Georgia Bankruptcy Blog

Georgia Bankruptcy Blog

Lender’s Security Interest In Cash Collateral Is Separate & Distinct From Security Interest In Land, Entitling Lender To Separate Adequate Protection For Cash Collateral

By Scott Riddle on Posted in Middle District Cases, Small Business Bankruptcy

The issue before the District Court in Putnall v. SunTrust Bank, No. 5:12-cv-481, 2013 U.S. Dist. LEXIS 44187 (M.D. Ga. March 28, 2013) was whether the lender’s security interest in rents (the “cash collateral”) was separate and apart from, and in addition to, its security interest in the rental property owned by the Debtor.  The lender argued that because it had two separate categories of collateral, it was entitled to separate adequate protection for each pursuant to 11 U.S.C. §522.  The Debtor argued that “SunTrust’s interest in rents is subsumed by its interest in the real property, and that so long as the real property’s value is not declining, all that must be protected is a lien in rents.” The Bankruptcy Court only authorized expenditures for (1) $5,000 incurred to appraise the property; (2) any expenses incurred in negotiating a new lease on the property; and (3) up to $623.72 per month to pay unreimbursed maintenance expenses.

The District Court found no Eleventh Circuit authority on point, but followed the majority of other courts and held that  the lender’s interest in rents is “separate from its interest in the land and corresponds to the amount of rents that accrue.”

By virtue of the Deed of Trust, SunTrust possesses a separate security interest in the rents produced by the Chattanooga property. Most of the few courts addressing this issue have held that the value of this interest should be measured by the actual rents that have accrued or will accrue… The Sixth Circuit’s unpublished opinion in [Stearns Building v. WHBCF Real Estate, 165 F.3d 28, 1998 WL 661071 (6th Cir. 1998)] and the Sixth Circuit Bankruptcy Appellate Panel’s decision in [In re Buttermilk Towne Center, LLC, 442 B.R. 558 (6th Cir. B.A.P. 2010)] are particularly instructive. In Stearns, the bankruptcy court had rejected the debtor’s request to use rents for administrative expenses, which he proposed to adequately protect by granting the creditor a replacement lien, and ordered him to surrender the rents as cash collateral. 1998 WL 661071 at *2. The debtor asked for a stay while he appealed. The bankruptcy and district court denied the request, and in appealing that decision to the Sixth Circuit, the appellate court considered whether the debtor was likely to prevail on the merits. Id. at *2-3. The court determined he would not, because his proposed diversion of the net rents would diminish the creditor’s interest in the assignment of rents portion of its perfected security interest:

 [The creditor] is entitled to receive adequate protection for Debtor’s use of the net rents generated post-petition if the rents constitute “cash collateral” and there is compliance with 11 U.S.C. § 552(b). Both requirements are met here. 11 U.S.C. § 363(a) expressly provides that rents are “cash collateral.” In addition, 11 U.S.C. § 552(b)(2) generally provides that, if there is a pre-petition security agreement that extends to pre-petition property and to amounts paid as rents of such property, then that security interest extends to post-petition rents to the extent provided in the security agreement. In the present case, the pre-petition security agreement establishes that, upon default, “[Debtor] in such case does hereby bargain, sell, assign and set over to [the creditor] all the rents, income and profits, which, whether before or after foreclosure of this mortgage or during the period of redemption, shall accrue and be owing for the use or occupation of [the complex] .” … Hence, it is clear that Debtor must provide adequate protection if it is to use the net rents.

Stearns, 1998 WL 661071 at *4

The Court rejected Debtor’s position:

Debtor’s argument ignores the nature of the interest actually assigned to SunTrust. SunTrust took more than security necessary to maintain the value of the property; it took an interest in the cash generated by the property. To treat SunTrust’s interest as an interest in only the existence of a lien in rents to protect the value of the property is to adopt a replacement lien theory, which does not provide adequate protection for SunTrust’s interest in the revenue the rents produce. See Buttermilk Towne Center, 442 B.R. at 566.

