• Ms. McNeal Goes to Washington
  • February 18, 2015 | Authors: Scott St. Amand; J. Ellsworth Summers
  • Law Firms: Rogers Towers, P.A. - Jacksonville Office ; Rogers Towers, P.A. - Fort Lauderdale Office
  • For those of you who have followed our blog since its inception, you will know that one of our most discussed opinions is that of In re McNeal, in which the Eleventh Circuit held that a debtor may strip a wholly unsecured junior mortgage in a Chapter 7 proceeding. Although the decision is anathema to every other federal appeals court decision in the country, McNeal has been controlling law in the Eleventh Circuit for over two years and has affected thousands of residential loans.

    Late last year, the Supreme Court finally agreed to hear Bank of America’s appeal of a case involving lien stripping in Chapter 7 bankruptcy. McNeal and the BOA case up on appeal are practically identical, insofar as they involve a debtor whose second mortgage is wholly underwater - that is the value of the home is less than the first mortgage, rendering the second mortgage valueless.

    As you may remember, McNeal and its Eleventh Circuit progeny relied upon the previous precedent set forth in the Folendore case, which allowed lien stripping in Chapter 7 cases. Between Folendore and McNeal, however, the Supreme Court decided the seminal case of In re Dewsnup, which every other federal circuit court of appeals has interpreted as prohibiting the stripping of wholly unsecured loans in Chapter 7 proceedings.

    Once McNeal was decided, a clear circuit split was established. It was only a matter of time until the Supreme Court was forced to reexamine the issue. As such, the BOA case has the potential to be one of the most influential Chapter 7 cases decided in the last twenty years, because the Supreme Court could, once and for all, eliminate any doubt as to whether an underwater debtor may eliminate a wholly unsecured junior mortgage on its property.

    Many commentators have noted that McNeal was a sympathetic response to the inequitable position in which debtors found themselves as a result of the lending bubble and subsequent downturn of the economy. By allowing the “unfortunate” debtor to set aside a junior loan, which has no value, the court attempted to rehabilitate the debtor by unsaddling a heavy debt. Unfortunately for the debtor, such practices are disfavored throughout the rest of the country and could be overturned upon review by the Supreme Court.