Dewsnup V. Timm And Nobelman V. AmericanSavings Bank: The Strip Down Of Liens InChapter 12 And Chapter 13 Bankruptcies

"When I use a word," Humpty Dumpty said, in a rather scornful tone, "it means just what I choose it to mean--neither more nor less." "The question is," said Alice, "whether you can make words mean so many different things." "The question is," said Humpty Dumpty, "which is to be master--that's all."(1)I. INTRODUCTIONOn January 15, 1992, the United States Supreme Court decided Dewsnup v. Timm.(2) In a six-to-two decision,(3) the Court held that a debtor in a Chapter 7 bankruptcy could not strip down a creditor's lien on real property to the value of the property securing the lien under section 506(d) of the Bankruptcy Reform Act of 1978(4) (Bankruptcy Code).(5) In its opinion the Court clearly stated an intent to limit its holding to the facts of the case.(6) However, section 506 applies to all chapters of the Bankruptcy Code,(7) and, accordingly, debtors also have attempted to strip down undersecured liens in reorganization plans under Chapter 12 and Chapter 13.(8) As a result of its analysis and statutory interpretation methodology, Dewsnup has left unanswered the question of whether the strip down of undersecured liens is still available in Chapter 12 and Chapter 13 bankruptcies(9) and has raised new questions about how debtors, creditors, and lower courts should interpret the language of the Bankruptcy Code.(10)The Supreme Court granted certiorari in December 1992 to the United States Court of Appeals for the Fifth Circuit in Nobelman v. American Savings Bank (In re Nobelman)(11) to address a split in the Circuits over the strip down of residential mortgages in a Chapter 13 case.(12) The Chapter 13 debtors in Nobelman had sought confirmation of a reorganization plan that included the strip down of the mortgage on their primary residence." The Fifth Circuit affirmed the lower courts' denial of confirmation of the plan based on the plain meaning of the statute and the implications of Dewsnup.(14) Nobelman epitomizes many of questions that Dewsnup's analysis and methodology raised or left unanswered.(15) Thus, Nobleman represents an opportunity to address the problems of Dewsnup.This Note first explains the strip down of liens in Chapter 7 and the role of the bankruptcy discharge of debts in that process. A review of the reasoning of Dewsnup, including an analysis of the majority's interpretation of section 506 and of Justice Scalia's dissent, follows. This Note then reviews the recent history of statutory interpretation by the Court in order to determine Dewsnup's use in interpretation of the Bankruptcy Code.After identifying many questions that Dewsnup either raises or leaves unanswered, this Note turns its focus to the most significant question, how Dewsnup applies to Chapter 12 and Chapter 13 cases. Beginning with an explanation of the purposes of Chapter 12 and Chapter 13, this Note reviews the conflict over strip downs in Chapter 13 cases and the arguments of Nobelman and the conflicting courts of appeals over the application of Dewsnup to that issue. An analysis of other problems created by the application of Dewsnup to Chapter 13 cases yields the assessment that Nobelman epitomizes the problems Dewsnup has created for bankruptcy. Finally, this Note offers the conclusion that Nobelman provides the Supreme Court with an opportunity to address many of the questions Dewsnup has raised and then offers a methodology with which to address the issues the Supreme Court faces in Nobelman.II. THE STRIP DOWN OF LIENS UNDER CHAPTER 7 OF THE BANKRUPTCY CODEStrip down is an attempt by the debtor to reduce a lien on real property securing a debt by the amount of the lien that exceeds the fair market value of the collateral, leaving the debtor with a lower obligation on the debt.(16) The first step in the strip down process is the bifurcation(17) of the claim of the creditor that the debtor's property secures.(18) Section 506(a)(19) provides for the bifurcation of the allowed claim of the undersecured creditor into two separate claims: a secured claim(20) equal to the value of the collateral, and an unsecured claim equal to the difference between the total undersecured claim and the value of the collateral. …