Breathing Underwater: The Survival of Second Mortgages in Bankruptcy Proceedings
In conjunction with the Wall Street collapse of 2008, the foreclosure crisis hit hard in Florida, and its impact was devastating. Not only were businesses losing revenue and consumers facing furloughs, pay cuts, and unemployment, but their properties’ values were plummeting. For example, median household income in Florida dropped from $53,707 to $46,036 between 2007 and 2013,1 while median home values decreased from $247,000 to $136,000 during the same period.2 The quick decline in property values placed Florida cities among the United States metropolitan areas with the highest percentage of “underwater” homes, i.e. , homes in which the mortgage debt exceeded the property value.3
The torrent of foreclosure filings that followed reached its peak in the 2008-09 fiscal year, when 403,473 new foreclosure cases were filed in Florida.4 Amid the hysteria, banks failed,5 law firms shut down due to, among other things, corruption,6 and borrowers were left searching for answers. For multiple reasons, one of the most effective strategic tools that borrowers could use during this foreclosure wave was petitioning for bankruptcy relief under Chs. 7, 11, and 13 of the Bankruptcy Code.7
Since the filing of a bankruptcy proceeding automatically stays all collection efforts, including a state court foreclosure case, borrowers can obtain time to secure additional income from their property or wait for its value to increase by filing for bankruptcy.8 In addition, under Ch. 11 and Ch. 13, debtors can propose a repayment plan that modifies the amount of debt secured by a lien on property.9 In bankruptcy jargon, reducing a lien to the value of the underlying collateral is called a “strip-down,” and reducing the value of the lien to zero when the underlying collateral is valueless is called a “strip-off.” The availability of such relief provided additional protection to debtors in Florida after the market crash.
While lien strip-offs were previously permitted in Florida through precedent laid down by the 11th Circuit, a recent Supreme Court decision and subsequent 11th Circuit rulings have abolished lien strip-offs in Ch. 7 bankruptcy proceedings. The issue came before the Supreme Court on appeal from the 11th Circuit in the consolidated cases of Bank of America v. Caulkett and Bank of America v. Toledo-Cardona, 2015 U.S. LEXIS 3579 (June 1, 2015) ( Caulkett ), and the Supreme Court struck down Ch. 7 lien strip-offs as being contradictory to the text of the code. The 11th Circuit subsequently acknowledged the precedent of the Caulkett decision, which confirmed that Ch. 7 lien strip-offs are no longer permitted in Florida.10 This article examines the history of lien-stripping in bankruptcy, the unique position of second mortgagees on underwater properties, and the changing legal landscape pertaining to the treatment of junior liens in light of Caulkett and Bank of America, N.A. v. Waits, 793 F.3d 1267 (11th Cir. 2015).
The History of Claims Allowance, Lien-Voiding, and Lien-Survival
Florida debtors had, for decades, been able to use the Bankruptcy Code to strip-off a wholly under-secured second mortgage through an adversary proceeding in Ch. 7 bankruptcy.11 Under the Bankruptcy Reform Act of 1978, which established the modern Bankruptcy Code,12 when a debtor files for bankruptcy, an estate is created that consists of all of the debtor’s nonexempt property. The modern code introduced the concept of bifurcation of claims. As it pertains to mortgages, for example, if the creditor is under-secured, the code bifurcates the secured creditor’s claim against the estate into a secured and unsecured portion.13
For example, assume a piece of real property within a debtor’s bankruptcy estate is worth $100,000 and is encumbered by a first mortgage in the amount of $120,000 and a second mortgage in the amount of $30,000. The first mortgagee’s claim is bifurcated into a $100,000 “secured claim” and a $20,000 “unsecured claim.”14 The second mortgagee’s claim is strictly an “unsecured claim” since the value of the underlying collateral is zero.15 The bifurcation of claims also opened the door for modifying the value of liens through §506(d). Under §506(d) of the code, “To the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such a lien is void….”16 When read in conjunction with §506(a)(1), this would suggest that a lien on property can be voided or “stripped” down to the value of the underlying collateral through a Ch. 7 bankruptcy.17
