Appeals Court Decision Against Chapter 13 Lien Stripping Not What It Seems

05 Sep Appeals Court Decision Against Chapter 13 Lien Stripping Not What It Seems

The U.S. Court of Appeals, Tenth Circuit, recently issued its ruling in Woolsey v. Citibank, No. 11-4014 (10th Cir. Sept. 4, 2012), holding that under bankruptcy code section 506(d), a chapter 13 debtor may not “strip off” a completely unsecured junior mortgage against homestead real estate. This seems, at first blush, to pit the Tenth Circuit against the other seven federal appeals court circuits which have approved lien stripping in such cases. But is there really a new split regarding lien stripping in the appeals courts, ordid something different happen?

Upon careful reading, it should be observed that in the Woolsey case, the appeals court based its ruling on code section 506(d). Moreover, the court went out of its way to point out that the debtor’s lawyers based all of their arguments on section 506(d), despite the court’s repeated invitation to the debtor to rely instead on sections 506(a) and 1322(b)(2). These two code sections have been interpreted by seven other appeals courts as permitting the stripping of wholly unsecured junior homestead mortgages in chapter 13. The court faulted the debtor’s lawyers for this stance. It is possiblethat the debtor’s lawyers pursued 506(d) as part of a broader strategy to develop the case law in areas other than chapter 13 lien stripping, or that they were attempting to avoid the need for the debtor to complete his plan before the lien strip became final.

The court in Woolsey even took the unusual step of saying that if the debtor had made hiscase for lien strippingunder sections 506(a) and 1322(b)(2), rather than section 506(d),then he would have a “promising argument.” It went on to say that because the debtor hadinsisted on a ruling based solely on section 506(d), the court had no choice but to hold that the mortgage could not be stripped under that section of the bankruptcy code.

The U.S. Supreme Court has ruled, in Dewsnup v. Timm, 502 U.S. 410 (1992), that section 506(d) cannot be used to modify secured claims on real estate in chapter 7 cases. However,the Supreme Courthas never spoken on the use of section 506(a) to strip wholly unsecured junior mortgages on homestead real estate. However, as noted above, seven federal appeals courts have approved this practice under sections 506(a) and 1322(b)(2).

Even after the Tenth Circuit’s ruling in Woolsey, federal appeals courtsremain unanimous that junior mortgage lien stripping is permissible in chapter 13 under sections 506(a) and 1322(b)(2). It’s just thatlien strippingcan’t be done, apparently, using section 506(d).

Photo courtesy of 401(k) 2012, Flickr.

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Craig Andresen is a Minnesota bankruptcy attorney who represents both consumers and small business owners in chapter 7 and chapter 13 cases. With thirty years experience, Mr. Andresen is a frequent speaker on the topics of stopping mortgage foreclosures, and stripping off second mortgages in chapter 13. His office is located in Bloomington just across the street from the Mall of America. Call his office at (952) 831-1995 for a free consultation about protecting your rights using bankruptcy.
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