Court Reaffirms Dewsnup in Chapter 7 Cases

Posted by NCBRC - June 2, 2015

“The reasoning of Dewsnup dictates that a debtor in a Chapter 7 bankruptcy proceeding may not void a junior mortgage lien under §506(d) when the debt owed on a senior mortgage lien exceeds the current value of the collateral.” So held the Supreme Court yesterday in Bank of America v. Caulkett, 575 U.S. ___, No. 13-1421, and Bank of America v. Toledo-Cardona, No. 14-163 (U.S. June 1, 2015). Justice Thomas (who did not take part in the Dewsnup decision) delivered the opinion of the Court in which all Justices joined except with respect to the footnote in which Justice Kennedy, Justice Breyer and Justice Sotomayor did not join.  The case should have no affect upon lien-stripping in the reorganization chapters. For example, the decision preserves the application of 506(a) and use of 1322(b)(2) to strip liens in chapter 13.

The Caulkett Decision. The Court began its discussion with section 506 of the Bankruptcy Code. Section 506(d) provides that to the extent a claim is not an “allowed secured claim,” it is void. Section 506(a) provides that a claim is secured to the extent that there is value to the creditor in the underlying property. If section 506 were read in accordance with familiar rules of statutory construction, the Court found that it would permit the “debtors . . . to void the Bank’s claims.” However, Dewsnup’s construction of the term “secured claim” in section 506(d) forecloses that textual analysis. Dewsnup separated the meaning of “secured claim” in section 506(a) from its meaning in section 506(d) thereby reducing section “506(d)’s function . . . to ‘voiding a lien whenever a claim secured by the lien itself has not been allowed.’” Thus, the underlying value of the collateral is irrelevant so long as there is an allowed claim secured by a lien.

The Caulkett Court declined to confine the holding in Dewsnup to partially secured liens. Despite Dewsnup’s language limiting its ruling to the facts before it, the Court found that nothing in the reasoning in Dewsnup justifies distinguishing between partially secured and wholly unsecured liens. Nor did the Court accept the debtors’ “artificial” definition of “secured claim” in section 506(d) as requiring “some value in the collateral,” as that definition would “give the term . . . a different meaning than its statutory definition in §506(a).” The Court, with no hint of irony, wholly rejected the debtors’ policy arguments finding that, without regard to their validity, they could not overcome the prohibition against giving the same words different meaning in statutory construction. Nor did Nobelman v. American Savings Bank, 508 U. S. 324 (1993), avail the debtors in this case. Nobelman, a chapter 13 case which, like Dewsnup, dealt with a partially secured lien, has been uniformly interpreted to permit strip-offs of wholly unsecured liens in chapter 13. The Caulkett Court here found that, unlike Dewsnup and the case before it, the reasoning in Nobelman (and its progeny) depends upon interaction of sections 506(a) and 1322(b)(2), rather than application of section 506(d) from which the Dewsnup Court had divorced section 506(a)’s definition of secured claim.

Having determined that Dewsnup’s interpretation of section 506 cannot be read to permit the debtors’ lien stripping, the Court noted that the debtors did not ask it to overrule Dewsnup. Instead, the debtors chose to rely on language in Dewsnup in which that Court, in a moment of introspection, noted the difficulty of applying its decision to “all possible fact situations,” and limited its focus to the “case before us [allowing] other facts to await their legal resolution on another day.” Because Dewsnup dealt with a partially secured lien, and both Caulkett and Toledo-Cardona dealt with wholly unsecured liens, the debtors chose the more conservative route of accepting the Dewsnup Court’s invitation to offer a distinct factual situation for which other statutory and policy considerations could hold sway. Unfortunately, the Court here found that Dewsnup’s reasoning, if applicable to partially secured liens, is equally applicable to wholly unsecured liens.

The decision should have limited effect as only debtors in the Eleventh Circuit were able to strip liens in chapter 7.

Will this affect chapter 13 lien-stripping?  This case should have no effect at all upon lien-stripping in chapter 13 or the other reorganization chapters. Caulkett simply reaffirms the holding in Dewsnup which applies only in chapter 7 cases. The Caulkett decision made this clear in several ways. First, the court distinguished Nobelman, stating that Nobelman “addressed the interaction between the meaning of the term “secured claim” in § 506(a) and an entirely separate provision, §1322(b)(2).” Second, while stating that it is may be inadvisable to adopt a line-drawing test where a difference of $1 could have an arbitrary impact, the court nonetheless found that such tests are appropriate where Congress has drawn the line, as the court had found it had done in Nobelman. Third, the conclusion of the opinion states “a debtor in a Chapter 7 bankruptcy proceeding may not void a junior mortgage lien under §506(d) when the debt owed on a senior mortgage lien exceeds the current value of the collateral.”

As amicus, NACBA considered the risk that an unfavorable, overly broad opinion in this case could negatively impact lien-stripping in chapter 13 and it specifically sought to prevent chapter 13 creditors from making any inroads in that regard. In fact, Justice Thomas’s remarks reinforce the continued validity of the widely accepted interpretation of Nobelman in chapter 13.

What does this bode for the future of Dewsnup? The Court was clearly troubled by the decision in Dewsnup, at times seeming to hold its nose when discussing the reasoning in that case and pointing out in a footnote that Dewsnup has consistently been the target of judicial and scholarly criticism.

Additionally, the Court, in describing the basis for Dewsnup’s unconventional statutory construction and its preliminary finding that section 506(d) was ambiguous, stated, “[r]ather than apply the statutory definition of ‘secured claim’ in §506(a), the [Dewsnup] Court reasoned that the term ‘secured’ in §506(d) con­tained an ambiguity because the self-interested parties before it disagreed over the term’s meaning.” [emphasis added]. The use of the term “self-interested” shines a laser on the fault in the Dewsnup Court’s premise that an ambiguity existed. This issue was explored by Justice Scalia in his scathing dissent in that case in which his outrage over the Court’s finding of ambiguity rested on the fact that that “status [was] apparently achieved by being the subject of disagreement between self-interested litigants.” The Caulkett Court’s echo of that language is clearly a slap at the Dewsnup Court by describing its reasoning with the very term used by Justice Scalia to attack it.







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