As a result of the claim bifurcation and lien-voiding provisions introduced by the 1978 Act, Ch. 7 debtors began utilizing adversary proceedings as a way to strip-down liens under §506(d), or strip-off liens completely when the underlying collateral carried no value.18 This had the practical effect of modifying the lien by reducing the lien to the property’s value at the time of bankruptcy, thereby allowing any subsequent increase in property value to inure to the benefit of the debtor. Since a claim in bankruptcy was only “secured” to the extent of the underlying collateral’s value pursuant to §506(a)(1), debtors contended that a lien securing an amount beyond the value of the property was “void” because it was a lien on a claim that was not an “allowed secured claim” under the meaning of §506(a)(1).19 Proponents of this contention deemed this the logical approach since both uses of “allowed secured claim” fell within the same section of the code.20 Under In re Folendore, 862 F.2d 1537 (11th Cir. 1989), strip-offs of wholly under-secured second liens were permitted in Florida for the past 26 years until the Supreme Court’s recent Caulkett decision struck down this practice.21
Treatment of Liens in Florida Under the Modern Code
Due to the lien-voiding language of §506(d), lien-stripping was common immediately following the 1978 Act, but whether lien-stripping was permissible under the code was a question for future adjudication in the courts. Under previous bankruptcy acts, liens passed through bankruptcy unaffected.22 The creation of §506 under the modern code, however, led practitioners to challenge whether the modern code provided a new mechanism for voiding liens. While the Supreme Court recently struck down Ch. 7 lien strip-offs, the opposite was the prevailing practice in the 11th Circuit for the past two decades.23
In the late 1980s, the majority of courts held that strip-offs were permissible under §506(d) in Ch. 7 cases, and the 11th Circuit followed the majority view.24 For example, in 1989, the 11th Circuit in Folendore held that liens could be voided when they did not secure an “allowed secured claim” within the meaning of §506(a)(1).25 The Folendore court held that an “allowed secured claim” should be construed as a term of art under §506(d) (as it was defined through §506(a)(1)) because this was the “plain language of the statute.”26
Despite its agreement with the majority view, the Folendore precedent was at odds with centuries-old practice and Supreme Court precedent supporting bankruptcy lien survival. The Supreme Court in Dewsnup v. Timm, 502 U.S. 410, 418-19 (1992), emphasized the importance of lien survival:
Apart from reorganization proceedings, no provision of the pre-Code statute permitted involuntary reduction of the amount of a creditor’s lien for any reason other than payment on the debt….[T]he [c]ourt [has] held that a discharge in bankruptcy does not release real estate of the debtor from the lien of a mortgage created by him before the bankruptcy. And in…consider[ing] additions to the Bankruptcy Act effected by the Frazier-Lemke Act…the [c]ourt noted that the latter act’s avowed object is to take from the mortgagee rights in the specific property held as security; and to that end to scale down the indebtedness to the present value of the property. The [c]ourt invalidated that statute under the Takings Clause. It further observed [that] [n]o instance has been found, except under the Frazier-Lemke Act, of either a statute or decision compelling the mortgagee to relinquish the property to the mortgagor free of the lien unless the debt was paid in full.27
Thus, lien survival was firmly rooted in bankruptcy jurisprudence before enactment of the modern code.
Lien-voiding under §506(d) was further complicated by the fact that the House and Senate reports to the 1978 Act indicated that §506(d)’s lien-voiding language pertained to whether the claim was “allowed” under §502, and did not relate to the claim bifurcation of §506(a).28 As such, the 11th Circuit’s lien-voiding practice, while arguably based on a textual interpretation of the code, did not have the support of earlier Supreme Court precedent or legislative intent.
