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Petition for Certiorari Seeks to Resolve Circuit Split Regarding Chapter 7 Lien Stripping

By Tracy M. Evans, Esq., Associate, Saxon, Gilmore, Carraway & Gibbons, P.A.

Tevans2-cropped-sLien stripping refers to a process in bankruptcy where a debtor may be permitted to void certain liens or portions of certain liens that are either undersecured or wholly unsecured. There are two types of lien stripping: strip down and strip off. Strip down occurs when only a portion of the lien remains secured, usually due to a decrease in the value of the collateral, and removes any remaining unsecured portion of the lien. Strip off occurs when a lien has become wholly unsecured and voids the entire lien. Both types of lien stripping are permitted under certain circumstances in chapter 13 bankruptcy cases, but there is currently a split among the United States circuit courts as to whether strip off is permitted in the context of a chapter 7 bankruptcy case.

In the recent case of Bank of America, NA v. Sinkfield, No. 13-12141 (11th Cir. July 30, 2013), the Eleventh Circuit summarily affirmed the lower court’s ruling which permitted the strip off of Bank of America’s junior lien on the debtor’s home in the debtor’s chapter 7 bankruptcy. Bank of America filed a petition for certiorari on December 9, 2013, claiming that the Eleventh Circuit’s policy of permitting strip off in chapter 7 bankruptcy cases is contrary to United States Supreme Court precedent and directly conflicts with the views of other circuits.

In Dewsnup v. Timm, 502 U.S. 410 (1992), the United States Supreme Court held that a partially secured lien could not be stripped down in a chapter 7 bankruptcy. In Dewsnup, the debtor sought to strip down the portion of a lien on the debtor’s property that exceeded the value of the property based upon 11 U.S.C. § 506. This section of the Bankruptcy Code 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.” In interpreting section 506, the Court found that this section does not permit a debtor to strip down a creditor’s lien simply because it is undersecured due to the present value of the collateral. All of the other circuits that have reviewed this issue have extended the holding in Dewsnup to preclude strip off in addition to strip down in chapter 7 bankruptcy cases. The Eleventh Circuit, however, has refused to adopt this view.

The Eleventh Circuit’s decision in Sinkfield is based upon the Eleventh Circuit’s prior decisions in McNeal v. GMAC Mortgage, LLC, 2012 WL 8964264 (11th Cir. May 11, 2012) and Folendore v. United States Bus. Admin., 862 F.2d 1537 (11th Cir. 1989). In Folendore, which was decided prior to Dewsnup, the Eleventh Circuit permitted a chapter 7 debtor to strip off a wholly unsecured junior mortgage. In McNeal, the Eleventh Circuit continued to follow the precedent set by Folendore, reasoning that Dewsnup was not controlling because it addressed strip down of an undersecured lien and did not specifically address strip off of a wholly unsecured lien.

As pointed out in Bank of America’s petition for certiorari, the Eleventh Circuit stands alone in its position. The Fourth, Sixth and Seventh Circuits, along with all lower courts outside of the Eleventh Circuit, have refused to permit strip off in chapter 7 bankruptcy cases based upon the interpretation of 11 U.S.C. § 506 in Dewsnup. In the event that certiorari is granted, the Supreme Court’s decision in Sinkfield should eliminate the discrepancy caused by the Eleventh Circuit, and ensure uniform application of the Bankruptcy Code across jurisdictions.

Bank of America’s petition for certiorari can be found at http://www.ncbrc.org/wp-content/uploads/Sinkfield-petition-for-cert.pdf.

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