In In re Bodensiek,[1] a chapter 7 case involving an abandoned Florida homestead, the bankruptcy court addressed the issue of whether a debtor can strip[2] a wholly unsecured claim on account of a second mortgage on abandoned homestead property. The question, as phrased by the court, was whether it had the authority under prevailing law to strip off a wholly unsecured lien, even if the property to which the lien was attached is no longer subject to administration in the case. The bankruptcy court found in the affirmative after analyzing 11 U.S.C § 506(a),[3] McNeal,[4] the dissent by Justice Antonin Scalia in Dewsnup[5] and the original bankruptcy petition and schedules.[6]
The facts in Bodensiek include a chapter 7 debtor whose petition listed his residence (“homestead”) as exempt under the Florida Constitution with the intent to “retain” the property. The trustee filed a report of abandonment under 11 U.S.C. § 554(a)[7] at the conclusion of the §341 meeting, which was noticed to all creditors in the case with no objections being raised by any party in interest. Subsequently, the debtor filed a motion to value and determine secured status of the second lienholder’s lien. The second lienholder argued that the homestead was abandoned, and so was no longer it was no longer property of the estate and thus its second lien could not be subject to stripping.[8]
The court, disagreeing with the second lienholder’s analysis, relied on the Dewsnup dissent,[9] which noted that “[t]he fallacy” that section 506(a) does not apply to abandoned property because the estate no longer has an interest in such property, “is the assumption that the application of § 506(a) (and hence § 506(d)) can be undone if and when the estate ceases to ‘have an interest’ in property in which it ‘had an interest’ at the outset of the bankruptcy proceeding.”[10] The court, again relying on the Dewsnup dissent, found that § 506 automatically operates upon all property in which the estate has an interest at the time that the bankruptcy petition is filed, which cannot be undone by later abandonment of the property.[11] An example cited by the court is when property initially not claimed as exempt, and thus available for distribution, may later be added to the list of exempt assets, making it not subject to administration, adding that the “absurdity of these questions[12] indicates the weakness of the argument” against lien-stripping abandoned property.
The court also addressed the question of whether lien-stripping was an issue of subject-matter jurisdiction or the power of the bankruptcy court to issue a final order and noted that the “determination of a claim for purposes of bankruptcy, including whether and to what extent a claim is secured, is a matter that arises under Title 11 and falls squarely within federal bankruptcy jurisdiction.”[13] The court found that determining the status of liens under § 506 are at the center of the adjustment of the debtor/creditor relationship in bankruptcy, not just issues that would “necessarily be resolved in the claims-allowance process” but rather that “they are the claims-allowance process,”[14] and that “motions seeking relief under § 506 are core matters subject to referral to the bankruptcy court for final orders.”[15]
The court concluded, relying on the Dewsnup dissent that the “only reasonable interpretation of section 506(a) is that it is effective as of the petition date, and so the use of the present tense — ‘in which the estate has an interest’ — means the petition date and not some later date when the court considers a motion to value. Any other interpretation would lead to a series of untenable results.”[16] Thus, as long as a lien is wholly unsecured,[17] it seems that lien-stripping will be available to debtors regardless of whether the subject property is claimed exempt or abandoned. It will be interesting to see what happens to the various interpretations as the Supreme Court has agreed to hear an appeal of two recent Eleventh Circuit cases permitting lien-stripping in chapter 7 to resolve the circuit split of opinions.[18]
[1] In re Bodensiek, Case No. 14-28812-EPK (Bankr. S.D. Fla. Jan. 9, 2015).
[2] Section 506(a) provides for the so-called bifurcation of a claim secured by a lien where the property subject to the lien has a value less than the amount of the claim. Such a claim is a secured claim to the extent of the value of the collateral (or the equity after taking account of senior liens), and is an unsecured claim for any remainder
[3] Lien-stripping applies only where the collateral is “property in which the estate has an interest.”
[4] McNeal v. GMAC Mortg. LLC, 735 F.3d 1263 (11th Cir. 2012).
[5] Dewsnup v. Timm, 502 U.S. 410 (1992).
[6] The Court noted for its analysis, “there is no difference between an asset that is abandoned and one that is claimed exempt.” Id. at 5 of 8.
[7] Section 554(a) defines what is abandonment of property of the estate.
[8] Citing 11 U.S.C. § 506.
[9] Dewsnup, Id.
[10] Dewsnup, 502 U.S. 432.
[11] “Once §506(a)’s grant of secured creditor rights, and § 506(d)’s elimination of the right to ‘underwater’ liens and liens securing unallowed claims have occurred, they cannot be undone by later abandonment of the property. Nothing in the statute expressly permits such an unraveling, and it would be absurd to imagine it.” Dewsnup at 432.
[12] The questions posed in the Bodensiek opinion included “what would happen if a nonexempt asset was added to the list of exempt assets list after an order allowed lien-stripping.” Id. at 5.
[13] 28 U.S.C. § 1334(b).
[14] See Stern v. Marshall, 131 S. Ct. 2594, 2618 (2011) (emphasis added).
[15] 28 U.S.C. § 157(b)(1).
[16] As Justice Scalia noted, “[t]he text [of § 506] does not read that way. Section 506 automatically operates upon all property in which the estate has an interest at the time the bankruptcy petition is filed.” Dewsnup at 432.
[17]“ At present in the Eleventh Circuit, one may void a lien with no equity, but may not reduce a lien that is partly secured. It is difficult to harmonize these alternative outcomes with a single view of the statute.” Bodensiek, at 4, fn.2.
[18] Bank of America v. Caulkett, 566 Fed. App’x. 897 (11th Cir. 2014), and Bank of America v. Toledo-Cardona, 556 Fed. App’x. 911 (11th Cir. 2014)