Nevertheless, the 11th Circuit and the majority of lower courts in the late 1980s viewed lien strip-offs as permissible pursuant to §506(d) in Ch. 7 cases.29 The Folendore court noted that this was the “common-sense” approach, and did not turn on whether a claim was “allowed” or “disallowed,” as opponents of lien-stripping suggested.30 While this construction was at odds with the contractual rights of the second mortgagee and the historical axiom that liens passed through bankruptcy unaffected,31 the court acknowledged the policy paradox and disposed of the conflict in the debtors’ favor:
The SBA [(as second mortgagee)] admits the banks’ power to foreclose and annihilate the SBA lien. The SBA presumably hopes that sometime in the future the [debtors] will have equity in the property which could be attached by the SBA. The SBA’s position is self-defeating. It simply provides an incentive for the [debtors] to abandon the property. There is no reason the [debtors] should remain on a piece of property on which the SBA can attach any equity they manage to generate. They, and any other post-discharge possessors of real property, would be far better off finding unencumbered property upon which to start their financial life afresh. This, of course, would leave a creditor like the SBA with nothing, which is exactly what §506(d) on its face says it has.32
The cornerstone of Folendore ’s construction of §506(d) is the historical bankruptcy goal of providing debtors with a “fresh start.”33 The concept of a fresh start in American bankruptcy dates back to 1877, when the Supreme Court stated that bankruptcy is “a general law by which the honest citizen may be relieved from the burden of hopeless insolvency.”34 The fresh start idea is so embedded that courts, Congress, and scholars repeatedly cite it as the justification for a particular interpretation of the Code.35 Indeed, the legislative history of the 1978 Act acknowledged the fresh start goal of a bankruptcy discharge.36 The tension between the competing ideas of lien survival and the fresh start has lurked within the jurisprudence of lien-stripping for decades, but the Folendore approach became progressively less popular in the years leading up to its eventual overruling by Caulkett and Waits.37
The Dewsnup Decision
The practice of lien strip-downs came to a halt in 1992 when the Supreme Court in Dewsnup ended this tactic. In that case, a 6-2 majority held that “allowed secured claim” within §506(d) was not a term of art, as it was defined in §506(a)(1).38 In Dewsnup, the debtor had a first mortgage in the amount of $120,000 on a property valued at $39,000.39 The debtor sought to strip-down the first mortgage to $39,000 — the current value of the collateral.40 The Supreme Court held that “allowed secured claim” within §506(d) simply meant a claim that was “allowed” under §502, and is “secured by a lien.”41 The §506(a)(1) definition of “allowed secured claim” had no application to its use in §506(d), and such strip-downs were impermissible.42 Beyond its statutory analysis, which was criticized in dissent,43 the court justified the holding with three policy reasons: 1) freezing the value of the lien in time would allow any increase in property value to inure to the debtor’s benefit, giving the debtor a windfall; 2) the parties’ bargain was that the lien would exist until full payment or foreclosure; and 3) bankruptcy law traditionally provided that liens pass through bankruptcy unaffected.44 The Dewsnup court, however, limited its holding to the specific facts of the case and did not address possible strip-offs of wholly under-secured second mortgages.45 As a result, the Dewsnup court, while cautioning against the broad application of its holding, reinforced the concept of lien survival, and strip-downs of partially under-secured liens were not permitted in Ch. 7.
Since the Dewsnup court limited the application of its holding, courts around the country were left to decide whether to extend Dewsnup to strip-offs. Except for the 11th Circuit, all circuits to address the issue had ruled that Dewsnup prevented strip-offs as well, marking a total shift from the previous majority view.46 The 11th Circuit, however, continued to follow its precedent in Folendore, and held that Ch. 7 strip-offs were permitted under §506(d) since Dewsnup was not “clearly on point.”47 With the 11th Circuit the lone hold-out, Ch. 7 strip-offs, until recently, were permitted only in Florida and the other states within the 11th Circuit’s jurisdiction.
Revisiting Dewsnup
Due to the circuit split, the Supreme Court took up the issue in Caulkett during the spring 2015 term, when it had to decide whether to extend Dewsnup to strip-offs or whether to limit Dewsnup to its particular facts.48 Before the Supreme Court, the creditor argued that Dewsnup applied in equal force, since §506(d) should not be given different meanings in different fact patterns,49 while the debtors contended that a debt secured by a wholly under-secured second mortgage does not constitute a “secured claim” since the collateral is valueless, and, therefore, can be voided under §506(d).50
