Consumer Finance Litigation

On June 1, 2015, the United States Supreme Court issued its decision in Bank of America, N.A. v. Caulkett, in which all nine Justices joined in an opinion that reversed an Eleventh Circuit ruling that chapter 7 debtors may "strip off" wholly unsecured junior liens. The Caulkett opinion largely relies upon the Supreme Court's prior decision in Dewsnup v. Timm, 502 U.S. 410 (1992), in which the Court held that a chapter 7 debtor may not "strip down" liens where the value of the property partially secures the underlying claim. The Eleventh Circuit previously recognized but distinguished the holding in Dewsnup in cases where the debtor wishes to "strip off" a junior lien and the value of the property is less than the value of the senior lien, leaving the junior lien wholly unsecured. In re McNeal, 477 Fed. App'x 562 (11th Cir. 2012). Commentators have criticized Dewsnup because of its interpretation of 11 U.S.C. § 506(d), which arguably allows lien stripping in a chapter 7 case. On March 24, 2015, the Justices heard argument in the Caulkett case, asking counsel for the debtors whether the Court should overrule its prior decision in Dewsnup. Counsel for the debtors refused to take the bait, and instead argued that the Court should distinguish between partially secured liens and wholly unsecured liens, allowing lien stripping only in the case of wholly unsecured liens. The Court rejected the proposed distinction and reasoned as follows:

Ultimately, embracing the debtors' distinction would not vindicate §506(d)'s original meaning, and it would leave an odd statutory framework in its place. Under the debtors' approach, if a court valued the collateral at one dollar more than the amount of a senior lien, the debtor could not strip down a junior lien under Dewsnup, but if it valued the property at one dollar less, the debtor could strip off the entire junior lien. Given the constantly shifting value of real property, this reading could lead to arbitrary results.

The Court also mentioned its prior decision in Nobelman v. American Savings Bank, 508 U.S. 324 (1993), where the Court held that debtors in chapter 13 cases are prohibited from stripping partially secured home mortgage liens based upon the anti-modification language in 11 U.S.C. § 1322(b)(2). Every Circuit Court to decide the issue has since distinguished Nobleman and allowed lien stripping in the context of wholly unsecured junior mortgage liens, i.e. where the value of the debtor's home is less, even by one dollar, than the value of the senior mortgage lien. The Eleventh Circuit has likewise allowed chapter 13 debtors to strip off wholly unsecured mortgage liens, but has acknowledged that doing so "places too much weight upon the valuation process." In re Dickerson, 222 F.3d 924, 926 (11th Cir. 2000). "Given the unavoidable imprecision and uncertainty of the valuation process, we think that choosing to draw a bright line at this point is akin to attempting to draw a bright line in the fog." Id. The Supreme Court in Caulkett agreed with this sentiment by rejecting the Eleventh Circuit's distinction between partially secured liens and wholly unsecured liens, at least in the context of a chapter 7 case:

To be sure, the Code engages in line-drawing elsewhere, and sometimes a dollar's difference will have a significant impact on bankruptcy proceedings. See, e.g., §707(b)(2)(A)(i) (presumption of abuse of provsions of Chapter 7 triggered if debtor's projected disposable income over the next five years is $12,475). But these lines were set by Congress, not this Court.

Now that the Supreme Court has revisited and affirmed the applicability of Dewsnup to prevent stripping of wholly unsecured liens in chapter 7 cases, it may also be time for the Court to revisit the applicability of Nobelman in the context of stripping wholly unsecured home mortgage liens in chapter 13 cases.