August 5, 2015
SLG Client Alert.
From: Spencer Scheer
Subject: Update: Lien Strips and the Impact of the Caulkett Cast in the Ninth Cicuit
Many SLG clients have expressed interest in following the impact of the recent ruling by United States Supreme Court limiting “liens strips” in a Chapter 7 to see if it will be extended to Chapter 13 cases. The first Ninth Circuit case to “weigh in” just came out. A review on this and the ability to lien strip in a “Chapter 20” case is set forth below. A prior alert on the impact of the Supreme Court case is also included below.
This issue will significantly impact creditors secured by residential real properties. As property values increase, the issue is now a battleground where debtors are seeking to consolidate equity they have gained due to the resurgence in property values, and creditors are seeking to recapture lost ground. The ability of a creditor to maintain a lien on property that may be underwater today, but “in the money” next year is critical. I strongly suggest that you follow this issue and make your staff aware of the arguments to support your rights.
Please call if you have any questions.
UPDATE: LIEN STRIP CASES
- Lien Strips: “The Times they May be Changing”,
- Chapter 7 Lien Strips: The U.S. Supreme Court in the case of Bank of America N.A. v Caulkett 135 S. Ct. 674, 190 L. Ed. 2d 388, 2014 U.S. LEXIS 7812 (U.S. 2014), denied claims by a debtor that a wholly unsecured second position lien could be avoided/stripped in a Chapter 7 proceeding. The holding in the Caulkett case was an extension of a prior holding by the Supreme Court in the case of Dewsnup v. Timm, 502 U.S. 410 (1992). The difference in Caulkett and Dewsnip was that in Dewsnup the debtor attempted to have a partially secured first position lien reduced/stripped to the actual value of the property, which was denied. Debtor advocates in the Caulkett case thought they might get “another bite at the apple” by taking aim at junior liens which obviously had no equity to support the lien. However, this attempt was denied by the Court in Caulkett, which in essence reaffirmed the principle that valid liens pass through bankruptcy unaffected.
- Chapter 13 Lien Strips: It is unclear whether the holding in the Caulkett case can be will be extended to Chapter 13 cases, and in particular when a loan is solely secured by the debtor’s principal residence. However, some guidance is emerging:
- Chapter 20 Debtors: A recent 9th Circuit BAP decision (Boukatch v. MidFirst Bank (In re Boukatch), 2015 Bankr. LEXIS 2254 (B.A.P. 9th Cir. July 9, 2015), held that nothing in the bankruptcy code prevents chapter 20 debtors from stripping a wholly unsecured junior lien against the debtor’s principal residence, notwithstanding their lack of eligibility for a chapter 13 discharge.
- Note: The lien strip does not become effective in a Chapter 20 until the plan is completed, not upon the discharge of the Debtor.
- Impact of Caulkett on Chapter 13 Lien Strips: The holding in in the Boukatch v.MidFirst case (supra) is also the first published case in the Ninth Circuit (as of August 5, 2015) to weigh in on whether the Caulkett decision would overturn the ability of a debtor to affect a lien strip in a Chapter 13 case. The Court cited the Caulkett decision seeking to distinguish the holding “as apples and oranges” to a lien strip in Chapter 13, and implying that existing 9th Circuit rulings allowing them despite anti-modification rights allowed to lenders solely secured by the debtor’s principal residence should continue . This is a defacto way of holding that the BAP holding in the case of In re: Lam, 211 B.R. 36 (B.A.P. 9th Cir. 1997) still applies, notwithstanding the Supreme Court decision in the Caulkett case (See Boukatch v. MidFirst Bank (In re Boukatch), 2015 Bankr. LEXIS 2254 (B.A.P. 9th Cir. July 9, 2015), footnote 7).
This interpretation of the Supreme Court decision in the Boukatch v.MidFirst is not binding on anyone (as this was not the issue on appeal), and may be “wishful thinking” . SLG believes that the Supreme Court meant exactly what it said i.e. lien strips can only occur if a claim is not allowed and secured, and that equity to support the lien is not required. This is certainly the law of the land in Chapter 7 cases. Whether it will be extended to Chapter 13 to uphold the anti-modification rights given to lenders secured by residential properties and taken away by Courts in the Ninth Circuit is the question. Time will tell, as the issue is certainly going to be brought up and appealed in the Ninth Circuit.