Opinion ID: 799809
Heading Depth: 2
Heading Rank: 3

Heading: Lien Stripping in Chapter 11 Reorganizations

Text: The Cornerstone Investors argue that denying them future lot sale proceeds that exceed the Project's judicially determined value as of confirmation constitutes a form of lien stripping disallowed by the Supreme Court's decision in Dewsnup. For the reasons set forth below, however, we reject this argument. In Dewsnup, the Supreme Court considered some ambiguities in § 506 and its relationship to other provisions of the Bankruptcy Code when a Chapter 7 debtor's property increases in value between the time of its judicial valuation and the time of its foreclosure sale. 502 U.S. at 416, 112 S.Ct. 773. Guided by the principle that liens are to pass through bankruptcy unaffected, the Court rejected the notion that a mortgagee could be forced to accept the judicially determined value, even if the foreclosure sale produced more: The practical effect of petitioner's argument is to freeze the creditor's secured interest at the judicially determined valuation. By this approach, the creditor would lose the benefit of any increase in the value of the property by the time of the foreclosure sale. The increase would accrue to the benefit of the debtor, a result some of the parties describe as a windfall. We think, however, that the creditor's lien stays with the real property until the foreclosure. That is what was bargained for by the mortgagor and the mortgagee. Id. at 417, 112 S.Ct. 773. Expressly limiting its focus to the specific facts presented, the Court held that [a]ny increase over the judicially determined valuation during bankruptcy rightly accrues to the benefit of the creditor. Id. at 416-17, 112 S.Ct. 773. Dewsnup involved a Chapter 7 liquidation proceeding and the Supreme Court did not address whether the same result would be reached in Chapter 11 reorganization cases. See id. A great majority of courts that have considered the issue ... have concluded that the holding in Dewsnup should be limited to Chapter 7 cases.... In re Johnson, 386 B.R. 171, 175 (Bankr.W.D.Pa.2008). That is because [t]he rationales advanced in the Dewsnup opinion for prohibiting lien stripping ... have little relevance in the context of rehabilitative bankruptcy proceedings under Chapter[] 11. In re Bartee, 212 F.3d 277, 291 n. 21 (5th Cir.2000) (internal quotation marks and citation omitted). Particularly significant is the fact that, as hinted by the Dewsnup Court itself, pre-Code law did provide for the modification of liens in reorganization cases. Harmon v. United States, 101 F.3d 574, 582 n. 4 (8th Cir.1996). Congress must have enacted the Code with a full understanding of this practice. Dewsnup, 502 U.S. at 419, 112 S.Ct. 773. The distinction makes sense: Chapter 7 liquidation proceedings involve the sale of liened property; Chapter 11 reorganizations involve the retention and use of that property in the rehabilitated debtor's business. The Code makes that clear: the process of lien stripping is ingrained in the reorganization provisions of the Bankruptcy Code to such an extent that any attempt to extend the holding in Dewsnup to Chapter 11 cases would require that numerous provisions of the statute be ignored or construed in a very convoluted manner. [10] Johnson, 386 B.R. at 176; see also In re Dever, 164 B.R. 132, 133 (Bankr.C.D.Cal.1994). Indeed, Congress's post- Dewsnup addition of 11 U.S.C. § 1123(b)(5)permitting modification of the rights of holders of secured claims, except those secured solely by a debtor's principal residenceseems to constitute explicit approval of lien stripping in Chapter 11 bankruptcies. Johnson, 386 B.R. at 176-77. We therefore agree with the majority of courts that Dewsnup 's holding should not be imported into Chapter 11 cases. That this particular plan of reorganization provides for Debtors to develop and sell all of the lots does not alter our conclusion, because that is Debtors' business. As appealing as it might be to apply the Dewsnup Court's holding to the sale context here, it simply does not fit. Debtors' collateral is not being sold in a Chapter 7 liquidation. There is neither foreclosure nor loss of opportunity to credit bid, which seem to have animated the Court's reasoning in Dewsnup. Unlike Chapter 7 liquidations, Chapter 11 reorganizations call for the creditor to receive payments equal to the value of its interest in the collateral over time. See In re Bowen, 174 B.R. 840, 855 (Bankr.S.D.Ga.1994) (Unlike the creditor in Dewsnup, creditors in reorganization cases receive something in exchange for the voiding of their liens: payment obligations under a plan of reorganization.). Thus, we find no impermissible stripping of the Cornerstone Investors' liens. Accordingly, the Bankruptcy Court correctly found that the fair market value of the Project was less than the secured claim of the Bank Lenders, and did not violate Dewsnup, or any other principle of bankruptcy law, by adjudging the Cornerstone Investors' claims wholly unsecured.