Challenge to Dewsnup Moving Up

Posted by NCBRC - September 22, 2020

When the debtors filed for chapter 7 bankruptcy, they had two outstanding mortgages on their residence. The first was partially secured and the second was fully underwater. The debtors filed an adversary complaint seeking to strip down the partially secured senior lien. The bankruptcy court, compelled by Dewsnup v.Timm, 502 U.S. 410 (1992) and Bank of America, N.A. v. Caulkett, 575 U.S. 790 (2015), granted the creditor’s motion to dismiss. In re Vasquez, No. 19-1841, Adv. Proc. No. 19-100 (Bankr. E.D. N.C. March 25, 2020). Agreeing with the bankruptcy court’s “thorough analysis and conclusions,” the district court affirmed. In re Vasquez, No. 20-62 (E.D. N.C. Aug. 2020).

Though the debtors understood that the bankruptcy court’s decision was a foregone conclusion, they asked the court to address their arguments that Dewsnup was wrongly decided. The bankruptcy court accepted the invitation. The court began with section 506(a) which provides that an allowed claim secured by a lien on property “is a secured claim to the extent of the value of such creditor’s interest in the estate’s interest in such property . . . and is an unsecured claim to the extent that the value of such creditor’s interest . . . is less than the amount of such allowed claim.” Section 506(d) appears to build on this by providing that “[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 Dewsnup, however, the Court held that a chapter 7 debtor could not use section 506(d) to strip down a lien that was both allowed under section 502 and secured. In so holding, the Court divorced the meaning of “allowed secured claim” in section 506(d) from the text of section 506(a). The Court found that its conclusion was compelled by legislative history where liens are said to pass through bankruptcy unaffected.

Caulkett took the Dewsnup decision to the next level, finding that even a wholly unsecured lien cannot be stripped off in chapter 7. There, the Court reasoned that Dewsnup’s holding did not depend on whether the lien was partially or wholly unsecured. In both cases, the security interest alone, without regard to whether it was supported by value, was sufficient to fulfill the requirements of section 506(d) that the lien be both allowed and secured.

The bankruptcy court described the Dewsnup opinion as short and “almost apologetic,” and turned to Justice Scalia’s scathing dissent. Justice Scalia pointed to the Court’s interpretation of the words in section 506(d) as differing from the same words in section 506(a) as an instance of the Court interpreting what it thought Congress ought to have said rather than what Congress did say. Opining that the language of the statute was clear, Justice Scalia took issue with the majority’s reliance on legislative history to interpret it.

The bankruptcy court discussed the backlash to Dewsnup in which many courts and commentators have pointed out that it rests on a misconception of what it means for a lien to pass through bankruptcy unaffected. In fact, that proviso refers to the lienholder’s in rem rights, which would be unchanged by a strip-down. Further, the general rule of passing through bankruptcy is not unlimited as the Code provides many opportunities for debtors to strip liens, such as in section 1123(b)(5) and 1322(b)(2), or where a lien impairs an exemption under section 522(f)(1).

The bankruptcy court also noted that the holding in Dewsnup has led to confusing and inconsistent results in lower courts, such as in In re Shelton, 735 F.3d 747, 748-49

(8th Cir. 2013), cert. denied, 72 U.S. 1116 (2014), and In re Hamlett, 322 F.3d 342, 347 (4th Cir. 2003), where the courts ignored step one of the Dewsnup interpretation and found that a claim that was disallowed by reason of untimeliness still could not be stripped under section 506(d).

The court speculated as to the likelihood of the Supreme Court taking up a challenge to Dewsnup, noting that in Caulkett the Court specified that it had not been asked to do so, and in Ritter v. Brady, 139 S. Ct. 1186 (Mem.) (2019) (cert. denied), it declined to do so.

The case is currently on appeal to the Fourth Circuit, No. 20-1941.

Vasquez Bankr ED NC March 2020

Vasquez ED NC Aug 2020


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