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Dewsnup v. Timm | 502 U.S. 410, 112 S.Ct. 773, 116 L.Ed.2d 903 (1992)

When collateral is used to secure a loan, the theory is that if the debtor defaults, then the creditor can recoup any outstanding balance from the collateral. But if the collateral’s value is less than the debt it secures, then the creditor is undersecured. In Dewsnup versus Timm, we explore the intersection of undersecured creditors and bankruptcy.

Lamar and Aletha Dewsnup borrowed money from Louis Timm. As security, they executed a deed of trust on farmland they owned, giving Timm a lien. The next year, the Dewsnups defaulted.

Before Timm could conduct a foreclosure sale, the Dewsnups filed for Chapter Seven bankruptcy. The outstanding loan balance was approximately one hundred twenty thousand dollars, and the farmland’s fair market value was only thirty-nine thousand dollars. As part of the bankruptcy, the Dewsnups initiated an adversarial proceeding against Timm, arguing that under Bankruptcy Code Section Five-Oh-Six, Timm’s lien should be reduced to the collateral’s value, essentially stripping down the lien. Timm objected to the Dewsnups’ statutory interpretation.

The bankruptcy court held in Timm’s favor, and the district court and Tenth Circuit affirmed. The United States Supreme Court granted cert, although at this point Lamar had died, leaving Aletha as the sole plaintiff.

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