Neither party advocated that Dewsnup was wrongly decided and should be overturned, leaving the Court to answer that question.51 Since its only difference from strip-downs was a matter of property valuation, it seemed logical to apply Dewsnup ’s holding to strip-offs. From a textual standpoint, this was the proper approach because to do otherwise would give one statutory provision two different meanings.52 Also, since Dewsnup has been good law for over 20 years, the Court expressed the importance of stare decisis in resolving the issue.53
However, the “secured” nature of a second mortgage is eviscerated, for all intents and purposes, when the underlying collateral is worthless. Indeed, whether a wholly under-secured second mortgagee’s claim is “secured by a lien” within §506(d) becomes a mere academic exercise.54 Moreover, wholly under-secured second mortgagees had the potential to spoil short sale and loan modification negotiations between debtors and first mortgagees, as well as prevent marketability of property by holding homes hostage in hopes of recouping equity at a later date.55 Such practical effects of extending Dewsnup would undermine the fresh start goal of the Bankruptcy Code and the various modification programs following the foreclosure crisis.56
While ignoring these competing goals and focusing on the statutory framework, the Court ultimately followed Dewsnup and held that §506(d) did not permit strip-offs of wholly under-secured liens.57 In relying on Dewsnup, the Court unanimously found no logical distinction between strip-downs and strip-offs, and, therefore, overturned the 11th Circuit’s Folendore precedent that permitted such strip-offs.58 The Court’s holding rested solely on the statutory analysis of Dewsnup, and made no reference to the code’s policy goal of a fresh start or to the policy rationales espoused by Dewsnup.59 Amid the competing policy rationales of lien survival and the fresh start, Dewsnup ’s odd statutory interpretation, and the lingering societal fatigue from the foreclosure crisis, the Court resolved the matter with a concise, and strikingly suitable statement: “Ultimately, embracing the debtors’ distinction would not vindicate §506(d)’s original meaning, and it would leave an odd statutory framework in its place.”60 Consequently, the Court extinguished the uncertainty among practitioners regarding Ch. 7 lien-stripping, and vindicated itself as a branch of government tasked with interpreting only “what Congress said” and not with “what it thinks Congress ought to have said.”61
While the 11th Circuit was the lone jurisdiction permitting lien strip-offs in Ch. 7 cases prior to Caulkett, the 11th Circuit’s recent decision in Waits acknowledged Caulkett ’s prohibition on Ch. 7 lien strip-offs.62 In Waits, the 11th Circuit had previously affirmed the district court’s approval of the stripping-off of a junior lien by the Bankruptcy Court for the Northern District of Georgia, but the Supreme Court vacated the 11th Circuit’s opinion in light of Caulkett.63 On remand from the Supreme Court, the 11th Circuit stated:
[O]ur prior precedents in [ McNeal ] and [ Folendore ] dictated the conclusion that §506(d) allows a [Ch.] 7 debtor to void a junior mortgage lien when the senior lien exceeds the home’s value….In Caulkett, the Supreme Court vacated two [11th] Circuit decisions that followed this same reasoning….In light of the Supreme Court’s holding in Caulkett, our holdings in McNeal and Folendore are overruled.64
The 11th Circuit has since restated Caulkett ’s controlling precedent in Bank of America, N.A. v. Cumpson, 2015 U.S. App. LEXIS 13540 (11th Cir. Aug. 4, 2015), and Bank of America, N.A. v. Beursken, 2015 U.S. App. LEXIS 13792 (11th Cir. Aug. 7, 2015). The law in the 11th Circuit following Caulkett is, therefore, settled that a Ch. 7 debtor may not void a wholly under-secured junior mortgage lien.
The Various Impacts of Caulkett
The Caulkett decision will have widespread impact, especially in Florida, where strip-offs are now prohibited.65 First, the mechanics of the Bankruptcy Code are directly affected, which necessarily impacts the way practitioners will advise their clients in utilizing bankruptcy protection and navigating a bankruptcy case. Second, the decision alters the balance between a fresh start and lien survival in bankruptcy. Third, the decision will have lasting consequences on the Florida housing market.
The most immediate impact for debtors’ attorneys is whether to steer the client toward proposing a plan under Ch. 13. Now that the Supreme Court has put lien-stripping in Ch. 7 to rest, debtors must accept that the Ch. 7 fresh start comes at a price.66 Personal debts will be discharged, but liens will remain on all secured debts until they are either paid in full or foreclosed. Therefore, debtors have the unenviable task of accepting foreclosure or continuing to make mortgage payments on an underwater property, potentially benefiting a junior mortgagee. Recent Florida bankruptcy law has also expedited the manner in which property surrendered in Ch. 7 must be delivered to the creditor,67 making Ch. 7 even less appealing for debtors attempting to maximize their possession of real property. Whether to utilize Chs. 7 or 13 will necessarily depend on the property’s present and projected value over the life of the mortgage(s), so practitioners should be attuned to this when advising clients.
