAZ, Circuit Judges, and SHEDD, Senior Circuit Judge.


Reversed and remanded by published opinion. Judge Diaz wrote the opinion in which
Judge King and Senior Judge Shedd joined.


ARGUED: John Douglas Burns, BURNS LAW FIRM, LLC, Greenbelt, Maryland, for
Appellants. Rebecca Anne Herr, OFFICE OF CHAPTER 13 TRUSTEE, Annapolis,
Maryland, for Appellee. ON BRIEF: Mary Park McLean, OFFICE OF CHAPTER 13
TRUSTEE, Bowie, Maryland, for Appellee.




                                   2
DIAZ, Circuit Judge:

         In this case, we consider whether a bankruptcy court may strip off valueless liens

on a Chapter 13 debtor’s principal residence when no proof of claims have been filed. The

trustee opposed the debtors’ request to strip the liens, arguing that 11 U.S.C. § 506(d) 1

expressly prohibits lien avoidance where no proof of claims have been filed.             The

bankruptcy court agreed and refused to strip the liens. The district court affirmed, holding

that even if § 506(d) did not bar the debtors’ effort to strip the liens, the text of § 506(a)

still requires a proof of claim to be filed before a lien can be stripped.

         We disagree and reverse. There is no question that the liens at issue are entirely

without value making the creditor the holder of an unsecured claim under § 1322(b).

Accordingly, the liens may be stripped regardless of whether a proof of claim has been

filed.

                                               I.

         Before turning to the merits, we discuss the relevant provisions of the bankruptcy

Code and the factual and procedural history of this case.

                                                A.

         The Bankruptcy Code contains two chapters aimed at individual debtors. Under

Chapter 7, a debtor’s estate is liquidated to pay creditors, after which he can obtain a

discharge, eliminating personal liability for nonexempt debts. §§ 726–727. Chapter 7 thus



         1
        All section references, unless otherwise indicated, are to Title 11 of the United
States Code.

                                               3
“allows a debtor to make a clean break from his financial past, but at a steep price: prompt

liquidation of the debtor’s assets.” Harris v. Viegelahn, 135 S. Ct. 1829, 1835 (2015). By

contrast, Chapter 13 operates as a “reorganization,” allowing a debtor to keep certain assets

by promising to repay creditors from future income streams over a three to five year period.

See id.; §§ 1306(b), 1322, 1327(b). However, only those debtors with a regular income

sufficiently stable to enable payments under a plan may seek relief under Chapter 13.

§§ 101(30), 109(e).

       Despite their differences, both chapters are governed by the same subchapter on

creditors and claims, found at §§ 501–511. See § 103(a). Among other things, this

subchapter details the formal process for filing a proof of claim and claim allowance. 2 See

§§ 501–503. It also provides the mechanism for determining a claim’s secured status and

instructs courts to divide allowed claims into their “secured” and “unsecured” components.

§ 506(a). 3




       2
          Section 501 provides that a creditor may file a proof of claim, but if the creditor
fails to do so, then the debtor or trustee may file the claim. § 501(a), (c). Section 502 states
that “[a] claim or interest, proof of which is filed under section 501 of this title, is deemed
allowed, unless a party in interest . . . objects.” § 502(a).
       3
           The relevant portions of § 506 state in full:


                                                4
       Under the Code, a claim’s secured status depends on the value of the underlying

collateral, not the mere existence of a security interest. Id. Thus, a creditor with a junior

lien on property entirely consumed by senior security interests would hold an unsecured

claim. Collier on Bankruptcy ¶ 506.03[4] (16th ed. 2017). Lien avoidance is the process

by which a debtor seeks to strip off or strip down such a “valueless” lien. In re Alvarez,

733 F.3d 136, 138 (4th Cir. 2013). In bankruptcy parlance, a “strip off” refers to removing

a lien entirely, while a “strip down” reduces the lien to its secured value. In re Scantling,

754 F.3d 1323, 1326–27 (11th Cir. 2014).

       The Supreme Court has held that Chapter 7 does not permit a debtor to strip off a

valueless lien. See Dewsnup v. Timm, 502 U.S. 410, 417 (1992) (holding that § 506(d)



       (a)(1) An allowed claim of a creditor secured by a lien on property in which
       the estate has an interest, or that is subject to setoff under section 553 of this
       title, is a secured claim to the extent of the value of such creditor’s interest
       in the estate’s interest in such property, or to the extent of the amount subject
       to setoff, as the case may be, and is an unsecured claim to the extent that the
       value of such creditor’s interest or the amount so subject to setoff is less than
       the amount of such allowed claim. Such value shall be determined in light of
       the purpose of the valuation and of the proposed disposition or use of such
       property, and in conjunction with any hearing on such disposition or use or
       on a plan affecting such creditor’s interest. . . .

