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 Since this was an unpublished opinion of a panel (and non-binding), and contrary to authority in other Circuits, lawyers have been watching to see what Bankruptcy Courts would do until the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 In Bertan, the court noted that McNeal is unpublished and thus without precedental value.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.