The U.S. Supreme Court agreed Tuesday to decide whether bankruptcy laws should allow a Utah widow to pay just $39,000 to reclaim land seized by creditors for her default on a $119,000 mortgage.
Althea Dewsnup is trying to recover farmland in Millard County by paying its fair market value, which courts said was valued at $39,000 in 1988 after a drop in land values.But creditors seized the land back in 1979 when Dewsnup and her late husband, Lamar, defaulted on a $119,000 mortgage secured by the land. The Dewsnups filed bankruptcy shortly afterward.
Creditors have been unable to auction off the land because of three different bankruptcy proceedings filed by the Dewsnups. The first two - which were later dismissed - were for Chapter 11 protection, which helps debtors reorganize debts to pay them off. The latest is under Chapter 7, which is to help liquidate property to pay off creditors.
But mortgage holders claim they should be allowed to auction the land because a bankruptcy trustee in one of the earlier proceedings under Chapter 11 abandoned the land to them. He agreed its value was less than what the Dewsnups owed to those creditors who held claims secured by that land.
But when the Chapter 7 action was filed, Dewsnup's lawyers sought to use its provisions to allow her to redeem that property for only its reduced fair market value.
The Supreme Court accepted the case to solve disputes between different U.S. circuit courts of appeal over whether Section 506 of the Bankruptcy Code should allow such action.
The 10th Circuit in Denver ruled against Dewsnup, saying debtors should not be able to redeem such "abandoned land" by merely paying its fair market value - and that creditors can hold onto it in hopes its value will increase. The 3rd Circuit in Philadelphia has taken the opposite stance.
Attorneys for Dewsnup said in petitions that the case is important to ensure bankruptcy law is applied uniformly nationwide, noting 880,000 bankruptcy cases were pending as of June 30, 1989, and nearly 650,000 new bankruptcy cases were filed in 1989.
Documents filed with the court said that in 1978, Dewsnup and her late husband used two farm parcels to secure $119,000 in loans. They defaulted in 1979. They were given 90 days to cure the default and could not. Creditors then gave notice they were going to auction the land.
But before the sale occurred, the Dewsnups filed in April 1981 a Chapter 11 bankruptcy.
That bankruptcy petition was dismissed in 1982, as was another Chapter 11 petition in 1984. Dewsnup then filed in 1984 a Chapter 7 bankruptcy to help liquidate assets and pay part of outstanding debts.
In the Chapter 7 proceedings, lawyers for Dewsnup claimed bankruptcy laws allowed her to reclaim the land for only its fair market value - not the amount owed on loans secured by it, which is now estimated at $140,000.