       (d) To the extent that a lien secures a claim against the debtor that is not an
       allowed secured claim, such lien is void, unless—

       (1) such claim was disallowed only under section 502(b)(5) or 502(e) of this
       title; or

       (2) such claim is not an allowed secured claim due only to the failure of any
       entity to file a proof of such claim under section 501 of this title.



                                               5
does not permit a Chapter 7 debtor to strip down a partially unsecured lien); Bank of

America v. Caulkett, 135 S. Ct. 1995, 1999 (2015) (extending Dewsnup to completely

valueless liens). The Court has also prohibited strip downs in Chapter 13 proceedings but

has not addressed whether a plan may nevertheless strip off an entirely underwater lien.

See Nobelman v. Am. Sav. Bank, 508 U.S. 324, 332 (1993) (barring strip downs under

Chapter 13). We, however, have held, “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.” Alvarez,

733 F.3d at 138.

       This unique result in Chapter 13 is explained by the powers granted to bankruptcy

plans under § 1322(b), including the ability to “modify the rights of holders of secured

claims, other than a claim secured only by a security interest in real property that is the

debtor’s principal residence, or of holders of unsecured claims, or leave unaffected the

rights of holders of any class of claims.” § 1322(b)(2).

       The limitation on modifying claims secured by a “security interest in real property”

is referred to as § 1322(b)(2)’s antimodification clause. See In re Bartee, 212 F.3d 277,

287 (5th Cir. 2000). In line with the Supreme Court’s reasoning in Nobelman, courts have

understood a partially underwater lien as falling within the antimodification clause and thus

not subject to lien avoidance. See In re Davis, 716 F.3d 331, 335 (4th Cir. 2013) (surveying

the approach of other circuits). By contrast, a nominally secured creditor with an entirely



                                             6
underwater lien does not fall within the antimodification clause and is viewed as holding

an unsecured claim. Id. at 335–36; In re McDonald, 205 F.3d 606, 612 (3d Cir. 2000).

                                               B.

       On September 14, 2012, Michael and Teresa Burkhart filed a Chapter 13 bankruptcy

petition in the United States Bankruptcy Court for the District of Maryland. At the time,

the Burkharts’ principal residence was encumbered by four liens. In order of seniority

these were: a $609,500 lien held by Chase Bank, a $49,411.80 lien held by Tri-County

Bank, a $78,289.11 lien also held by Tri-County, and a $105,995.75 lien held by PNC

Bank. Chase Bank and PNC Bank filed proofs of claim with the bankruptcy court. Tri-

County did not.

       The Burkharts commenced an adversary proceeding to avoid the liens held by PNC

and Tri-County. Their home was valued at $435,000, making the three junior liens

unsecured and the senior lien only partially secured. The bankruptcy court entered a default

judgment against the two banks, finding the liens completely underwater, and stripped

PNC’s lien. But the court refused to strip the liens held by Tri-County on the ground that

§ 506(d)(2) prohibits lien avoidance where no proof of claims have been filed.

       The Burkharts appealed to the district court, which also refused to strip the liens.

The district court agreed with the bankruptcy court that in a Chapter 13 proceeding, a strip

off cannot occur without application of § 506(d), but that §506(d)(2) barred a lien from

being voided when that lien is not an “allowed secured claim” due simply to the failure to

file a proof of claim. The court added that it would reach the same result even if it accepted

the debtors’ contention that a lien strip can occur by application of § 1322(b)(2) alone. In

                                              7
the court’s view, it could not turn to § 1322(b)(2) until after the claim had been valued

under § 506(a), which in turn cannot occur until that claim has been filed and “allowed.”

