Supreme Court Cracks Down on Stripping! (Lien Stripping Junior Mortgages, that is!)

Supreme Court Cracks Down on Stripping! (Lien Stripping Junior Mortgages, that is!)

Published on June 1, 2014 by: Ian M. Falcone

In 2012, the Eleventh Circuit held that, contrary to common belief at the time, a junior mortgage that is wholly unsecured, was not considered a secured debt and therefore, could be stripped off or voided in a Chapter 7 case.  (See McNeal v. GMAC Mortgage, 735 F. 3d 1263 (11th Cir. 2012).  Learning of this opportunity, Debtors' lawyers filed motion after motion to strip off these junior mortgages.  Earlier today, the party ended;  the United States Supreme Court, in a unanimous decision, held that junior mortgages, even those that are wholly unsecured, can not be stripped off.  

The issue of lien stripping turns on the definition of whether or not a debt is secured.  "Section 506(a)(1) of provides that "[a]n allowed claim of a credit secured by a lien on property . . is a secured claim to the extent of the value of such creditor's interest in  . .  such property," and "an unsecured claim to the extent that the value of such creditor's interest . . . is less than the amount of such allowed claim." Bank of America, N.A. v. Caulkett, 575 U.S. _____ (2015).  The Court went on to explain that under 506(a), where a senior mortgage exceeds the fair market value of the real property, it would certainly seem that the junior mortgage, by definition is not secured.

Unfortunately, as the Supreme Court went on to explain, the "Court has already adopted a construction of the term 'secured claim; in 506(d) that forecloses this textual analysis.'"  Bank of America, N.A. v. Caulkett, 575 U.S. _____ (2015) (referring to Dewsnup v. Timm, 502 U.S. 410 (1992)).  In Dewsnup, the Court, rather than relying on the statutory meaning, concluded that a "secured" claim was one in which a security interest existed regardless of the value of the collateral.

The Debtors in Caulkett tried to convince the Court, as the McNeal court did, between partially secured liens and wholly unsecured mortgages.   The Court refused to draw such  distinction.

Thus, it appears that Chapter 7 debtors are now stuck with all mortgages on their homes, regardless of the fair market value of the real property.   It was a nice party while it lasted.

Chapter 7 - Removing An Unsecured Lien

Chapter 7 Debtors Can Now Strip Off A Wholly Unsecured Lien

Published on June 14, 2012 by: Ian M. Falcone

Last month the 11th Circuit Court of Appeals decided that a Chapter 7 debtor can strip off a wholly unsecured second lien. See In McNeal v. GMAC Mortgage, LLC, et al, No. 11-11352 (11th Cir. May 11, 2012)

In Dewsnup v. Timm, 502 U.S. 410 (1992), the Supreme Court had rejected a Chapter 7 debtor’s argument to allow for the “strip down” of an undersecured lien. “The vast majority of courts have concluded that Dewsnup’s reasoning for not permitting a “strip down” of an undersecured lien in chapter 7 applies likewise to a chapter 7 debtor’s attempt to “strip off” a wholly unsecured lien. Talbert v. City Mortgage Services 344 F.3d 555 (6th Cir. 2003); Ryan v. Homecomings Fin. Network, 253 F.3d 778 (4th Cir. 2001); Laskin v. First National Bank of Keystone (In re Laskin), 222 B.R. 872 (B.A.P. 9th Cir. 1998); In re Caliguri, 2010 WL 1027411 (Bankr. E.D.N.Y. Mar. 17, 2010); In re Grano, 422 B.R. 401 (Bankr. W.D.N.Y. 2010); In re Arrieta, 2009 WL 1789576 (Bankr. N.D. Ill. 2009). Contra, In re Lavelle, 2009 WL 4043089 (Bankr. E.D.N.Y. Nov. 25, 2009); Howard v. National Westminster Bank, U.S.A. (In re Howard), 184 B.R. 644 (Bankr. E.D.N.Y. 1995).”

In the McNeal case, the Chapter 7 debtor alleged that her home was worth less than the amount of the first mortgage. Debtor argued that § §506(a) and (d) required that the second mortgage, being wholly unsecured, should be determined to be void and the lien stripped off completely. Judge Bonapfel of the Bankruptcy Court of the Northern District of Georgia, Atlanta Division, disagreed, and ruled that the reasoning of Dewsnup applied and that a wholly unsecured lien could not be “stripped off” in a Chapter 7 case. The district court then affirmed. The National Association of Consumer Bankruptcy Attorneys (NACBA) filed an amicus brief with the Court. The Eleventh Circuit then reversed the decison.

To determine whether such an allowed -- but wholly unsecured -- claim is voidable, we must then look to section 506(d), which provides that “[t]o the extent that a lien secures a claim against a debtor that is not an allowed secured claim, such lien is void.” See 11 U.S.C. § 506(d). Several courts have determined that the United States Supreme Court’s decision in Dewsnup v. Timm, 112 S. Ct. 773 (1992) -- which concluded that a Chapter 7 debtor could not “strip down” a partially secured lien under section 506(d) -- also precludes a Chapter 7 debtor from “stripping off” a wholly unsecured junior lien such as the lien at issue in this appeal. See, e.g., Ryan v. Homecomings Fin. Network, 253 F.3d 778 (4th Cir. 2001); Talbert v. City Mortgage Services., 344 F.3d 555 (6th Cir. 2003); Laskin v. First National Bank of Keystone, 222 B.R. 872 (B.A.P. 9th Cir. 1998). But the present controlling precedent in the Eleventh Circuit remains our decision in Folendore v. United States Small Business Administration, 862 F.2d 1537 (11th Cir. 1989). In Folendore, we concluded that an allowed claim that was wholly unsecured -- just as GMAC’s claim is here -- was voidable under the plain language of section 506(d). 862 F.2d at 1538-39.

The Court then explained although several Courts had treated Folendore as having been abrogated by Dewsnup, departure from a prior panel’s ruling was only appropriate only when an intervening Supreme Court decision is “clearly on point.”

Although the Supreme Court’s reasoning in Dewsnup seems to reject the plain language analysis that we used in Folendore, “‘[t]here is, of course, an important difference between the holding in a case and the reasoning that supports that holding.’” Atlanta Sounding Co., Inc., 496 F.3d at 1284 (citing Crawford-El v. Britton, 118 S. Ct. 1584, 1590 (1998)). “[T]hat the reasoning of an intervening high court decision is at odds with that of our prior decision is no basis for a panel to depart from our prior decision.” Id. “As we have stated, ‘[o]bedience to a Supreme Court decision is one thing, extrapolating from its implications a holding on an issue that was not before that Court in order to upend settled circuit law is another thing.” Id. In fact, the Supreme Court -- noting the ambiguities in the bankruptcy code and the “the difficulty of interpreting the statute in a single opinion that would apply to all possible fact situations” -- limited its Dewsnup decision expressly to the precise issue raised by the facts of the case. 112 S. Ct. at 778.

The Court reversed the District Court's opinion. Thus, at least in the 11th Circuit, a wholly unsecured lien may now be stripped in a Chapter 7 case.