On Feb. 19, 2019, the Supreme Court considered a petition for a writ of certiorari in the case of Ritter v. Brady,[1] asking the high court to overrule its infamous decision in Dewsnup v. Timm.[2]
The Dewsnup Decision
In Dewsnup, over a vigorous dissent, the Supreme Court ruled that a chapter 7 debtor may not employ §§ 506(a) and 506(d) of the Bankruptcy Code to “strip down” an undersecured mortgage. Largely ignoring the language of the statute and substituting the majority’s economic policy in lieu of choices made by Congress, Dewsnup has been the subject of harsh criticism by commentators and judges alike.
The justices comprising the Dewsnup majority based their holding that liens survive chapter 7 and cannot be stripped down on their understanding of pre-Code law under the former Bankruptcy Act. While their analysis might have reflected the law under the Act, the majority’s conclusion defies the plain language of § 506 of the Bankruptcy Code, which provides, in relevant part:
(a)(1) An allowed claim of a creditor secured by a lien on property in which the estate has an interest, or that is subject to setoff under section 553 of this title, is a secured claim to the extent of the value of such creditor’s interest in the estate’s interest in such property, or to the extent of the amount subject to setoff, as the case may be, and is an unsecured claim to the extent that the value of such creditor’s interest or the amount so subject to setoff is less than the amount of such allowed claim. Such value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property, and in conjunction with any hearing on such disposition or use or on a plan affecting such creditor's interest.
(2) If the debtor is an individual in a case under chapter 7 or 13, such value with respect to personal property securing an allowed claim shall be determined based on the replacement value of such property as of the date of the filing of the petition without deduction for costs of sale or marketing. With respect to property acquired for personal, family, or household purposes, replacement value shall mean the price a retail merchant would charge for property of that kind considering the age and condition of the property at the time value is determined.
***
(d) To the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void, unless—
(1) such claim was disallowed only under section 502(b)(5) or 502(e) of this title; or
(2) such claim is not an allowed secured claim due only to the failure of any entity to file a proof of such claim under section 501 of this title.
From the language of the Bankruptcy Code, it appears that Congress intended to change or clarify pre-Code law by adopting § 506(a) and (d), which together appear to void a lien to the extent is it not supported by value in the underlying collateral. The Dewsnup decision negated that change.
The Certiorari Petition
The most recent petition challenging Dewsnup arose from the Ritter case in California, where a chapter 7 debtor sought to strip off a wholly unsecured, subordinate mortgage. From the bankruptcy court to the Ninth Circuit Bankruptcy Appellate Panel and to the Ninth Circuit, each court addressing the case summarily denied the debtor’s request, holding that the issue had been definitively decided by the Supreme Court in Dewsnup and Bank of America v. Caulkett.[3]
Despite repeated defeats based on purportedly well-settled authority, the debtor filed a petition for certiorari in December, asking the justices head-on to overrule Dewsnup. The debtor said that Dewsnup was “plainly wrong[,] ... ignores Section 506’s text,” and denies “people the fresh start that Congress promised.”
Despite being supported by a number of amici, including former judges Eugene Wedoff, Leif M. Clark, and professors including Bruce A. Markell (a bankruptcy judge before returning to teaching), Kenneth N. Klee, Michael D. Sousa, Jack Williams, Margaret Howard and David R. Kuney, the Court denied certiorari on Feb. 19, 2019.
Conclusion
While the Court ultimately denied the opportunity to overturn Dewsnup in the Ritter case, that decision alone does not mean that Dewsnup will never be overturned. The Court’s decision in Bank of America v. Caulkett from 2015 included a lone footnote (interestingly not joined by three justices in an otherwise unanimous decision) that specifically noted the harsh criticism of Dewsnup and highlighted that the debtors in that case were not seeking an overruling of Dewsnup. Given this footnote, it appears that a majority of the Court — at least as it was comprised in 2015 — would be willing to overrule Dewsnup, given the right case. Ritter, however, was apparently not that case.
[1] Supreme Court Case No. 18-747.
[2] 502 U.S. 410 (1992).
[3] 575 U.S. ____, 135 S. Ct. 1995 (2015).