See Burkhart v. Cmty. Bank of Tri-Cty., No. PJM 14-315, 2016 WL 4013917, at *4 (D.

Md. July 27, 2016).

       This appeal followed.


                                             II.

       We review the district court’s judgment affirming the bankruptcy court order de

novo. Morris v. Quigley, 673 F.3d 269, 271 (4th Cir. 2012). Since both banks failed to

respond to the Burkharts’ complaint, the debtor’s well-pleaded facts are admitted as true.

Ryan v. Homecomings Fin. Network, 253 F.3d 778, 780 (4th Cir. 2001).

       Accordingly, we need only address questions of law on appeal. Specifically, we

must decide whether a Chapter 13 debtor can strip off a completely unsecured junior lien

when no proof of claim has been filed. In the process, we must answer two other questions.

First, what role, if any, does § 506(d) play in a Chapter 13 lien strip? Second, is Tri-County

the holder of an “unsecured claim” under § 1322(b)? We address each issue in turn.

                                           A.

       Our past decisions make clear that the power to effectuate a lien strip in a Chapter

13 case stems from §§ 506(a) and 1322(b). See Davis, 716 F.3d at 335 (“The end result is

that section 506(a), which classifies 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.”); Alvarez, 733 F.3d at 138 n.2 (“[T]he


                                                8
statutory basis for a strip off is found in 11 U.S.C. §§ 506(a) and 1322(b), without

application of § 506(d).”).

       Section 506(d), on the other hand, voids liens “on the basis of whether the

underlying claim is allowed or disallowed under section 502.” Collier on Bankruptcy

¶ 506.06[1][a]. The provision therefore implements the bankruptcy court’s broad power

over claim allowance—permitting the court to remove a lien after it has extinguished the

underlying debt. See H.R. Rep. No. 95–595, at *357 (1977), as reprinted in 1978

U.S.C.C.A.N. 5963, 6313 (“Subsection (d) permits liens to pass through the bankruptcy

case unaffected. However, if . . . the claim is not allowed, then the lien is void to the extent

that the claim is not allowed.”).

       The Supreme Court made this point clear in Dewsnup when it rejected the Chapter 7

debtor’s argument that § 506(d) can be used to strip down a partially secured lien. 502

U.S. at 417. The Court explained that the applicability of § 506(d) depends on whether a

claim is an “allowed” secured claim, agreeing that this reading “gives the provision the

simple and sensible function of voiding a lien whenever a claim secured by the lien itself

has not been allowed.” Id. at 415–16; accord Caulkett, 135 S. Ct. at 1999 (“Under this

definition, § 506(d)’s function is reduced to voiding a lien whenever a claim secured by

the lien itself has not been allowed.”) (internal quotation marks omitted). Thus the

provision “ensures that the Code’s determination not to allow the underlying claim against

the debtor personally is given full effect by preventing its assertion against the debtor’s

property.” Dewsnup, 502 U.S. at 416.



                                               9
       Here though, the Burkharts are not challenging the validity of the underlying debt,

say by arguing that it was the product of fraud or duress. Rather, they argue that Tri-

County’s otherwise valid debt is now unsecured because the value of the senior security

interest (the Chase Bank lien) is far greater than the value of the Burkharts’ home. As such,

they look (we think correctly) to “§ 506(a) for a judicial valuation of the collateral to

determine the status of the bank’s secured claim” and modification of the “‘rights’ the bank

enjoys as a mortgagee” under § 1322(b)(2). Nobelman, 508 U.S. at 329.

                                             B.

       Tri-County also holds an unsecured claim for purposes of § 1322(b) despite never

filing a formal proof of claim. In reaching a contrary result, the district court concluded

that the filing of a formal proof of claim is a prerequisite to valuing that claim under

§ 506(a). However, this conclusion confuses the claim allowance and lien avoidance

process and turns a blind eye to economic reality. In our view, the language and purpose

of § 1322(b) compels the opposite result.