Even though a few courts once followed it, the replacement lien theory has by now been generally discredited, and not just by the Sixth Circuit panels. Most courts recognize that a pre-petition security interest in rents is a special kind of collateral that, pursuant to 11 U.S.C. § 552(b), continues in full force and effect after the petition is filed. As such, the replacement lien theory’s purported protection is seen as “illusory.” In re Smithville Crossing, LLC, 2011 WL 5909527 at *10. Put another way, a replacement lien simply provides no protection for the very real interest the creditor has in accruing rents. That is why “virtually every case addressing this issue” has rejected the replacement lien. Id. This Court now does the same…

Accordingly, SunTrust has a secured interest in each dollar in rents that accumulates, and each of those dollars is entitled to adequate protection. The Debtor may not use any of the rents to administer his bankruptcy or for other general purposes, because for each dollar in rents he spends, he deprives SunTrust of the adequate protection of that dollar. The Debtor’s use of rents is therefore limited to expenses that are “directly related to the operation, maintenance, or preservation of the” Chattanooga property, or that “are reasonable and necessary to preserving or disposing of such property and are incurred primarily for the benefit of the secured creditor.”

The order of the Bankruptcy Court was affirmed.

Bankruptcy Court Has Jurisdiction To Enter Final Judgment On Fraudulent Transfer Claims; Judge Sacca Follows Narrow View Of Stern v. Marshall

By Scott Riddle on Posted in Northern District Cases, US Supreme Court Cases

In a 28 page opinion, Judge Sacca of the Northern District of Georgia held that Bankruptcy Courts have jurisdiction to enter final orders in some cases involving fraudulent transfer claims. Mitchell v. Banks, Adv. Proc. No. 12-0562, 2013 Bankr. LEXIS 2384 (Bankr. N.D. Ga. June 5, 2013) (click here for opinion).  Judge Sacca based his opinion on the majority and other opinions in Stern v. Marshall, 131 S. Ct. 2594 (2011), reh’g denied, 132 S. Ct. 56 (2011), as well as prior cases on which the holding in Stern was based.   Judge Sacca also review subsequent decisions of courts that have addressed the issue since Stern was decided, including those that follow a narrow view of Stern and those that follow a more expansive view.  I will not attempt to summarize the thorough opinion in detail, as it is important to read the decision.  While the other Judges in the District are free to take a different view, I would expect Judge Sacca’s opinion to be followed by the other Judges until and unless the Supreme Court or Eleventh Circuit rules otherwise.

While Judge Sacca supports a narrow interpretation of Stern, and thus a broader view of Bankruptcy Court jurisdiction, it is important to note the scope of the ruling and relevent facts of the case.  The proceeding was brought  by a Chapter 13 Debtor to contest and avoid a pre-petition foreclosure of real property as a fraudulent transfer based less than reasonably equivalent value (see 11 U.S.C. §548).  The Defendants, who were purchasers, alleged that the Court did not have jurisdiction over the claims and that the Debtor did not have standing.  Judge Sacca ruled in favor of the Debtor on these issues. Continue Reading

Several Popular Local Restaurants, Including Garrison’s, Einstein’s and Joe’s on Juniper, File Chapter 11 Petitions After Large Judgment Entered

By Scott Riddle on Posted in News and Comments, Northern District Cases

Several popular restaurants in metro Atlanta filed Chapter 11 petitions in the Northern District of Georgia on June 13, 2013 after a $2.14 million judgment was entered in Cobb County Superior Court.  The entities filing include:

  1. Vinings Dining, LLC (d/b/a Garrison’s Boiler & Tap), Ch. 11 Case No. 13-63089 (click here for Ch. 11 petition).
  2. Mystical Pizza, LLC (d/b/a Metrotainment Bakery and Sugar Shack), Ch. 11 Case No. 13-63090 (click here for Ch. 11 petition).
  3. Political Concepts, LLC (d/b/a/ Joes’s on Juniper), Ch. 11 Case No. 13-63087 (click here for Ch. 11 petition).
  4. Peach State Restaurants, LLC (d/b/a Einstein’s), Ch. 11 Case No. 13-63081 (click here for Ch. 11 petition).

