Wednesday, October 1, 2014

11th Circuit - Two Days - Two 506 Decisions

Lien Stripping in Chapter 7 

Last week, the 11th Circuit issued two back-to-back ("not for publication") decisions in  In re Phillip, 2014 WL 4802758 (11th Cir. Sept. 29, 2014) and  In re Vaner Iest, 2014 WL 4825253 (11th Cir. Sept. 30, 2014).  The mortgage lender in both cases was Bank of America, N.A.

In both Phillips and Vaner Iest, the second mortgage on the chapter 7 debtor's home was wholly "underwater" and had been "lien stripped" by the Bankruptcy Court.  In both cases, the 11th Circuit help that it was bound by its "prior panel precedent" rule and upheld the Bankruptcy Court's lien avoidance in the same manner it did previously in McNeal v. GMAC Mortgage, LLC, 735 F.3d 1263 (11th Cir. 2012)("not for publication"). In McNeal the Court ruled that it was bound by its 1989 decision in  Folendore v. Small Business Administration, 862 F.2d 1537 (11th Cir. 1989), which held that section 506 (d) of the Bankruptcy Code permits a chapter 7 debtor to avoid ("strip off") a wholly "underwater" second mortgage.

Bank of America, N.A. is a taking tremendous efforts to prohibit the ability of chapter 7 debtors to avoid wholly underwater second mortgages.  A motion filed in one such case indicates that there were 21 appeals pending before the 11th Circuit on this issue and that Bank of America was trying to consolidate them for appeal. But it is not clear how quickly this issue will obtain an en banc review as it was denied recently on an attempt in June, 2014 in the case of the In Re Trina Renee Banks, No. 13-13867 as "no Judge in regular active service on the Court having requested that the Court be polled."


The problem the decisions of the 11th Circuit have on this issue is that Folendore pre-dates the U.S. Supreme Court's decision in the landmark case of Dewsnup v. Timm, 502 U.S. 410 (1992). The Court's ruling in McNeal indicated that if it were not bound by the "prior panel precedent" rule it would not apply Folendore as Dewsnup appears to reject the reasoning of Folendore.  This article indicates that the 7th Circuit in Ryan v. United States (reviewed here) and 10th Circuit in In re Woolsey, 696 F.3d 1266 (2012)  have already held that Dewsnup prohibits the avoidance of "underwater" junior liens in chapter 7. Dewsnup is reviewed  here and here. 

Prior Panel Precedent Rule - "Clear Contrary Opinion" Required

In McNeal, the Court held that it was bound by the Court's "prior panel precedent" rule to apply Folendore and allow the strip down of wholly underwater liens in a chapter 7 case despite the Supreme Court's decision in Dewsnup. Timm, 502 U.S. 410 (1992). Under the prior precedent rule, "a panel cannot overrule a prior one's holding even though convinced it was wrong." United States v. Steele, 147 F. 3d 1316 (11th Cir. 1998)(en banc). This article explains that the 11th Circuit in the case of Main Drug, Inc. v. Aetna U.S. Healthcare, Inc., 475 F.3d 1228 (11th Cir. 207), held that “‘[w]ithout a clearly contrary opinion of the Supreme Court or of this court sitting en banc, we cannot overrule a decision of a prior panel of  this court.’”
Apparrently, the Judges in Phillips were not very happy to be bound by the "prior precedent rule" as they wrote that the Supreme Court in Dewsnup  "rejected the reasoning of  Folendore" and that if Bank of America sought  "to petition this Court for en banc consideration of the issue it raises here, this Court should seriously consider the petition."

Motion for "Summary Affirmance" against Itself

The Court's docket in Phillips, indicates that Bank of America got to the 11th Circuit after it moved for and was granted "summary affirmance" against itself  by the District Court of the Bankruptcy Court against itself.   Bank of America, N.A. did so so as to permit it to seek "en banc review and/or petition the Supreme Court for a writ of certiorari regarding the continued viability of Folendore."

Sinkfield in the 11th Circuit

In another case which reached the 11th Circuit after "summary affirmance" in the District Court (Sinkfield), took the following course:
  1. 11th Circuit granted summary affirmance to permit Bank of America to seek en banc review and/or petition the Supreme Court for a writ of certiorari regarding the continued viability of Folendore
  2. Bank of American's petition for rehearing en banc was construed as a motion for reconsideration of the summary affirmance order and referred to the panel
  3. Panel denied the motion without explanation
  4. Writ of Certiorari to the Supreme Court was denied on March 31, 2014 - "presumably to permit the en banc Eleventh Circuit to resolve the issue"

Post a Comment