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

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, or did 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 possible that 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 his case for lien stripping under 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 had insisted 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 Court has 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 courts remain unanimous that junior mortgage lien stripping is permissible in chapter 13 under sections 506(a) and 1322(b)(2).  It’s just that lien stripping can’t be done, apparently, using section 506(d).

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