This is the same tension that the courts have been grappling with going back to 1989, when the Folendore court attempted to simplify the issue by suggesting that abandoning the property and allowing the debtors to find a new home unencumbered with a second mortgage would allow the debtors to start afresh.68 Lenders, however, have become stricter after the foreclosure crisis,69 and a foreclosure or bankruptcy is sure to ruin a debtor’s credit score and seriously hamper homeownership for the debtor in the near future. Thus, finding a new home might not be so simple, and, as a result, renting is and will continue to be more expensive for debtors.70
This landscape makes Ch. 13 more attractive for debtors with the means to effectuate a plan, so practitioners should understand the lien-stripping framework of Ch. 13. Under the modification provision of §1322(b)(2), debtors in Florida can strip-off liens on homestead and nonhomestead properties alike. Tanner v. FirstPlus Financial, Inc., 217 F.3d 1357, 1360 (11th Cir. 2000). Chapter 13 allows “secured claims” on nonhomestead properties (or nonprincipal places of business) to be modified, thereby allowing lien-voiding,71 but the nonhomestead qualifier does not apply to “unsecured claims.”72 Therefore, debtors, such as those in Tanner, sought to define “secured claim” in §1322(b)(2) as it is defined in §506(a) in order to strip-off wholly under-secured liens on homestead properties, since those claims would be classified as “unsecured claims” under §506(a).73
The current majority position, which the Tanner court followed, adopted the debtor’s approach that wholly under-secured second mortgages can be stripped-off of a homestead property under §1322(b)(2) because they are not “secured claims” within the meaning of §506(a).74 In doing so, the 11th Circuit distinguished the Supreme Court’s position in Nobleman v. Am. Sav. Bank, 508 U.S. 324 (1993), in which the Supreme Court held that a partially under-secured claim could not be stripped-down because it was “secured by a lien.”75 The Supreme Court in Nobleman gave “secured claim” the same meaning it was given in Dewsnup and in Caulkett — simply a claim secured by a lien on the underlying debt.76 Because the Supreme Court in Caulkett made no distinction between partially or wholly under-secured claims in defining “secured claim” under §506(d),77 this would suggest that the Court, if presented with the question, may ban Ch. 13 strip-offs on homestead properties because the term “secured claim” within §1322(b)(2) is not contingent on the property’s value. Therefore, the Caulkett decision opens the door for a challenge to Ch. 13 lien strip-offs on homestead property.
For the time being, however, Ch. 13 lien strip-offs on all properties are permitted in Florida under the Tanner precedent, so practitioners can presently utilize lien strip-offs to their fullest extent. Moreover, strip-offs on nonhomestead properties will always be permissible under §1322(b)(2) because even secured claims on nonhomestead properties can be modified under this provision of the code.78 Florida being a popular location for second homes, this may have widespread applicability to Florida consumer debtors, thereby encouraging debtors to seek Ch. 13 relief rather than Ch. 7.
For lenders, Caulkett opens the door for increased lending through junior mortgages. Because underwater second mortgages cannot be voided in a Ch. 7 proceeding,79 junior lenders will no longer face the ballooning attorneys’ fees and transaction costs associated with defending Ch. 7 lien-stripping adversary proceedings. This increases predictability for lenders when underwriting loans. Since the Caulkett ruling means all under-secured liens survive Ch. 7 bankruptcy, stay relief should be more readily conceded in Ch. 7 and properties should be more promptly surrendered, freeing debt disputes from bankruptcy to be resolved in state court.
The benefit for lenders, however, does present an issue for society as a whole. In Caulkett, the debtors and their amici reiterated in briefs and oral argument that lien survival incentivizes second mortgagees to act as spoiler in short sale, loan modification, and other settlement matters between mortgagors and first mortgagees.80 This practice, known as holding properties for their “hostage value,” occurs when the second mortgagee saddles the property by holding out of loss mitigation efforts in the hope that future property value increases will yield greater recovery on the secured debt.81 Holding properties for their hostage value places second mortgagees at odds with priority lenders, property owners, prospective buyers, and the economy at large, as it prevents the free marketability of real estate outside of the foreclosure process, thereby restricting supply, increasing transaction costs, and prolonging the legacy of “dead” real estate.82 While this societal ill may seem universally deplorable, the response of the Caulkett creditor, and now the Supreme Court, is that contract rights, particularly those of second mortgagees, should be honored to a fault, and that even the debt discharge and loan modification provisions of the Code do not trump the time-honored and bargained-for principle that liens survive until foreclosure or payment in full.83 While the Caulkett Court limited its holding to a statutory interpretation through Dewsnup,84 its practical effects cannot be ignored.
