Tuesday, April 29, 2014

Chapter 7 Strip Off of " Below Water" Mortgages Issue - US Supreme Court Denies Review

Bankruptcy - Ability of Chapter 7 debtor to "strip off" wholly unsecured junior mortgage lien -- Certiorari Denied
Denying certiorari, the United States Supreme Court has let stand an unpublished Eleventh Circuit decision that summarily affirmed a district court order summarily affirming a bankruptcy court order that granted a Chapter 7 debtor's motion to "strip off," or void, a junior lien on the debtor's house where the debt owed to the senior lienholder exceeded the house's current value. <p>According to the junior lienholder's petition for a writ of certiorari, the debtor, who had two mortgages on his house, filed a motion to strip off the junior lien, which was completely underwater. In light of In re McNeal, 735 F.3d 1263 (C.A.11-Ga. 2012), in which the Eleventh Circuit concluded that its decision in Matter of Folendore, 862 F.2d 1537 (C.A.11-Ga. 1989), which permitted a Chapter 7 debtor to strip off a wholly underwater mortgage, remained binding precedent in the circuit, notwithstanding Dewsnup v. Timm, 502 U.S. 410, 112 S.Ct. 773, 116 L.Ed.2d 903 (1992), in which the Supreme Court concluded that a Chapter 7 debtor could not "strip down" a partially secured lien under 11 U.S.C.A. 506(d), the parties in the present case agreed to resolve the debtor's motion by stipulated order, while preserving the junior lienholder's right to seek appellate review. On appeal, the parties successfully filed a joint motion for summary affirmance, again expressly preserving the lienholder's right to seek further appellate review. Following the district court's summary affirmance, the parties jointly filed a motion requesting that the Eleventh Circuit panel summarily affirm the district court, so that the junior lienholder could seek en banc review and/or certiorari. Although the Court of Appeals granted the joint motion for summary affirmance, thus upholding the order stripping off the junior lien on the authority of McNeal and Folendore, the court treated the lienholder's petition for rehearing en banc as a motion for reconsideration, which was denied. <p>In its certiorari petition, the junior lienholder noted that the circuits are split over whether a Chapter 7 debtor may strip off a junior lien that is completely underwater. "In holding that a Chapter 7 debtor may strip off a lien in such circumstances, the Eleventh Circuit disregarded the Supreme Court's holding and reasoning in Dewsnup--which should have dictated the opposite conclusion--and expressly rejected the contrary holdings of the Fourth, Sixth, and Seventh Circuits," the petition asserted. <p>The National Association of Consumer Bankruptcy Attorneys (NACBA), as amicus curiae, agreed with the debtor that certiorari should be denied because the Bankruptcy Code plainly allows debtors to void mortgage liens that are unsupported by value in the underlying collateral. Section 506(d) provides, in pertinent part, that "to the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void." The fact that the junior lienholder had stipulated to judgment against it throughout the lower court proceedings also weighed against granting review in this case, the NACBA argued. (Case below: Bank of America, N.A. v. Sinkfield, No 13-12141 (C.A.11-Ga. July 30, 2013).)