Latest Court To Consider Issue Concludes That "Unsecured" Lien Cannot Be Stripped Off
In Dewsnup v. Timm, 502 U.S. 410 (1992), the US Supreme Court held that a debtor cannot avoid an undersecured lien under Bankruptcy Code Section 506(d), known as "stripping down" a lien. The Court did not consider, however, whether a debtor can avoid a wholly unsecured lien under Section 506(d), known as "stripping off" lien. The Delaware bankruptcy court recently considered the latter issue in In Re Pistritto, USBC Del., Case No. 03-10245 (April 19, 2005), and concluded that a Chapter 7 debtor cannot avoid a wholly unsecured consensual lien under Section 506(d).
In Pistritto, the Chapter 7 debtors executed three mortgages against their home. The value of the home was $123,000. The debt owed under the first two mortgages exceeded $134,000, leaving no remaining equity to satisfy any portion of the third mortgage. The debtors sought to avoid the third mortgage on the grounds that there was no equity for the third mortgage.
Following a line of cases, including cases from the Sixth and Fourth Circuits, In re Talbert, 344 F.3d 555, 561-62 (6th Cir. 2003) and Ryan v. Homecomings Fin. Network, 253 F.3d 778, 782 (4th Cir. 2001), the Delaware bankruptcy court concluded that a Chapter 7 debtor may not strip off a wholly unsecured lien. The rationale is the same as that in cases involving under-secured liens: (1) any increase in the value of property from the date of the judicially determined valuation to the time of the foreclosure sale should accrue to the creditor; (2) the mortgagor and mortgagee bargained that a consensual lien would remain with the property until foreclosure; and (3) liens on real property survive bankruptcy unaffected. Talbert, 344 F.3d at 559.
The Ninth Circuit Bankruptcy Appellate Panel is in accord. See, e.g., In re: Laskin, 222 Bankr. 872, 875-876 (9th Cir. BAP 1998) (where chapter 7 trustee not disposing of collateral, or collateral not being valued for plan confirmation purposes, no basis exists to avoid a lien under 506(d)) (dicta). The BAP cited to the same three factors noted above.
Written by: Theodore A. Cohen
In communicating with us through this blog, you should not provide any confidential information to us concerning any potential or actual legal matter you may have. Before providing any such information to us, you must obtain approval to do so from one of our lawyers.
By choosing to communicate with us without such prior approval, you understand and agree that Sheppard Mullin will have no duty to keep confidential any information you provide.