       Section 1322(b)(2) permits a plan to “modify the rights of holders of secured claims,

other than a claim secured only by a security interest in real property that is the debtor’s

principal residence.” § 1322(b)(2). As the Supreme Court explained in Nobelman, the

critical focus here is on “rights.” 508 U.S. at 328. Thus, § 1322(b) “does not state that a

plan may modify ‘claims’ or that the plan may not modify ‘a claim secured only by’ a home

mortgage. Rather, it focuses on the modification of the ‘rights of holders’ of such claims.”

Id. at 328. By contrast, § 506(a) speaks only of allowed claims.



                                             10
       Nor has a Chapter 13 plan’s power to modify rights ever been restricted to the

universe of allowed claims. To the contrary, bankruptcy proceedings routinely modify a

non-participating creditor’s rights, for example via § 362’s automatic stay provision, or

perhaps most saliently, by extinguishing the debtor’s personal liability on the debt

following plan confirmation pursuant to § 1327(c). We see no reason for a different result

when it comes to avoiding an entirely unsecured lien. 4

       And while we have said that courts should look to § 506(a) to value collateral before

proceeding to § 1322(b), see Davis, 716 F.3d at 335, we have never required strict

compliance with the claim allowance process. Rather, the thrust of our instruction in Davis

was to remind bankruptcy courts that whether “a lien claimant is the holder of a ‘secured

claim’ or an ‘unsecured claim’” under § 1322(b)(2) turns on “whether the claimant’s

security interest has any actual ‘value.’” In re Lane, 280 F.3d 663, 669 (6th Cir. 2002).

Thus, Nobelman explained that the petitioners “were correct in looking to § 506(a) for a

judicial valuation of the collateral to determine the status of the bank’s secured claim” but

made clear that such a “determination does not necessarily mean that the ‘rights’ the bank

enjoys as a mortgagee, which are protected by § 1322(b)(2), are limited by the valuation

of its secured claim.” 508 U.S. at 328–29. In other words, the valuation process in § 506(a)


       4
         The recent amendments to the federal bankruptcy rules also support our view.
Under the new rules, a debtor may request a valuation of a secured claim directly in his
Chapter 13 plan. Fed. R. Bankr. P. 3012(b). And any determination in a confirmed plan
regarding the value of a secured claim is binding on the holder of the claim, “even if the
holder files a contrary proof of claim.” Fed. R. Bankr. P. 3015(g)(1). Thus, the new rules
plainly contemplate application of § 506(a) even when no formal proof of claim has been
filed.

                                             11
does not determine a creditor’s rights under § 1322(b)(2). Such rights turn on whether

there is any value in the collateral. Id. at 329.

       Focusing on the value of the claim, rather than the claim allowance process as the

trustee urges, explains why a secured creditor whose lien has real value may decide not to

participate in the bankruptcy proceeding and rely only on its in rem right of foreclosure

following the debtor’s discharge. See U.S. Nat'l Bank in Johnstown v. Chase Nat’l Bank

of N.Y.C., 331 U.S. 28, 33 (1947). In the same vein, we think an entirely valueless lien

may be stripped under § 1322(b) whether or not a proof of claim has been filed.

       The trustee’s contrary view would require us to ignore the plain fact that Tri-

County’s liens are entirely without value, and that such a creditor has no incentive to file a

proof of claim. Moreover, while the Code permits a debtor to file a proof of claim where

a creditor has not, see § 501, requiring such an act merely so that a debtor may then strip

the worthless lien only serves to drive up litigation costs. As things stand now, PNC, which

filed a proof of claim, has had its lien stripped. But Tri-County, which did nothing, has

had its lien survive. That cannot be the law.



                                              III.

       To summarize, the ability of a Chapter 13 debtor to strip off an underwater lien

stems from § 1322(b) not § 506(d). The former provision permits plans to modify the

rights of holders of unsecured claims. Whether a creditor has an unsecured claim turns on

the value of the underlying collateral not the mere existence of a security interest. And in

making this determination, courts are not limited to valuing claims that have been filed and

                                              12
allowed. Where, as here, a senior lienholder is only partially secured, any junior lienholder

is by definition the holder of an unsecured claim for purposes of § 1322(b), which may be

stripped without the filing of a proof of claim.

       The decision of the district court is therefore reversed and the case is remanded for

further proceedings consistent with this opinion.

                                                            REVERSED AND REMANDED




                                             13
