Tuesday, July 3, 2012

Another Fully Underwater 2nd Mortgage Holder Gets Wiped Out As Federal Appeals Court OKs Lien Stripping Of Subordinate Loan In Ch. 7 Bankruptcy

From a post from the National Consumer Bankruptcy Rights Center:

  • The Eleventh Circuit has come through for consumer debtors on the issue of stripping off wholly unsecured liens in chapter 7.

  • In In re McNeal, No. 11-11352 (11th Cir., May 11, 2012), the court found that once a lien is determined to be wholly unsecured under section 506(a) it may be stripped off under section 506(d), which provides “[t]o the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void.”

  • In so holding, the Eleventh Circuit joined the minority view that the decision in Dewsnup v. Timm, 502 U.S. 410 (1992), does not extend to wholly unsecured liens. After listing the cases that have found such lien strips to be prohibited under Dewsnup, the court turned to its own precedent for guidance.

  • In Folendore v. United States Small Bus. Admin., 862 F.2d 1537 (11th Cir. 1989), the court found that section 506(d) permits strip-off of an allowed claim that is wholly unsecured. The court found that Dewsnup did not abrogate this decision because Dewsnup dealt with a partially secured claim while Folendore was precisely on point, dealing with a wholly unsecured lien.

  • The McNeal court noted that some of the reasoning used in Dewsnup did not support its decision, but it did not find that discrepancy to be determinative for two reasons.

  • First, the holding in Dewsnup was not directly on point, and the reasoning that would seem to abrogate Folendore was not essential to its holding. Second, the Court in Dewsnup was careful to limit its holding to the issue before it, thereby discouraging extrapolation of its holding to cases beyond its four corners.(1)

  • This is the first circuit level court to reach this holding. Courts finding that Dewsnup does not permit the strip-off include: Ryan v. Homecomings Fin. Network, 253 F.3d 778 (4th Cir. 2001); Talbert v. City Mortg. Serv., 344 F.3d 555 (6th Cir. 2003); Laskin v. First Nat’l Bank of Keystone, 222 B.R. 872 (B.A.P. 9th Cir. 1998).

  • The Bankruptcy Court for the Eastern District of New York has found that such strip-offs are permitted by the Code. In re Lavelle, 2009 WL 4043089 (Bankr. E.D.N.Y. 2009); In re Howard, 184 B.R. 644 (Bankr. E.D. N.Y. 1995).

  • NACBA submitted an amicus brief in support of the debtor in the district court.

(1) In its ruling, the three-judge panel makes the following observation on the application of the Supreme Court's Dewsnup decision in connection with the earlier, seemingly conflicting 11th Circuit's ruling in Folendore:

  • A few bankruptcy court decisions within our circuit — including the decision underlying this appeal — have treated Folendore as abrogated by Dewsnup. See, e.g., In re McNeal, No. A09-78173, 2010 Bankr. LEXIS 1350, at *9-12 (Bankr. N.D. Ga. Apr. 9, 2010); In re Swafford, 160 B.R. 246, 249 (Bankr. N.D. Ga. 1993); In re Windham, 136 B.R. 878, 882 n.6 (Bankr. M.D. Fla. 1992). But Folendore — not Dewsnup — controls in this case.

    "Under our prior panel precedent rule, a later panel may depart from an earlier panel's decision only when the intervening Supreme Court decision is `clearly on point.'" Atl. Sounding Co., Inc. v. Townsend, 496 F.3d 1282, 1284 (11th Cir. 2007). Because Dewsnup disallowed only a "strip down" of a partially secured mortgage lien and did not address a "strip off" of a wholly unsecured lien, it is not "clearly on point" with the facts in Folendore or with the facts at issue in this appeal.

    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.'" Atl. 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.

    Because — under Folendore — GMAC's lien is voidable under section 506(d), we reverse and remand for additional proceedings consistent with this decision.

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