By: Tracy M. Evans, Esq., Associate, Saxon Gilmore & Carraway, P.A.
The United States Supreme Court recently agreed to hear two Eleventh Circuit cases to resolve a circuit split regarding the ability to “lien strip” in chapter 7 bankruptcy cases. Last year, we reported on an Eleventh Circuit case that the Supreme Court declined to hear regarding the same issue. Likely recognizing the need for consistency in bankruptcy cases across the country, the Supreme Court finally agreed to hear the issue, and resolved the issue against lien stripping in chapter 7 bankruptcy cases in its opinion issued June 1, 2015.
As discussed in our previous article, lien stripping refers to a process in bankruptcy where a debtor can seek to avoid certain liens or portions of certain liens that are either under secured or wholly unsecured. There are two types of lien stripping. The first type, strip down, occurs when only a portion of the lien remains secured and removes any remaining unsecured portion of the lien. Conversely, strip off occurs when the lien has become wholly unsecured and voids the entire lien.
In the case of Dewsnup v. Timm, 502 U.S. 410 (1992), the Supreme Court held that a partially secured debtor could not be stripped down in a chapter 7 bankruptcy. In reaching this holding, the Supreme Court reviewed and interpreted 11 U.S.C. § 506 of the Bankruptcy Code 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.” The Supreme Court held that §506 does not permit a debtor to strip down a creditor’s lien simply because it is only partially secured based on the property’s present value.
The Dewsnup holding has been extended by the Fourth, Sixth and Seventh Circuits, along with all lower courts outside of the Eleventh Circuit that have reviewed this issue, to also preclude strip off in chapter 7 bankruptcy cases. The Eleventh Circuit, however, has repeatedly refused to adopt this view, and has continued to allow the strip off where the lien is completely underwater.
The Supreme Court’s new decision in Bank of America v. Caulkett, No. 13–1421 (June 1, 2015), resolves the circuit split against the Eleventh Circuit. In Caulkett, the debtors sought to strip off second mortgage liens on their properties because the amount owed on each debtor’s senior mortgage lien was greater than each home’s current market value. The debtors argued that the second mortgage liens were therefore not “secured claims,” so they fell within the scope of § 506 and could be stripped off.
The Supreme Court determined that the Dewsnup holding resolved the issue presented. Under Dewsnup, a secured claim is a claim supported by a security interest in property, regardless of the present value of the property. The Supreme Court determined that the definition provided in Dewsnup did not distinguish partially secured from wholly unsecured liens, and refused to imply any such distinction. Accordingly, the Supreme Court extended the Dewsnup holding to prohibit all lien stripping in chapter 7 cases.
The Caulkett ruling serves to protect the rights of real estate lenders in the event that a debtor files a chapter 7 bankruptcy, and positively impacts a lender’s ability to collect on its loans. The Supreme Court’s full opinion is available here:
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