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Lien Stripping in Chapter 7 -- Pending US Supreme Court Case -- Bank of America v Caulkett

The purpose of this guide really has to do with a quick analysis of Chapter 7, lien stripping and the apparent conflict between McNeal v GMAC and Dewsnup v. Timm. Because this case is pending in the US Supreme Court, it is quite possible the US Supreme Court may revisit Dewsnup v Timm.

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On November 17th, 2014, the United States Supreme Court granted certioriri in two cases, to decide whether or not 11 USC 506(d) of the Bankruptcy Code permits a Chapter 7 debtor to “strip off” a subordinate second or junior mortgage lien when the outstanding first or senior mortgage or similar lien exceeds the current value of the senior lien. In Bank of America, N.A. v. Caulkett, No. 13-1421, 2014 WL 2207208 (U.S. Nov. 17, 2014) and Bank of America, N.A. v. Toledo-Cardona, No. 14-163, 2014 WL 3965212 (U.S. Nov. 17, 2014), both cases involving a lien strip, the petitioner Bank of America sought review ostensibly on the grounds that the opinion of the 11th Circuit Court of Appeal in Atlanta, coving the Southeast region including Florida, in McNeal v GMAC Mortgage, LLC, 735 F.3d 1263 (11th Cir. 2012) violates the Supreme Court's decision in Dewsnup v Timm, 502 U.S. 410 (1992).

I believe that the McNeal holding is largely correct and that in my opinion, a revisit to Dewsnup in the post 2005 Bankruptcy Amendment scenario, should lead to the conclusion that wholly and even partially unsecured claims should be avoided or adjusted as a matter of practicality.

11 U.S.C. § 506(a) specifies which claims qualify as a “secured claim” or an “unsecured
claim”:

"An allowed claim of a creditor secured by a lien on property in which the estate has an
interest . . . is a secured claim to the extent of the value of such creditor’s interest in the
estate’s interest in such property . . . and is an unsecured claim to the extent that the
value of such creditor’s interest . . . is less than the amount of such allowed claim."

I suggest that Dewsnup runs contrary to Section 506(a) entirely. As a matter of practical effect, if a debtor is in bankruptcy and the property were to be theoretically foreclosed, the secured lender, even if a 1st position senior lienholder, would not get anything more than what would be had on the date of the filing of the initial petition for relief in bankruptcy. In other words, a bankruptcy is the theoretical foreclosure.

Dewsnup I believe was intended to protect the lender on a residential principal residence from an increase in value, post-petition, in the real property at a later date, thereby preventing the debtor from reaping a windfall. However, the whole purpose of the Bankruptcy Code is to freeze the assets and liabilities of a debtor on the petition date. See 11 USC 541.

Therefore, I believe Dewsnup should be overruled. I say this because it creates an artificial distinction between homeowners and commercial property or investment property owners.

An investment property owner for instance in a Chapter 11 case could theoretically obtain the partial or complete lien strip that Dewsnup denies to a homeowner if the plan of reorganization permits it. This puts Wall Street ahead of Main Street so to speak.

I agree with Justice Scalia's dissent in Dewsnup and believe his position was imminently correct. That a debtor in a Ch. 11 can treat a secured claim as wholly secured, while reducing it, by allowing a lien to continue until the plan is fully performed. But a Chapter 7 debtor receives less treatment, even though the Code provides for its reduction to present-day value.

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