The apparent reason for the filings is a recent $2.14 million judgment entered against the entities and other related individuals in the Superior Court of Cobb County, Georgia (click here for Superior Court Judgment and click here for Superior Court Complaint).

Debtor Can Pay Tax Sale Redemption Price in Chapter 13 Plan, in Northern District of Georgia

By Scott Riddle on Posted in Northern District Cases

In In re Francis, Ch. 13 Case No. 12-73183, 2013 Bankr. LEXIS 923 (Bankr. N.D. Ga. March 13, 2013) (J. Hagenau) (click here for opinion), the issue before the Court was whether a Debtor can pay the redemption price from a tax sale through a Chapter 13 plan, where her petition was filed on the eve of the expiration of her right to redeem.  The Purchaser at the tax sale objected on the grounds that the Debtor could not pay the redemption price through the plan and the real property at issue was not property of the estate.  The Court held that the Debtor’s rights in the property were property of the estate and the Purchaser’s claim could be treated in the Chapter 13 plan.  This case clarifies that debtors who have lost their property in a tax sale have a second option (other than state law redemption) in getting their property back.

The Purchaser bought Debtor’s property at a tax sale on August 11, 2011 for $9500.00.  At the time Wells Fargo held a lien on the property in the amount of $155,000, but that was subsequently released.  The property was rental property worth approximately $40,700.00.   On August 3, 2012, Purchaser served the Debtor with a Notice of Foreclosure of Equity of Redemption (“Barment Notice”) stating that Debtor’s right to redeem the property would expire on September 18, 2012.  On September 17, 2012, Debtor filed a Chapter 13 petition and a plan that proposed to pay the Purchaser in full over the 60 month plan period.  As of the Petition Date, the Purchaser was owed $14,382.19.

Continue Reading

Single Premium Annuity Exempt In Bankruptcy, Says Georgia Supreme Court.

By Scott Riddle on Posted in Eleventh Circuit Cases, Georgia State Cases, Northern District Cases

The Georgia Supreme Court recently answered certified questions from the Eleventh Circuit Court of Appeals regarding whether a single premium annuity was exempt in a Chapter 7 case, where the annuity was purchased a year before filing with $220,000 in inherited funds.  A debtor’s transfer of $220,000 a year before filing Chapter 7 is certainly going to get the attention of a Trustee, and that was true of this case. However, in a significant win for the Debtor, the Georgia Supreme Court held that the annuity was exempt under Georgia law.  The case is Silliman v. Cassell, 2013 Ga. LEXIS 157, (Ga. Feb. 13, 2013) (click here for opinion).  The facts, as stated in the opinion, are as follows:

In 2008 [Debtor] inherited $220,000 from a relative. After consulting with advisors, she used the inherited funds in May 2009 to purchase a single-premium fixed annuity from National Life Insurance Company. [Debtor] was 65 years old at the time she purchased the annuity. The annuity agreement provides that beginning in June 2009 and until the time of her death, [Debtor] shall receive monthly annuity payments of $1,389.14. The agreement guarantees payments for ten years regardless of when [Debtor] dies and names her children as beneficiaries should she die within the guaranteed payment period. [Debtor] is not authorized to withdraw any funds from the annuity, cancel the annuity, or change the payment terms of the agreement. She is authorized to assign the right to the annuity payments and to change the name of her beneficiaries during the guaranteed period.

On May 11, 2010,  [Debtor] filed a Chapter 7 bankruptcy petition in the Bankruptcy Court for the Northern District of Georgia and she included the annuity as an asset. However, she also listed the annuity as exempt property under OCGA § 44-13-100 (a) (2) (E). The trustee objected, arguing the annuity payments did not meet two of the requirements necessary to qualify for the statutory exemption, specifically that the annuity was not funded by employment related wages or benefits and the payments due under the annuity were not “on account of age.”

