01 December 2015

SCOTUS in Review: US Supreme Court Bankruptcy Cases 2014-2015 -- Part 6

It's been a long time since I've posted a segment of my paper presented at the annual meeting of the Bankruptcy Section of the North Carolina Bar Association. If you've lost track, go here, here, here, here, and here to read my five earlier posts on what the Supreme Court did in its most recent term. Here are my comments about the concluding case. I may eventually follow up with some thoughts about the overall direction of the Court in this area of the law.

V. “Allowed Secured Claims:” Dewsnup Lives!

Nearly twenty-five years ago, the Supreme Court decided Dewsnup v. Timm.[1] The majority in Dewsnup came to the peculiar conclusion that the expression “allowed secured claim” in Bankruptcy Code § 506(d) had a meaning other than that of the same expression in § 506(a). Aletha and LaMar Dewsnup had owned some farmland subject to a deed of trust that secured a debt in excess of the value of the land. Aletha ultimately filed for relief under chapter 7 and sought to redeem the property by paying the holder of the deed of trust the value of the creditor’s interest in the property, which was far less than the debt. Even though § 506(a) allows a creditor’s secured claim only to the extent of its value, the Court held that the undersecured portion of the claim is not void.[2] In other words, so long as the claim has been allowed, it is secured regardless of the extent of the security. Writing for the majority, Justice Blackmun admitted this construction of § 506(d) was difficult and noted that the decision should be limited to its facts, that is, situations where the creditor’s claim was undersecured but not entirely unsecured.[3] Justices Scalia and Souter dissented on the ground that the correct construction of the expression “allowed secured claim” in § 506(d) should be the same as 506(a) (and other places in the Code).[4]

Bank of America v. Caulkett[5] presented an opportunity to test the Court’s willingness to limit Dewsnup to its facts or to overrule Dewsnup altogether. Debtor David Caulkett filed for relief under chapter 7 and moved to avoid Bank of America’s entirely unsecured junior mortgages. Distinguishing Dewsnup on its facts (undersecured but not underwater), the bankruptcy court granted the debtor’s motion and on appeal, both the district court and the Eleventh Circuit affirmed. After granting the bank’s petition for certiorari, the Court reversed the Eleventh Circuit in an opinion written by Justice Thomas.

Justice Thomas began by reciting the rule from Dewsnup: “§ 506(d) permits the debtors here to strip off the Bank’s junior mortgages only if the Bank’s ‘claim’—generally, its right repayment from the debtors, § 101(5)—is ‘not an allowed secured claim.’”[6] He then restated the debtor’s argument in simple and straightforward terms:

[I]f the value of a creditor’s interest in the property is zero–as is the case here–his claim cannot be a “secured claim” within the meaning of § 506(a). And given that these identical words are later used in the same section of the same Act—§ 506(d)—one would think this “presents a classic case for the application of the normal rule of statutory construction that identical words used in different parts of the same act are intended to have the same meaning. Under that straightforward reading of the statute, the debtors would be able to void the Bank’s claim.[7]

Regrettably, at least from the debtor’s point of view, the Court, including Justice Scalia who had dissented in Dewsnup, held that the peculiar construction of Dewsnup foreclosed this "plain meaning" argument.[8]

Justice Thomas acknowledged the many academic criticisms of the Dewsnup decision[9] and on several occasions observed that the debtor had not asked the Court to overrule Dewsnup. A review of the transcript of the oral argument suggests that several members of the Court were frustrated that they did not have the opportunity to address the holding in Dewsnup head on.[10]

Apart from consistent statutory construction, the policy issue at work in Dewsnup and now Caulkett is straightforward: who gets the benefit of appreciation? In other words, the effect of the Court’s construction permits the secured creditor to realize the benefit of any subsequent appreciation in value of the undersecured or even underwater collateral. With its mortgage in place, Bank of America can wait five, ten, or even more years for the property to appreciate sufficiently before foreclosing. Reversal of Dewsnup would leave that contingent benefit with the debtor.

Hindsight suggests that the debtor’s tactical decision to attempt to distinguish Dewsnup on its facts was not the best approach. Given the tone of the Court’s opinion, there is reason to believe that a direct attack on Dewsnup might succeed. One should not, however, conclude that such an attack would necessarily be successful. Justices Kennedy, Breyer, and Sotomayor did not join in the footnote citing the criticism of Dewsnup and the transcript of the oral argument revealed that some of the justices were concerned that overruling Dewsnup might upset the settled expectations of mortgage lenders who had relied on that case in pricing mortgage loans.[11]

[1] 502 U.S. 410 (1992).
[2] Id. at 417 (“[W]e hold that § 506(d) does not allow petitioner to ‘strip down’ respondents’ lien, because respondents’ claim is secured by a lien and has been fully allowed pursuant to § 502.”).
[3] Blackmun observed that

 [h]ypothetical applications that come to mind and those advanced at oral argument illustrate the difficulty of interpreting the statute in a single opinion that would apply to all possible fact situations. We therefore focus upon the case before us and allow other facts to await their legal resolution on another day.

Id. at 416–17.
[4] Id. at 423 (“[A]bandoning the normal and sensible principle that a term (and especially an artfully defined term such as ‘allowed secured claim’) bears the same meaning throughout the statute, the Court adopts instead what might be called the one-subsection-at-a-time approach to statutory exegesis.”).
[5] 135 S.Ct. 1995 (2015). Disclaimer: I was a party to an amicus brief supporting respondents.
[6] Id. at 1998.
[7] Id. at 1999. (Citation and internal quotation marks omitted.).
[8] The Court commented that

Dewsnup’s construction of “secured claim” resolves the question presented here. Dewsnup construed the term “secured claim” in § 506(d) to include any claim secured by a lien and ... fully allowed pursuant to § 502. Because the Bank's claims here are both secured by liens and allowed under § 502, they cannot be voided under the definition given to the term “allowed secured claim” by Dewsnup. (Citation and internal quotation marks omitted.).

[9] Id. at 2000 (footnote).
[10] See Transcript of Oral Argument 13-1421 (March 24, 2015) at http://www.supremecourt.gov/oral_arguments/argument_transcripts/13-1421_0813.pdf.
[11] Justice Scalia questioned counsel for petitioner Bank of America as follows:

Now, I thought you were going to tell me, you know, I feel strongly that–Dewsnup was wrong, but I’m not going to upset expectation. I mean, if banks have been, you know, lending money for second mortgages on the assumption that they would not be stripped, I mean, that’s what I thought you were going to tell me. Oh, you know, many expectations that have been rested upon this this misbegotten opinion of Dewsnup.

Id. at 14.

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