Chapter 7 Lien Strip Issue in Eleventh Circuit Unclogged

Posted by NCBRC - June 2, 2014

Cases have been piling up in the Eleventh Circuit challenging that court’s position that a chapter 7 debtor may strip a wholly unsecured lien. See In re Brown No. 13-14298 (lead case). But that court’s recent decision in Bank of Amer. v. Toledo-Cardona, No. 13-15855 (May 15, 2014) (relying on McNeal), and more significantly, its denial of petitions for rehearing and rehearing en banc in the case of McNeal v. GMAC Mortg., LLC, 735 F.3d 1263 (11th Cir. 2012) pet. den. (May 20, 2014), suggest that movement toward Supreme Court resolution may be in the offing. In McNeal, the court bucked the trend to find that Dewsnup v. Timm, 502 U.S. 410 (1992), which held that a partially secured lien could not be stripped-down in chapter 7, did not apply to wholly unsecured liens. See contra, Palomar v. First American Bank (In re Palomar), 722 F.3d 992 (7th Cir. 2013); Talbert v. City Mortg. Serv., 344 F.3d 555 (6th Cir. 2003); Ryan v. Homecomings Fin. Network , 253 F.3d 778 (4th Cir. 2001); Wachovia Mortg. v. Smoot, 478 B.R. 555 (E.D. N.Y. 2012). Instead, the McNeal court relied on its pre-Dewsnup decision in Folendore v. U.S. Small Bus. Admin., 862 F.2d 1537 (11th Cir. 1989), which held that such strip-offs were permissible. The McNeal court found that Dewsnup did not control in part because the reasoning in Dewsnup that would seem to abrogate Folendore was not essential to its holding and 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.

The Supreme Court recently declined to grant cert. in a case challenging the Eleventh Circuit’s position. Bank of America v. Sinkfield, No. 13-700 (cert. denied, March 31, 2014) (NACBA opposed cert. as amicus in that case). There, the creditor bank avoided full analysis of the issue and hustled Sinkfield through the appeal process by stipulating to judgment in the courts below. If the issue makes its way back to the Supreme Court, it will give that Court an opportunity to revisit some of the more dubious aspects of Dewsnup.




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