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.).
Id.
[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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