The Bankruptcy Court ruled in favor of the Debtor (click here for Judge Hagenau’s opinion) and the District Court affirmed (click for opinion).  The Trustee appealed to the Eleventh Circuit Court of Appeals which found no clear authority on point and certified the case to the Georgia Supreme Court (click here for Eleventh Circuit opinion).   The questions certified to the Georgia Supreme Court are the following:

  1. Is a single-premium fixed annuity purchased with inherited funds an “annuity” for purposes of OCGA § 44-13-100 (a) (2) (E); and
  2. Is a debtor’s right to receive a payment from an annuity “on account of … age” for the purposes of OCGA § 44-13-100 (a) (2) (E) if the annuity payments are subject to age-based federal tax treatment, if the annuitant purchased the annuity because of age, or if the annuity payments are calculated based on the age of the annuitant at the time the annuity was purchased. Continue Reading

Security Deed Lacking Signature of Additional Witness and Improperly Identifying Property Was Invalid in Georgia, says Eleventh Circuit

By Scott Riddle on Posted in Eleventh Circuit Cases, Northern District Cases

In National City Mortgage v. Gordon (In re Bennett), No. 12-13239, 2013 U.S. App. LEXIS 10765 (11th Cir. May 29, 2013) (click here for .pdf), the issue was the validity of a Security Deed that did not contain the signature of “one additional witness,” as required by O.C.G.A. § 44-14-33 and identified a larger tract of property than owned by the debtor.  National City, the lender, argued that the Security Deed was properly recorded because the “waiver of borrower’s rights” filed with (and attached to) the Security Deed did contain the signature of the additional witness.  Not surprisingly, the Court disagreed with National City based on the Georgia Supreme Court’s recent holding in Wells Fargo Bank, N.A. v. Gordon,  292 Ga. 474 (Ga. 2013).  In the Wells Fargo case, discussed here, the Georgia Supreme Court held that a deed’s incorporation of a rider that contained the attestations required by Georgia Code § 44-14-33 did not cure the deed’s lack of the additional witness’s signature.

The Court also disagreed with National City’s argument that the recordation of the flawed Security Deed still constituted inquiry notice of the security interest.  This argument was also dismissed by the Wells Fargo Court.

Finally, the Court held that the description of the property contained in the waiver was “manifestly too meager, imperfect, or uncertain to serve as adequate means of identification” as it encompassed parts of three different neighborhoods and not just the debtor’s property.

Accordingly, the Security Deed was not valid, and the Chapter 7 Trustee, as a bona fide purchaser for value, took priority over National City.  The Court affirmed the opinion of the District Court, which affirmed the Bankruptcy Court’s grant of summary judgment in favor of the Trustee.

Student Loan Discharge: Opinion Of Judge Walker of Middle District Of Georgia Illustrative Of “Certainty Of Hopelessness” Required For Discharge

By Scott Riddle on Posted in Middle District Cases

The opinion of Judge Walker in the case of  In re Williams (Williams v. American Education Service, et al,), 2013 Bankr. LEXIS 2050, Adv. Proc. No. 12-5059 (Bankr. M.D. Ga. May 13, 2013) is a good example of the standard that must be met to discharge student loans. Debtor’s must not only demonstrate “undue hardship” as required under 11 U.S.C. § 523(a)(8), they must demonstrate a “certainty of hopelessness” for the future.

Debtor alleged that her government insured educational loans, totaling $29,593.92 and dating back as far as 1996, should be discharged based upon “undue hardship.”  The summary of the facts show that Debtor’s take-home pay was $1,542 per month from her job as a municipal bus driver. She is financially responsible for her adult child, who apparently has severe emotional disorders. Her son receives social security, including a lump sum for back payments, but Debtor is required to spend the money only for the benefit of her son. In addition, in 2010, Debtor was diagnosed with an eye disorder, with a growth in her eye that could not be removed until it matured in 2011. There is some question about her ability to retain her certification as a bus driver based upon her impaired vision.

Debtor’s expenses, after consideration of her son’s social security payments and his expenses, leaves Debtor with a surplus of $53 per month. Under the income-based repayment plan for student loans, Debtor’s payment would be little or nothing.

The Court began the analysis by reviewing the standard for the discharge of educational loans.

The Eleventh Circuit has adopted the three-prong Brunner test for determining whether repayment of student loans will impose an undue hardship:

(1)… the debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for herself and her dependents if forced to repay the loans; (2) … additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and (3) … the debtor has made good faith efforts to repay the loans.

