Source: https://www.michbankruptcyblog.com/Debtor-Cannot-Strip-Off-Junior-Lien
Timestamp: 2019-04-18 23:27:32+00:00

Document:
In these cases, the Court held that a Chapter 7 debtor may not void a junior lien under 11 U.S.C. § 506(d) when the debt owed on a senior lien exceeds the current value of the collateral if the junior creditor’s claim is both secured by a lien and allowed under § 502 of the Bankruptcy Code.
In each case, Bank of America holds a junior mortgage lien on a home owned by a Chapter 7 Debtor. The amount owed on each debtor’s senior mortgage lien exceeds each home’s market value.
The bankruptcy court in each case granted the debtor’s motion to strip off Bank of America’s junior lien. The district court and the U.S. Courts of Appeals for the Eleventh Circuit affirmed on appeal. All other Circuit Courts of Appeal that have addressed the issue have held that lien stripping is not permitted in Chapter 7 cases.
The Supreme Court reversed. The Court noted that “under a straightforward reading of the statute” the debtors would prevail because Bank of America’s claims are not “secured” under § 506(a)(1). Under this reading, Bank of America’s claims cannot be “allowed secured claims,” so they are void under § 506(d).
However, in Dewsnup v. Timm, the Court held that a claim was “secured” as long as it was “supported by a security interest in the property, regardless of whether the value of that property would be sufficient to cover the claim.” Thus, under Dewsnup, § 506(d) voids a lien only when the claim supporting the lien was not allowed under § 502. And because both of Bank of America’s claims are secured by liens, Dewsnup resolved the issue in both cases - the debtors cannot strip off the liens because the existence of the liens categorizes the claims as secured.
The Court explained that the debtors did not ask the Court to overrule Dewsnup. Rather they asked the Court limit Dewsnup to partially, rather than wholly, underwater liens. The Court declined to do so, explaining that Dewsnup’s definition did not depend on whether a lien is partially or wholly underwater, and that the debtors’ argument would result in the term “secured claim” having a different meaning under § 506(d) than it does under § 506(a). The debtor’s interpretation would also result in an “odd statutory framework” where a debtor would not be able to strip a junior lien if a court valued the collateral at one dollar more than the senior lien, but could strip it if the collateral was valued at one dollar less.
If you have any questions about this case, or bankruptcy issues in general, please contact Laura Genovich at lgenovich@fosterswift.com.

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