[CLBS] Lien Stripping wholely unsecured 2nd....more decisions to chew on

[Jon Wilson]

For those interest,

 

Narrative provided courtesy of Robin Miller and her excellent Publication,
if interested, you may purchase her service by contacting:  Robin Miller
<robin at cbar.pro>

 

In a surprising decision by a court of appeals not noted for its sympathy
for debtors' positions, the Eleventh Circuit Court of Appeals, relying on
circuit precedent, has held in a unanimous panel decision that a Chapter 7
debtor may strip off a lien that is wholly unsecured by value in the
collateral. Twenty-three years earlier, the Court of Appeals had reached
this conclusion in Matter of Folendore, 862 F.2d 1537 (11th Cir. 1989), and
the present court reasoned that the decision in Folendore survived the
Supreme Court's subsequent decision in Dewsnup v. Timm, 502 U.S. 410, 112
S.Ct. 773, 116 L.Ed.2d 903 (1992), which held that a Chapter 7 debtor may
not cram down an undersecured claim to the value of the collateral. Here,
the Court of Appeals reasoned, the creditor's junior mortgage lien was both
allowed under Code § 502 and wholly unsecured under § 506(a), and the lien
was therefore voidable under the plain language of § 506(d).
 
Several bankruptcy court cases within the Eleventh Circuit have treated
Folendore as abrogated by Dewsnup. See In re McNeal, 2010 WL 1753376 (Bankr.
N.D. Ga., April 12, 2010), aff'd, Case No. 1:10-cv-01612 (N.D. Ga., March
16, 2011); In re Swafford, 160 B.R. 246 (Bankr. N.D. Ga. 1993); In re
Windham, 136 B.R. 878 (Bankr. M.D. Fla. 1992). This was incorrect, the Court
of Appeals explained, because a later panel of the Court of Appeals (and, by
extension, lower courts within the circuit) may depart from an earlier
panel's decision only when the intervening Supreme Court decision is
"clearly on point." That the reasoning of an intervening Supreme Court
decision is at odds with that of a prior decision by the Court of Appeals is
no basis to depart from the court's prior decision: "Obedience 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."
 
The impact of this decision outside the circuit will be undercut by two
factors: the court's decision not to designate the opinion for publication,
and the court's reliance on pre-Dewsnup authority without reconsidering the
validity of that earlier authority. Still, this decision may make Judge
Dorothy Eisenberg of the Bankruptcy Court for the Eastern District of New
York--the only judge in the country currently permitting Chapter 7 lien
strips, at least in published opinions--feel not quite so lonely on this
issue. 
 
The next step in this case is to see if the creditor, GMAC Mortgage, files a
motion for rehearing en banc. 
 
This issue is currently on appeal in three district court cases: Wachovia
Mortgage v. Smoot, Case No. 2:11-cv-6379 (E.D. N.Y., filed Dec. 30, 2011)
(an appeal from one of Judge Eisenberg's decisions); Palomar v. First
American Bank, Case No. 1:12-cv-2418 (N.D. Ill., filed April 2, 2012); and
Richins v. Bank of America Home Loans, Case No. 2:12-cv-290 (D. Utah., filed
March 26, 2012).
 
One previous Court of Appeals decision had allowed Chapter 7 lien strips.
See In re Smith, 1 Fed. Appx. 178 (4th Cir., Jan. 10, 2001). However, this
was an unpublished decision, and it was superseded by a published decision
released a few months later reaching the opposite conclusion. See Ryan v.
Homecomings Financial Network, 253 F.3d 778 (4th Cir., June 1, 2001).
 
In re McNeal, Case No. 11-11352 (11th Cir., May 11, 2012)



 

Jon R. Wilson

Attorney at Law

 

Wilson Law Offices, P.C.

4614 W. Emerald St.

Boise, ID 83706

Tel. (208)343-8400

Fax (208)424-5006

Email:   <mailto:jon at boiselaw.org> jon at boiselaw.org

 

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