Hemar Ins. Corp. v. Cox (In re Cox), 338 F.3d 1238, 1241 (11th Cir. 2003) (quoting Brunner v. New York State Higher Educ. Servs. Corp.), 831 F.2d 395, 396 (2d Cir. 1987)). The burden is on Debtor to prove each prong of the Brunner test by a preponderance of the evidence. Douglas v. Educational Credit Mgmt. Corp. (In re Douglas), 366 B.R. 241, 252 (Bankr. M.D. Ga. 2007).

Brunner requires more than a mere present inability to repay student loans; instead, the debtor must demonstrate a “‘certainty of hopelessness‘ that the debtor will be able to repay the loans within the repayment period[.]” Educational Credit Mgmt. Corp. v. Mosley (In re Mosley), 494 F.3d 1320, 1326 (11th Cir. 2007). This results in a high standard such that a discharge of student loans may be obtained only in “the most dire circumstances.” Educational Credit Mgmt. Corp. v. Frushour (In re Frushour), 433 F.3d 393, 399 (4th Cir. 2005). As the court in Cox explained:

The government is not twisting the arms of potential students. The decision of whether or not to borrow for a college education lies with the individual; absent an expression to the contrary, the government does not guarantee the student’s future financial success. If the leveraged investment of an education does not generate the return the borrower anticipated, the student, not the taxpayers, must accept the consequences of the decision to borrow.

The Court found that the Debtor met the first prong, that she cannot meet a “minimal standard of living” if she is forced to repay her loans, given that she has virtually no surplus after paying her necessary expenses.

The second prong, that “additional circumstances exist indicating that state of affairs is likely to persist for a significant portion of the repayment period,” required what the Eleventh Circuit stated to be a “certainty of hopelessness.” The Court found two such “additional circumstances” exist in this case: 1) the needs of Debtor’s son, and 2) her vision impairment and the possible effect on her employment. For the first “circumstance,” the Court found that Debtor will have a little more disposable income when her son moves to a facility that will provide care. In addition, Debtor will pay off her car loan and have an additional $260 per month. As far as her future employment, while the Debtor may be correct in believing her future employment as a bus driver may be at risk, she did not demonstrate that she would be unable to work in another capacity. A mere speculative decline in income does not meet the Brunner test.

Although Debtor’s employment prospects are likely limited due to her age and obsolete education, she has demonstrated an ability to shift careers from mechanics to bus driving. She has further demonstrated an ability to maintain steady employment for the past 23 years, interrupted only by the need for eye surgery. For these reasons, as well as her anticipated decrease in expenses, the Courts finds Debtor failed to carry her burden to prove additional circumstances likely to persist for the duration of the loan repayment period.

The Court found that the Debtor met the third prong of the Brunner test, the “good faith” requirement, but because she did not meet the second prong, her educational debt was non-dischargeable.

Scott Riddle’s practice focuses on bankruptcy and litigation. Scott has represented Chapter 7 and 11 debtors, creditors, creditor committees, trustees, court-appointed receivers and other interested parties in bankruptcy cases and bankruptcy litigation.  For more information, click here. 

U.S. Supreme Court Rules On Meaning Of “Defalcation” In Section 523(a)(4) in Bullock v. BankChampaign.

By Scott Riddle on Posted in US Supreme Court Cases

In a case appealed from the Eleventh Circuit Court of Appeals, the United States Supreme Court ruled on a case involving the definition of "defalcation" in 11 U.S.C. § 523(a)(4).  The case, decided yesterday, May 13, 2013, is Randy Bullock v. BankChampaign NA, 2013 U.S. LEXIS 3521 (U.S. May 13, 2013) (click here for .pdf of opinion). The issue before the Court was the definition and meaning of the term "defalcation," which is not defined in the Code.  The Court held that  “defalcation” in the Bankruptcy Code includes a culpable state of mind requirement involving knowledge of, or gross recklessness in respect to, the improper nature of the fiduciary behavior.

