In McNeal v. GMAC Mortgage, LLC, et al, No. 11-11352 (11th Cir. May 11, 2012) (click here for .pdf) the issue before the Court was whether a debtor in a Chapter 7 case can strip a second priority, unsecured lien from her residence. At least in the Eleventh Circuit, a debtor can strip the unsecured second lien, at least according to the panel. It remains to be seen if the full Court will hear the case. As of now, it probably be considered persuasive, and not binding, authority.
Debtor alleged that her home was worth $141,416 and subject to a first priority lien in the amount of $176,413 and a second lien in the amount of $44,444. Debtor sought to “strip off” the second priority lien, pursuant to sections 506(a) and 506(d) of the Bankruptcy Code. Debtor contended that, because the senior lien exceeded the home’s fair market value, the second lien was wholly unsecured and, thus, void under section 506(d). The Bankruptcy Court in the Northern District of Georgia concluded that section 506(d) did not permit a Chapter 7 debtor to “strip off” a wholly unsecured lien (click here for the Bankruptcy Court Order). The district court affirmed (click here for District Court Order and click here for the Amicus Brief filed by the National Association of Consumer Bankruptcy Attorneys).
The Eleventh Circuit reversed, holding that precedent in the Circuit allowed the stripping of an unsecured second lien.
To determine whether such an allowed — but wholly unsecured — claim is voidable, we must then look to section 506(d), which provides that “[t]o the extent that a lien secures a claim against a debtor that is not an allowed secured claim, such lien is void.” See 11 U.S.C. § 506(d).
Several courts have determined that the United States Supreme Court’s decision in Dewsnup v. Timm, 112 S. Ct. 773 (1992) — which concluded that a Chapter 7 debtor could not “strip down” a partially secured lien under section 506(d) — also precludes a Chapter 7 debtor from “stripping off” a wholly unsecured junior lien such as the lien at issue in this appeal. See, e.g., Ryan v. Homecomings Fin. Network, 253 F.3d 778 (4th Cir. 2001); Talbert v. City Mortg. Serv., 344 F.3d 555 (6th Cir. 2003); Laskin v. First Nat’l Bank of Keystone, 222 B.R. 872 (B.A.P. 9th Cir. 1998). But the present controlling precedent in the Eleventh Circuit remains our decision in Folendore v. United States Small Bus. Admin., 862 F.2d 1537 (11th Cir. 1989). In Folendore, we concluded that an allowed claim that was wholly unsecured — just as GMAC’s claim is here — was voidable under the plain language of section 506(d). 862 F.2d at 1538-39.
Although the Supreme Court’s reasoning in Dewsnup seems to reject the plain language analysis that we used in Folendore, “‘[t]here is, of course, an important difference between the holding in a case and the reasoning that supports that holding.’” Atl. Sounding Co., Inc., 496 F.3d at 1284 (citing Crawford-El v. Britton, 118 S. Ct. 1584, 1590 (1998)). “[T]hat the reasoning of an intervening high court decision is at odds with that of our prior decision is no basis for a panel to depart from our prior decision.” Id. “As we have stated, ‘[o]bedience to a Supreme Court decision is one thing, extrapolating from its implications a holding on an issue that was not before that Court in order to upend settled circuit law is another thing.” Id. In fact, the Supreme Court — noting the ambiguities in the bankruptcy code and the “the difficulty of interpreting the statute in a single opinion that would apply to all possible fact situations” — limited its Dewsnup decision expressly to the precise issue raised by the facts of the case. 112 S. Ct. at 778.
The Court reversed the District Court’s opinion, and remanded the case.