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 The legal issue presented here is complicated by the recent unpublished decision entered by the Eleventh Circuit.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 The unpublished nature of McNeal is used by each party in support of its argument for opposite outcomes.

Eleventh Circuit Rule 36-2 provides that an unpublished decision does not serve as binding precedent for lower courts.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