UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION

In re ALEJANDRO PALOMAR Sr. and RAFAELA

PALOMAR, 

Debtors.

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ALEJANDRO PALOMAR Sr. and RAFAELA

PALOMAR, 

Plaintiffs-Appellants,

vs.

FIRST AMERICAN BANK,

Defendant-Appellee.

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12 C 2418

Judge Feinerman

Appeal from:

11 B 30585

11 A 1792

MEMORANDUM OPINION AND ORDER

Plaintiffs-Appellants Alejandro and Rafaela Palomar filed a voluntary joint petition for

bankruptcy under Chapter 7 of the Bankruptcy Code and received a discharge in December

2011. They brought this adversary proceeding in the bankruptcy court against DefendantAppellee First American Bank, seeking a discharge or “strip off” of First American’s secondpriority mortgage on their residence. The value of the residence is $165,000, and it was subject

to a first-priority mortgage held by another lender that secures a debt of $242,894. Doc. 1-3 at

55. First American’s second-priority lien secures an obligation of at least $50,000, and that is

the obligation that the Palomars asked the bankruptcy court to discharge. Ibid. They grounded

their request on Bankruptcy Code provisions saying that “[a]n allowed claim of a creditor

secured by a lien on property in which the estate has an interest ... is a secured claim to the

extent of the value of such creditor’s interest in the estate’s interest in such property ... and is an

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unsecured claim to the extent that the value of such creditor’s interest ... is less than the amount

of such allowed claim,” 11 U.S.C. § 506(a)(1), and “[t]o the extent that a lien secures a claim

against the debtor that is not an allowed secured claim, such lien is void,” with inapplicable

exceptions, 11 U.S.C. § 506(d). The bankruptcy court, adhering to its decision in In re Immel,

436 B.R. 538 (Bankr. N.D. Ill. 2010), held that strip offs are prohibited in Chapter 7 cases and

thus dismissed the adversary proceeding. Doc. 1-3 at 55-60. 

The Palomars’ appeal of the bankruptcy court’s judgment presents a single question of

law: May debtors in a Chapter 7 bankruptcy use 11 U.S.C. § 506(d) to “strip off” a junior lien on

their residence where the debt secured by the senior lien exceeds the market value of the

residence? In Dewsnup v. Timm, 502 U.S. 410 (1992), the Supreme Court interpreted the abovequoted Bankruptcy Code provisions to hold that Chapter 7 debtors may not use section 506(d) to

“strip down” a lien on their residence—that is, to void the lien to the extent that it exceeds the

value of the residence while retaining it to the extent that it does not. Id. at 417. This appeal

turns on whether Dewsnup should be read to also preclude the “stripping off” of a junior

lien—that is, voiding it entirely—where liens of higher priority exceed the value of a Chapter 7

debtor’s residence. In dismissing the Palomars’ claim, the bankruptcy court answered in the

affirmative.

The Seventh Circuit has not addressed the question, though it has often cited Dewsnup

for “the principle that (with immaterial exceptions) liens pass through bankruptcy unaffected,”

Gradel v. Piranha Capital, L.P., 495 F.3d 729, 732 (7th Cir. 2007); see also Cox v. Zale

Delaware, Inc., 239 F.3d 910, 912 (7th Cir. 2001); In re Penrod, 50 F.3d 459, 461 (7th Cir.

1995); In re CMC Heartland Partners, 966 F.2d 1143, 1147 (7th Cir. 1992); In re James Wilson

Assocs., 965 F.2d 160, 167 (7th Cir. 1992), which would seem to apply as much to a junior lien

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as to a senior lien. The Fourth and Sixth Circuits agree with the bankruptcy court that

Dewsnup’s determination that stripping down the primary lien on the debtor’s residence is

impermissible under Chapter 7 applies “with equal force and logic” to the stripping off of a

secondary lien. In re Talbert, 344 F.3d 555, 556 (6th Cir. 2003); see also Ryan v. Homecomings

Fin. Network, 253 F.3d 778, 779 (4th Cir. 2001) (“Because we find that the Supreme Court’s

reasoning in Dewsnup ... is equally applicable to ‘strip offs’ as to ‘strip downs,’ we hold that a

debtor may not strip off an unsecured but allowed lien pursuant to Section 506(d).”); In re

Laskin, 222 B.R. 872 (B.A.P. 9th Cir. 1998) (same). This court finds Ryan and Talbert

persuasive, and for the reasons stated therein, the bankruptcy court’s judgment is affirmed.

A recent decision of the Eleventh Circuit on analogous facts, In re McNeal, 2012 WL

1649853 (11th Cir. May 11, 2012) (per curiam), adopted the position advanced here by the

Palomars. McNeal is unpublished and thus non-precedential. See 11th Cir. R. 36-2

(“Unpublished opinions are not considered binding precedent, but they may be cited as

persuasive authority.”). The McNeal panel explained that it was bound to follow a pre-Dewsnup

Eleventh Circuit decision holding that “strip offs” are permitted in Chapter 7 cases, Folendore v.

U.S. Small Bus. Admin., 862 F.2d 1537 (11th Cir. 1989), unless “the intervening Supreme Court

decision,” Dewsnup, was “clearly on point.” McNeal, 2012 WL 1649853, at *2. The panel

determined that “[b]ecause Dewsnup disallowed only a ‘strip down’ of a partially secured

mortgage lien and did not address a ‘strip off’ of a wholly unsecured lien, it is not ‘clearly on

point’ with the facts in Folendore or with the facts at issue in this appeal.” Ibid. Accordingly,

the Eleventh Circuit panel determined that it was bound by Folendore and did not consider

whether the reasoning of Dewsnup (as opposed to its precise holding) would otherwise have

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required a different result. Ibid. (“that 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”).

Folendore is not binding here, and in light of the particular legal context in which

McNeal was decided, the decision is not persuasive and does not affect this court’s conclusion

that the bankruptcy court’s judgment should be affirmed.

October 3, 2012 

United States District Judge

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