Finally, practitioners should be mindful of Caulkett’s impact on the real estate market, which has been volatile in Florida since 2008. Attorneys must understand Caulkett’s impact on the housing market so that they can properly understand their clients’ interests and develop legal strategies that will better help those clients navigate within the housing market. This is true whether the client is a borrower or lender.
The Caulkett decision will likely have a dichotomous effect on the housing market. On one hand, bankruptcy does not automatically facilitate distressed properties toward becoming more freely marketable. Second mortgagees can hold up loan modifications and short sales after Chs. 7 and 13 bankruptcies on homestead or primary business properties, thereby forcing properties into foreclosure and temporarily depressing the real estate market. On the other hand, Caulkett encourages new lending on both commercial and residential real estate by creating certainty for lenders regarding their lien rights. Also, in many commercial contexts, second mortgagees eliminate the additional risk of being under-secured by entering “inter-creditor agreements” with the first mortgagee.85 These agreements provide safeguards for the second mortgagee in the case of property depreciation and undersecuritization, thereby encouraging continued lending.86 Therefore, opportunity abounds for new property purchases on unstressed properties, but the purchase and sale of distressed properties will be less fluid without the cooperation of second mortgagees.
Conclusion
The lesson taught in Caulkett is that underwater second mortgages still breathe life. Regardless of the negative impact that second mortgages may have on enabling a debtor’s fresh start, courts are reluctant to sever the bargained-for contract rights of creditors and debtors absent an explicit provision within the Bankruptcy Code permitting such modification. Accordingly, it is the responsibility of the contracting parties (creditors and debtors alike) to analyze the risks and benefits of a second mortgage when entering the agreement, and resign themselves to the consequences if things go wrong. The Bankruptcy Code still provides protections like discharge of personal liability,87 but bargained-for security will not be stripped-off unless expressly permitted by the Code.88 Practitioners making policy-based arguments in bankruptcy litigation should be mindful of the policy concerns articulated in Dewsnup, and the courts’ general trend toward assuaging those concerns in favor of underwater lien survival.
1 Department of Numbers , Florida Household Income, http://www.deptofnumbers.com/income/florida.
2 Zillow, Florida Home Prices and Values, http://www.zillow.com/fl/home-values.
3 Mary Shanklin, Orlando, Polk, Brevard Rank High in Housing Debt, Orlando Sentinel, Oct. 23, 2014, available at http://www.orlandosentinel.com/business/os-underwater-houses-20141023-story.html.
4 Fla. Leg. Off. of Econ. Dem. Research, Florida: An Overview of Foreclosures, Jan. 24, 2013, available at http://edr.state.fl.us/Content/presentations/economic/FLOverviewofForeclosures_1-24-13.pdf.
5 Bank Madness, Economy Watch, Wash. Post, 2015, http://www.washingtonpost.com/wp-srv/business/economy-watch/banks/.
6 Evan M. Rosen, Marshall Watson Foreclosure Mill Shut Down After Guilty Plea and Consent to Judgment, Changed Name to Choice Legal Group,
Jan. 9, 2013, https://www.evanmrosen.com/2013/01/09/marshall-watson-foreclosure-mill-shut-guilty-plea-consent-judgment-choice-legal/.
7 Chapter 7 of the code allows debtors to discharge their personal debt obligations. 11 U.S.C. §727. Chapter 13 allows debtors to modify the repayment structure of their secured and unsecured debt obligations (11 U.S.C. §1325), and also contains a provision for the discharge of debt. 11 U.S.C. §1328. Chapter 11 allows debtors, usually commercial entities, to reorganize their debts through planned payments. 11 U.S.C. §1101, et seq.
8 See 11 U.S.C. §362.
9 See, e.g., 11 U.S.C. §§1123(b)(5), 1129(b)(2), and 1322(a)(2).
10 See Bank of America, N.A. v. Waits, 793 F.3d 1267 (11th Cir. 2015).
11 See In re Folendore, 862 F.2d 1537 (11th Cir. 1989), overruled by Caulkett, 2015 U.S. LEXIS 3579, and Waits, 793 F.3d at 1267.
12 Bankruptcydata.com, A Brief History of Bankruptcy, http://www.bankruptcydata.com/Ch11History.htm.
13 1 1 U.S.C. §506(a), under which “an allowed claim of a creditor secured by a lien on property…is a secured claim to the extent of the value of…[the] property.”
