• 11th Circuit Dilutes Dewsnup
  • June 8, 2012 | Authors: Mark E. Steiner; Damian A. Valladares
  • Law Firm: Weltman, Weinberg & Reis Co., L.P.A. - Fort Lauderdale Office
  • On May 11th, 2012, a three judge panel of the 11th circuit held that a Chapter 7 debtor may strip off a wholly unsecured lien.  In in re McNeal, 1:10-cv-01612-TCB; 09-BKC-78173-PWB, an unpublished opinion arising from the Northern District of Georgia, the Court overturned the District and Bankruptcy Court, stating that the debtor had the ability to strip off the creditor's wholly unsecured second lien under sections 506(a) and (d) of the bankruptcy code.

    Prior to this ruling, the lower courts of the 11th Circuit maintained the Supreme Court's ruling in Dewsnup v. Timm, 112 S. Ct. 773 (1992) controlled; precluding all lien stripping (whether fully secured, partially secured, or wholly unsecured) in Chapter 7 cases.  In McNeal, the court advances a narrow interpretation of Dewsnup's holding applying it only to liens that were partially secured.

    Instead, the court points to the 11th Circuit's previous holding in Folendore v. United States Small Business Admin., 862 F.2d 1537 (11th Cir. 1989) which concluded that an allowed wholly unsecured claim was voidable under section 506(d). The court went on to state that since the facts in Dewsnup differed from Folendore, the latter still controlled.

    The ramifications of the McNeil holding will be quickly apparent: Chapter 7 debtors in Florida will be able to strip off wholly unsecured junior liens, and in most instances, will pay little or nothing to unsecured liens.  The Middle District of Florida has already responded to the McNeil decision by establishing a negative notice procedure where a default order will be automatically entered if there is no creditor response to the motion.  No longer will a debtor, who is eligible for a Chapter 7, have to wait 3-5 years to complete a Chapter 13 plan to effectuate a lien strip.  Finally, valuation hearings in Chapter 7 cases will now be routine where equity or value is contested.

    It is unclear at this time if the creditor will request a review from the entire 11th Circuit or appeal the decision.