 Section 523(a)(4) provides that:

(a) A discharge under section 727, 1141, 1228 (a), 1228 (b), or 1328 (b) of this title does not discharge an individual debtor from any debt— (4) for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny.

The brief facts of this case are the following.  In 1978, Debtor’s father established a Trust for his five children and made Debtor the trustee.  The sole asset of the Trust was an insurance policy, and the Trust allowed the Debtor to borrow against the policy.  Debtor subsequently borrowed money from the Trust and used the funds to purchase property and a mill for himself and his mother.  Debtor repaid the borrowed funds.

Debtor’s siblings filed suit in state court, and the court held that Debtor breached his fiduciary duties in the self-dealing, albeit without malicious motive.  The court awarded damages of the "benefits he received from his breaches" plus attorneys fees and costs, and appointed BankChampaign as the constructive trustee of the properties and mill.  Debtor was unable to liquidate his interests to pay the judgment, and filed for Bankruptcy.  The Bank sought an exception to the Debtors discharge pursuant to section 523(a)(4) based on the alleged defalcation while acting in a fiduciary capacity. The Bankruptcy Court held in favor of the Bank, and the decision was affirmed by the District Court and the Eleventh Circuit (click here for Eleventh Circuit opinion).  Debtor appealed to the Supreme Court, contending that the debt should not be excepted from discharge absent ill intent or loss of trust principal.  As there was a disagreement on the issue among the lower courts, the Supreme Court granted the petition.

Continue Reading

Judge Diehl In ND Georgia Allows Lien Stripping In Chapter 7, Follows McNeal

By Scott Riddle on Posted in Northern District Cases

In In re Malone, Ch. 7 Case No. 12-61289, 2013 Bankr. LEXIS 1282 (Bankr. N.D. Ga. March 28, 2013) (click here for .pdf), the Debtor filed a  Motion to Determine Status of Wholly Unsecured Second Mortgage on Real Property when Debtor’s case was pending as a Chapter 13, but the court heard the matter only after conversion to Chapter 7.  The Motion raised the issue of whether a debtor may strip a wholly unsecured lien from real property pursuant to § 506 of the Bankruptcy Code.

The relevant facts were undisputed:

Debtor owns real property .. which is subject to two security deeds. JPMorgan Chase Bank, NA purportedly holds or services the first priority security deed. The outstanding balance on its corresponding note is approximately $153,088.37. Citibank holds a valid second priority security deed on the Property and the balance on the corresponding note is approximately $32,197.36. The parties agree that the value of Property was $62,100.00.

The Debtor argued that § 506(a)(1) and (d) allowed them to strip the unsecured second lien pursuant to the 11th Circuit’s opinion in In re McNeal. 

This is not a novel question of statutory interpretation; however, the parties disagree as to what caselaw is binding precedent on this court. The legal issue presented here is complicated by the recent unpublished decision entered by the Eleventh Circuit. In re McNeal, 477 Fed. Appx. 562 (11th Cir. 2012) (per curium). The unpublished nature of McNeal is used by each party in support of its argument for opposite outcomes.

Eleventh Circuit Rule 36-2 provides that an unpublished decision does not serve as binding precedent for lower courts. Of course, the McNeal opinion operates as persuasive authority. Debtor urges the court to adopt McNeal’s rationale, which determined that the control-ling law in this circuit permits a chapter 7 debtor to "strip off" a wholly unsecured lien by relying on the holding in Folendore v. U.S. Small Business Administration, 862 F.2d 1537 (11th Cir. 1989). McNeal, 477 Fed. Appx. at 564-65. In contrast, Citibank asserts that McNeal is wrongly decided and that the intervening Supreme Court decision of Dewsnup v. Timm, 502 U.S. 410, 112 S.Ct. 773, 116 L.Ed.2d 903 (1992) prohibits voiding its junior security deed.

Judge Diehl did a very thorough analysis of the three cases and attempted to reconcile their holdings, which will not be repeated here, and concluded that deference should be given to the McNeal decision. 

