Tuesday, June 02, 2015

Supreme Court Extends Dewsnup But Suggests They Really Don't Care for the Decision

The Supreme Court extended the holding of Dewsnup v. Timm, 502 U.S. 410 (1992) to a fully unsecured junior lien in a chapter 7 case.    However, the Court suggested in a footnote that they are ready to reconsider the underlying precedent.    This suggests that the Petitioners may have lost because they were not bold enough in challenging Dewsnup.   Bank of America v. Caulkett, No. 13-1421 (6/1/15). 

What Happened

Both debtors in these consolidated cases owned a home with a senior mortgage and a fully unsecured second mortgage.   They each filed chapter 7 and tried to strip off the junior mortgage under 11 U.S.C. Sec. 502(d).    In each case, the Bankruptcy Court, the District Court and the Eleventh Circuit approved the "strip off" of the junior liens with the result that they were voided.   The Eleventh Circuit decisions were unreported, which suggests that the Court of Appeals did not find them remarkable.  The Supreme Court granted cert but did not mention a conflict in circuits.   

The Ruling

In a 9-0 decision written by Justice Thomas, the Supreme Court reversed the Eleventh Circuit, finding that the result was compelled by Dewsnup v. Timm.    Under 11 U.S.C. Sec. 506(d), a lien that secures a claim against the debtor that is not an "allowed secured claim" is void.   The Court suggested that the debtors' argument made sense under the statutory language.
The Code suggests that the Bank’s claims are not secured.  Section 506(a)(1) provides that “[a]n allowed claim of a creditor secured by a lien on property . . . is a secured claim to the extent of the value of such creditor’s interest in . . . such property,” and “an unsecured claim to the extent that the value of such creditor’s interest . . . is less than the amount of such allowed claim.” (Emphasis added.)In other words, if the value of a creditor’s interest in the property is zero—as is the case here—his claim cannot be a “secured claim” within the meaning of §506(a). And given that these identical words are later used in the same section of the same Act—§506(d)—one would think this“presents a classic case for application of the normal rule of statutory construction that identical words used indifferent parts of the same act are intended to have the same meaning.” (citation omitted). Under that straightforward reading of the statute, the debtors would be able to void the Bank’s claims. (emphasis added).  
Opinion, p. 3.   While seeming to help the debtors, the Court quickly followed with the statement that:
Unfortunately for the debtors, this Court has already adopted a construction of the term “secured claim” in §506(d) that forecloses this textual analysis.
Id.     Showing some disdain for its own precedent, the Court explained Dewsnup as follows:
Rather than apply the statutory definition of “secured claim” in §506(a), the 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. (citation omitted). Relying on policy considerations and its understanding of pre-Code practice, the Court concluded that if a claim “has been ‘allowed’ pursuant to §502 of the Code and is secured by a lien with recourse to the underlying collateral, it does not come within the scope of §506(d).” (citation omitted). It therefore held that the debtor could not strip down the creditors’ lien to the value of the property under §506(d) “because [the creditors’] claim [wa]s secured by a lien and ha[d] been fully allowed pursuant to §502.” (citation omitted).   In other words, Dewsnup defined the term “secured claim” in §506(d) to mean a claim supported by a security interest in property, regardless of whether the value of that property would be sufficient to cover the claim. Under this definition, §506(d)’s function is reduced to “voiding a lien whenever a claim secured by the lien itself has not been allowed.”
Opinion, p. 4.    Relying on Dewsnup, the Court found that:
Because the Bank’s claims here are both secured by liens and allowed under §502, they cannot be voided under the definition given to the term “allowed secured claim” by Dewsnup.
Id.    The court rejected several arguments as to why Dewsnup could be limited without being overruled.    Among other things, it found that it made little sense to treat a claim secured by $1 of value differently than a claim which was completely underwater.   While the Court noted that there are some instances where a dollar makes a difference, such as under the means test, there was nothing to indicate that underwater mortgages should be treated differently than completely unsecured ones.

Dewsnup Is Not Dead Yet But It's Not Very Healthy

Probably the most interesting part of the opinion is its lone footnote.   The footnote does not even have a number.   It is simply indicated by a cross.   After stating that the debtors did not ask the Court to overrule Dewsnup, Justice Thomas wrote:
†From its inception, Dewsnup v. Timm, 502 U. S. 410 (1992), has been the target of criticism. See, e.g., id., at 420–436 (SCALIA, J., dissenting); In re Woolsey, 696 F. 3d 1266, 1273–1274, 1278 (CA10 2012); In re Dever, 164 B. R. 132, 138, 145 (Bkrtcy. Ct. CD Cal. 1994);Carlson, Bifurcation of Undersecured Claims in Bankruptcy, 70 Am. Bankr. L. J. 1, 12–20 (1996); Ponoroff & Knippenberg, The Immovable Object Versus the Irresistible Force: Rethinking the Relationship Between Secured Credit and Bankruptcy Policy, 95 Mich. L. Rev. 2234,2305–2307 (1997); see also Bank of America Nat. Trust and Sav. Assn. v. 203 North LaSalle Street Partnership, 526 U. S. 434, 463, and n. 3 (1999) (THOMAS, J., concurring in judgment) (collecting cases and observing that “[t]he methodological confusion created by Dewsnup has enshrouded both the Courts of Appeals and . . . Bankruptcy Courts”). Despite this criticism, the debtors have repeatedly insisted that they are not asking us to overrule Dewsnup.
Justices Kennedy, Breyer and Sotomayor expressly joined in all of the opinion except for the footnote.

This opinion reminds me of the He Is Not Dead Yet song in Spamalot.   In this opinion, the Justices are saying that Dewsnup is not dead yet.   However, like the person dragging the still protesting man out to the dead body collector, they seem willing to give it a whack and speed it on its way.    Given the pointed comments made about Dewsnup in this opinion, it appears that there may be as many as six justices who are willing to kick it to the curb if given the opportunity.


Jennifer Davies said...

That's fascinating to know. I always assumed judges were in favor of Dewsnup if they weren't overturning the decision, but it sounds like there are more factors at play. If the opinion is already so negative, I wouldn't be surprised if that decision was discarded in the future. If they do drop that precedent, a lot of bankruptcies involving foreclosures will be different. http://www.rlslaw.com

Paige said...

I agree with Jennifer. This is very interesting. Thank you for sharing.