What, if Anything, is Section 506(d)?

Posted by NCBRC - October 3, 2012

(Borrowing from Stephen Jay Gould’s, “What, If Anything, Is a Zebra?” Hen’s Teeth and Horse’s Toes (W.W. Norton & Co. 1980)).

Where, in his essay, Gould discusses the evolution of striped members of the genus equus, cautioning that appearances do not necessarily dictate classifications, bankruptcy practitioners likewise have had to look beyond appearances (or plain language) to determine meaning. This could not be more manifest than in the Supreme Court interpretation of section 506(d) which provides: “To the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void . . .” A simple reading of this clause in conjunction with section 506(a) which provides that a lien is “a secured claim to the extent of the value of the creditor’s interest,” would suggest that when a lien has no value, it is unsecured and therefore void under the operation of section 506(d). But a recent case out of the Eastern District of New York has joined the majority of courts in deciding otherwise. Wachovia Mortgage v. Smoot, No. 11-6379 (E.D. N.Y. Sept. 20, 2012).

It will be news to few that the meaning of “secured claim” in section 506(a), and its meaning in section 506(d), have not evolved in lockstep. The genesis of this discrepancy is Dewsnup v. Timm, 502 U.S. 410 (1992). After painful verbal contortions and reference to considerations beyond the plain text, the Dewsnup Court alighted on the conclusion that a partially secured lien in chapter 7 cannot be stripped down to its value and partially voided because, under section 506(d), where the lien is “allowed” and there is property to which the lienholder has recourse, the claim is “secured” without regard to value. Not surprisingly, many courts, including most recently the Tenth Circuit, have struggled with this “topsy-turvy” reasoning noting that the Dewsnup analysis flies in the face of one of the most fundamental rules of statutory interpretation, “that identical words used in different parts of the same act are [presumed] to have the same meaning.” Woolsey v. Citibank, No. 11-4014 (10th Cir. Sept. 4, 2012) (quoting Sullivan v. Stroop, 496 U.S. 478, 484 (1990)).

Though the Dewsnup Court, perhaps in awareness of its own faulty reasoning, cautioned that its opinion was to be narrowly construed, lower courts have expanded its reach to preclude strip-offs of wholly unsecured liens. See, e.g., In re Talbert, 344 F.3d 555 (6th Cir. 2003); Ryan v. Homecomings Fin. Network (In re Ryan), 253 F.3d 778 (4th Cir. 2001); Laskin v. First National Bank of Keystone (In re Laskin), 222 B.R. 872 (B.A.P. 9th Cir. 1998). Cf. Woolsey, No. 11-4014 (10th Cir. Sept. 4, 2012) (506(d) does not permit strip-off in chapter 13). But see, In re McNeal, 2012 WL 1649853 (11th Cir. May 11, 2012) (finding that Dewsnup did not reach wholly unsecured liens and therefore relying on prior Eleventh Circuit precedent to find that lien could be stripped in chapter 7); In re Lavelle, No. 2009 Bankr. LEXIS 3795 (Bankr. E.D. N.Y. Nov. 25, 2009) (finding Dewsnup not controlling and allowing strip-off).

As things stand at this point, therefore, an “unsecured” claim in section 506(a) is an entirely different animal from an “unsecured” claim in section 506(d) and it behooves the bankruptcy practitioner to remember that when you hear hoof beats in the hallway, sometimes you need to think zebra.

Smoot opinion

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