The application of the prior panel precedent rule in McNeal is assessed with deference by this court. Yet, its application in an unpublished opinion where there is replete persuasive authority holding that Dewnsup is directly on point creates a predicament. As explained above, this court has struggled to reconcile McNeal and Dewsnup in deciding Debtor’s motion. The legal analysis as set forth above and the principles underlying Dewsnup are compelling to this court.

Regarding the underlying principles, this court takes issue with Folendore’s characterization that stripping a lien using § 506(d) — when the value of the property is less than the senior lien–promotes the fresh start policy of bankruptcy. Folendore, 862 F.2d at 1540. In assessing this position, it is important to consider that chapter 7 provides relief for a debtor through liquidation, not reorganization. In a chapter 7, a debtor’s options for treating property are limited to redemption, reaffirmation, or surrender. In re Taylor, 3 F.3d 1512, 1516 (11th Cir. 1993).

The issues presented by the parties in this action are identical to those arguments presented to the McNeal court. Although this court can not reconcile the Folendore and Dewsnup decisions with respect to the scope and application of § 506(d), deference to the Eleventh Circuit’s McNeal decision ultimately tips the balance in favor of Debtor.

Judge Diehl granted the motion and the second lien was stripped.  In addition, Judge Diehl has provided a form order for use in future cases. 

 

Scott Riddle’s practice focuses on bankruptcy and litigation. Scott has represented Chapter 7 and 11 debtors, creditors, creditor committees, trustees, court-appointed receivers and other interested parties in bankruptcy cases and bankruptcy litigation.  For more information, click here. 

Middle District Bankruptcy Court Approves Lien Stripping In Chapter 7 Case, Although Judge Disagreed With Precedent

By Scott Riddle on Posted in Middle District Cases

In May 2012 the Eleventh Circuit entered its opinion in  In re McNeal and seemingly approved the stripping of wholly unsecured second liens in Chapter 7 cases.  Since this was an unpublished opinion of a panel (and non-binding), and contrary to authority in other Circuits, lawyers have been watching to see what Bankruptcy Courts would do until the issue was decided by the full Circuit or the Supreme Court.  Many Courts in the Circuit, including the Northern District of Georgia, have entered orders allowing the stripping.

In Williams v. Internal Revenue Service (In re Williams), Adv. Proc. No. 12-1027, 2013 Bankr. LEXIS 1107 (Bankr. M.D. Ga. March 15, 2013) (click here for .pdf), the debtors home was worth $210,000.00 and subject to a first-priority lien in the amount of $237,564.00.  The IRS held a second-priority tax lien on the property in the amount of $$77,588.51.  The debtors filed a proceeding to strip the wholly unsecured lien of the IRS.

On summary judgment, Judge Walker ruled in favor of the debtors based on the McNeal case, although he believes it was wrongly decided by the Eleventh Circuit.

Since the McNeal decision, only one bankruptcy judge in the Eleventh Circuit has published a decision on a Chapter 7 debtor’s attempt to strip off a wholly unsecured lien. In re Bertan, No. 11-27057-BKC-AJC, 2013 WL 216231 (Bankr. S.D. Fla. Jan. 18, 2013) (Cristol, J.). In Bertan, the court noted that McNeal is unpublished and thus without precedental value. Id. at *2. It nevertheless followed McNeal … This Court, too, will follow McNeal, even though the Court is persuaded McNeal was wrongly decided. McNeal and Folendore rely on application of § 506(a) prior to application of § 506(d) to void the wholly unsecured lien. However, § 506(a) serves no function in a no-asset Chapter 7 case. Logically, it should only apply when the case provides a distribution to unsecured creditors.  In such circumstances § 506(a) determines the extent to which an undersecured creditor will participate in the distribution. Nevertheless, the Eleventh Circuit has authorized strip off of a wholly unsecured claim pursuant to § 506(d). Although McNeal is not binding, the Court cannot simply ignore a decision of the Eleventh Circuit, especially one that holds that a prior published (and therefore precedental) decision remains good law. Therefore, the status of the IRS’s lien determines whether Dewnsup applies or McNeal applies. If the IRS’s lien is partially secured, Dewsnup prohibits strip down. If the IRS’s lien is fully unsecured, Debtor’s may rely on McNeal to void the lien.