Circuit Court Permits Strip-off in Chapter 7

Posted by NCBRC - May 12, 2012

The Eleventh Circuit has come through for consumer debtors on the issue of stripping off wholly unsecured liens in chapter 7. In In re McNeal, No. 11-11352, (11th Cir., May 11, 2012), the court found that once a lien is determined to be wholly unsecured under section 506(a) it may be stripped off under section 506(d), which provides “[t]o the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void.”

In so holding,  the Eleventh Circuit joined the minority view that the decision in Dewsnup v. Timm, 502 U.S. 410 (1992), does not extend to wholly unsecured liens. After listing the cases that have found such lien strips to be prohibited under Dewsnup, the court turned to its own precedent for guidance. In Folendore v. United States Small Bus. Admin., 862 F.2d 1537 (11th Cir. 1989), the court found that section 506(d) permits strip-off of an allowed claim that is wholly unsecured. The court found that Dewsnup did not abrogate this decision because Dewsnup dealt with a partially secured claim while Folendore was precisely on point, dealing with a wholly unsecured lien. The McNeal court noted that some of the reasoning used in Dewsnup did not support its decision, but it did not find that discrepancy to be determinative for two reasons. First, the holding in Dewsnup was not directly on point, and the reasoning that would seem to abrogate Folendore was not essential to its holding. Second, the Court in Dewsnup was careful to limit its holding to the issue before it, thereby discouraging extrapolation of its holding to cases beyond its four corners.

This is the first circuit level court to reach this holding. Courts finding that Dewsnup does not permit the strip-off include: Ryan v. Homecomings Fin. Network, 253 F.3d 778 (4th Cir. 2001); Talbert v. City Mortg. Serv., 344 F.3d 555 (6th Cir. 2003); Laskin v. First Nat’l Bank of Keystone, 222 B.R. 872 (B.A.P. 9th Cir. 1998). The Bankruptcy Court for the Eastern District of New York has found that such strip-offs are permitted by the Code. In re Lavelle, 2009 WL 4043089 (Bankr. E.D.N.Y. 2009); In re Howard, 184 B.R. 644 (Bankr. E.D. N.Y. 1995).

NACBA submitted an amicus brief in support of the debtor in the district court.


McNeal 11th Cir


Post a Comment

You must be logged in to post a comment.