14 See id.
15 Id.
16 1 1 U.S.C. §506(d).
17 See, e.g., Folendore, 862 F.2d at 1541; McNeal v. GMAC Mortg. LLC, 735 F.3d 1263, 1266 (11th Cir. 2012).
18 See generally id.
19 See, e.g., Dewsnup, 502 U.S. at 414-15.
20 Id. at 421 (Scalia, J., dissenting); see also Folendore, 862 F.2d at 1537.
21 See Caulkett, 2015 U.S. LEXIS 3579 (reversing the 11th Circuit’s permission of strip-offs due to its Folendore precedent); Waits, 793 F.3d at 1267 (acknowledging that Caulkett overruled Folendore ).
22 See Bankruptcy Act of 1898 §67d (“Liens given or accepted in good faith…and for a present consideration…shall not be affected by this [a]ct.”); City of Richmond v. Bird, 249 U.S. 174, 177 (1919) (“Section 67d…declares that liens given or accepted in good faith…shall not be affected by [the bankruptcy act].”).
23 See Folendore, 862 F.2d at 1537.
24 Id. at 1539.
25 See generally id.
26 Id. at 1539.
27 Dewsnup, 502 U.S. at 418-19 (internal quotations and citations omitted).
28 See 11 U.S.C.S. §506 (History; Ancillary Law and Directives; Prior Law and Revision: §506(d) allows liens to pass through bankruptcy unaffected (citing Sen. Rep. No. 95-989 and House Rep. No. 95-595)).
29 See, e.g., Folendore, 862 F.2d at 1541.
30 Id. at 1539.
31 See Dewsnup, 502 U.S. at 417-418.
32 Folendore, 862 F.2d at 1540.
33 Id. (“The whole point of bankruptcy is to provide a debtor with a fresh start.”).
34 Margaret Howard, A Theory of Discharge in Consumer Bankruptcy, 48 Ohio St. L. J. 1047, n. 1 (1987) ( citing Neal v. Clark, 95 U.S. 704, 709 (1877)).
35 Katherine Porter & Dr. Deborah Thorne, The Failure of Bankruptcy’s Fresh Start, 92 Cornell L.R. 67, 68 (2006).
36 Report of the Commission on the Bankruptcy Law of the United States, H.R. Doc. No. 137, 93d Cong., 1st Sess., pt. I at 75 (1973).
37 See, e.g., Dewsnup, 502 U.S. 410 (holding that “strip-downs” in Ch. 7 were not allowed under §506(d)); Ryan v. Homecomings Fin. Network, 253 F.3d 778 (4th Cir. 2001); In re Talbert, 244 F.3d 555 (6th Cir. 2003); Palomar v. First Am. Bank, 722 F.3d 992 (7th Cir. 2013).
38 Dewsnup, 502 U.S. at 417.
39 Id. at 413-14.
40 Id.
41 Id. at 417.
42 Id.
43 See id. at 420-36 (Scalia, J., dissenting).
44 Id. at 417-19.
45 Id. at 417, n. 3 (“[W]e express no opinion as to whether the words ‘allowed secured claim’ have different meaning in other provisions of the Bankruptcy Code.”).
46 See Brief for Petitioner, Bank of Am., N.A. v. Caulkett, No. 13-1421, and Bank of America v. Toledo-Cardona, No. 14-163 at 14 (Jan. 2015), available at www.supremecourtpreview.org.
47 McNeal, 735 F.3d at 1265.
48 Caulkett, 2015 U.S. LEXIS 3579 at *2.
49 See Brief for Petitioner, Bank of Am., N.A. v. Caulkett, No. 13-1421, and Bank of America v. Toledo-Cardona, No. 14-163 at 24-29 (Jan. 2015).
50 Caulkett, 2015 U.S. LEXIS 3579 at *10-11.
51 Id. at *8.
52 Id. at *11 (changing the meaning of §506(d) in cases of wholly underwater second mortgages “would leave an odd statutory framework in its place”).
53 Transcript of Oral Argument at 45-46, Bank of Am., N.A. v. Caulkett, No. 13-1421, and Bank of America v. Toledo-Cardona, No. 14-163 (March 24, 2015).
