Eleventh Circuit Gearing Up to Revisit Chapter 7 Lien Strip

Posted by NCBRC - August 5, 2013

Will the Eleventh Circuit continue to buck the trend by allowing lien strips in chapter 7? That is the question that will likely be answered in the case of In re Sinkfield, No. 13-12141. On July 30, the circuit court summarily affirmed the lower courts’ finding that, pursuant to In re McNeal, No. 11-11352 (11th Cir. May 11, 2013), chapter 7 debtors may strip wholly unsecured liens under section 506(d). You will recall that the Court in Dewsnup v. Timm, 502 U.S. 410 (1992), found that under the historical principle that a lien survives bankruptcy unaffected, and a reading of sections 506(a) and (d) under which “allowed secured claim” is given different meanings, debtors may not strip-down a partially secured lien in chapter 7. In addressing a case in which the debtor sought to strip a wholly unsecured lien, however, the court in McNeal found that Dewsnup was inapplicable and that its earlier precedent, Folendore v. United States Small Bus. Admin., 862 F.2d 1537 (11th Cir. 1989), permitting such strip-offs under section 506(d), was still good law. On August 2, the McNeal court agreed to publish its previously unpublished opinion to that effect. In granting summary affirmance of the lower court in Sinkfield, the circuit court specifically stated that its purpose was to allow the parties to seek en banc review.

On the same topic, the Seventh Circuit recently found that, under Dewsnup, neither section 506(a) standing alone, nor in conjunction with section 506(d), permits lien stripping of a wholly unsecured lien in chapter 7. Palomar v. First American Bank (In re Palomar), No. 12-3492 (7th Cir. July 11, 2013). See also Ryan v. Homecomings Fin. Network , 253 F.3d 778 (4th Cir. 2001); Talbert v. City Mortg. Serv., 344 F.3d 555 (6th Cir. 2003); Wachovia Mortg. v. Smoot, 478 B.R. 555 (E.D.N.Y. 2012) (section 506 may not be used to strip off wholly unsecured lien in chapter 7).


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