54 Cf. Dewsnup, 502 U.S. at 417.
55 Brief of Amicus Curie, Jerome N. Frank Legal Services Organization and Connecticut Fair Housing Center in Support of Respondents, Bank of Am., N.A. v. Caulkett, No. 13-1421, and Bank of America v. Toledo-Cardona, No. 14-163 at 16 (Feb. 24, 2015).
56 See id. at 17-22.
57 Caulkett, 2015 U.S. LEXIS 3579 at *12.
58 Id. at *11-12.
59 See generally id.
60 Id. at *11.
61 See Dewsnup, 502 U.S. at 420 (Scalia, J., dissenting).
62 See Waits, 793 F.3d 1267.
63 See id. (citing Bank of America, N.A. v. Waits, __ S. Ct. __, 2015 U.S. LEXIS 3893 (2015)).
64 Id. (Internal citations omitted).
65 Id.
66 Transcript of Oral Argument at 9-11, Caulkett, No. 13-1421.
67 See In re Metzler, 2015 Bankr. LEXIS 1627 at *12-13 (Bankr. M.D. Fla. May 13, 2015).
68 Folendore, 862 F.2d at 1540 (if strip-offs were permitted, “post-discharge possessors of real property, would be far better off finding unencumbered property upon which to start their financial life afresh”).
69 Kenneth R. Harney, Lenders’ Credit Score Requirements May be Stricter than Needed, L.A. Times, May 11, 2014, available at http://www.latimes.com/business/realestate/la-fi-harney-20140511-story.html.
70 See Matrix Monthly, No Signs of a Slowdown: Rent Growth Accelerates in Spring, Yardi Matrix, June, 2015, available at http://www.pi-ei.com/downloads/reports/matrix-monthly/Yardi-Matrix-Monthly-Jun-2015.pdf.
71 1 1 U.S.C. §1322(b)(2).
72 Id.
73 See Tanner, 217 F.3d 1357.
74 Id. at 1360.
75 Nobleman, 508 U.S. at 332.
76 Id.
77 See generally Caulkett, 2015 U.S. LEXIS 3579.
78 See 11 U.S.C. §1322(b)(2).
79 See generally Caulkett, 2015 U.S. LEXIS 3579.
80 See, e.g., Brief of Amicus Curie, Jerome N. Frank Legal Services Organization and Connecticut Fair Housing Center in Support of Respondents at 16, n.50, Bank of Am., N.A. v. Caulkett, No. 13-1421, and Bank of America v. Toledo-Cardona, No. 14-163.
81 Id. This tactic also assumes a prolonged foreclosure process for the first mortgagee, as a swift foreclosure would extinguish the second mortgage before any meaningful appreciation could occur.
82 Id. at 16-24.
83 See Caulkett, 2015 U.S. LEXIS 3579 at *8 (citing Dewsnup, 502 U.S. at 417, which held generally that liens pass through bankruptcy unaffected, honoring the bargained-for position of the parties).
84 See id. at *11.
85 Richard E. Gottlieb & Moorari Shah, High Court Win Is No Cure-all for Subordinate Lien Market, Law 360, June 2, 2015, available at http://www.law360.com/articles/662226/high-court-win-is-no-cure-all-for-subordinate-lien-market.
86 Id.
87 See 11 U.S.C. §§727, 1141, and 1328.
88 See Nobleman, 508 U.S. at 329 (in the absence of a controlling Bankruptcy Code definition, the Court presumed that Congress left the determination of property rights in estate assets to state law).
Joseph C. Savino is a partner at Lazer, Aptheker, Rosella & Yedid, P.C., in its West Palm Beach office, where he chairs the banking litigation group. He is admitted to practice in Florida, New York, and New Jersey, and is a member of the bar of the U.S. Supreme Court, as well as the bar of the Courts of Appeals for the 11th, Second, Third, and District of Columbia circuits. For the last 32 years, Savino has focused his practice on creditors’ rights and commercial, banking, foreclosure, and bankruptcy litigation.
Brian M. Streicher is an associate at Lazer, Aptheker, Rosella & Yedid, P.C., in its West Palm Beach office where he works closely with Savino on banking litigation, loan workouts, and bankruptcies. Before joining Lazer, Aptheker, Rosella & Yedid, P.C., he gained substantial experience representing lenders in residential foreclosure litigation throughout the state of Florida. Streicher is a member of The Florida Bar and is admitted to practice in the U.S. District Courts for the Southern and Middle Districts of Florida.
