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In Re Alejandro Palomar Sr. and Rafaela Palomar, Debtors. v. Appeal From: First American Bank

October 3, 2012


The opinion of the court was delivered by: Judge Feinerman


Plaintiffs-Appellants Alejandro and Rafaela Palomar filed a voluntary joint petition for bankruptcy under Chapter 7 of the Bankruptcy Code and received a discharge in December 2011. They brought this adversary proceeding in the bankruptcy court against Defendant-Appellee First American Bank, seeking a discharge or "strip off" of First American's second-priority mortgage on their residence. The value of the residence is $165,000, and it was subject to a first-priority mortgage held by another lender that secures a debt of $242,894. Doc. 1-3 at 55. First American's second-priority lien secures an obligation of at least $50,000, and that is the obligation that the Palomars asked the bankruptcy court to discharge. Ibid. They grounded their request on Bankruptcy Code provisions saying that "[a]n allowed claim of a creditor secured by a lien on property in which the estate has an interest . is a secured claim to the extent of the value of such creditor's interest in the estate's interest in such property . and is an unsecured claim to the extent that the value of such creditor's interest ... is less than the amount of such allowed claim," 11 U.S.C. § 506(a)(1), and "[t]o the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void," with inapplicable exceptions, 11 U.S.C. § 506(d). The bankruptcy court, adhering to its decision in In re Immel, 436 B.R. 538 (Bankr. N.D. Ill. 2010), held that strip offs are prohibited in Chapter 7 cases and thus dismissed the adversary proceeding. Doc. 1-3 at 55-60.

The Palomars' appeal of the bankruptcy court's judgment presents a single question of law: May debtors in a Chapter 7 bankruptcy use 11 U.S.C. § 506(d) to "strip off" a junior lien on their residence where the debt secured by the senior lien exceeds the market value of the residence? In Dewsnup v. Timm, 502 U.S. 410 (1992), the Supreme Court interpreted the above-quoted Bankruptcy Code provisions to hold that Chapter 7 debtors may not use section 506(d) to "strip down" a lien on their residence-that is, to void the lien to the extent that it exceeds the value of the residence while retaining it to the extent that it does not. Id. at 417. This appeal turns on whether Dewsnup should be read to also preclude the "stripping off" of a junior lien-that is, voiding it entirely-where liens of higher priority exceed the value of a Chapter 7 debtor's residence. In dismissing the Palomars' claim, the bankruptcy court answered in the affirmative.

The Seventh Circuit has not addressed the question, though it has often cited Dewsnup for "the principle that (with immaterial exceptions) liens pass through bankruptcy unaffected," Gradel v. Piranha Capital, L.P., 495 F.3d 729, 732 (7th Cir. 2007); see also Cox v. Zale Delaware, Inc., 239 F.3d 910, 912 (7th Cir. 2001); In re Penrod, 50 F.3d 459, 461 (7th Cir. 1995); In re CMC Heartland Partners, 966 F.2d 1143, 1147 (7th Cir. 1992); In re James Wilson Assocs., 965 F.2d 160, 167 (7th Cir. 1992), which would seem to apply as much to a junior lien as to a senior lien. The Fourth and Sixth Circuits agree with the bankruptcy court that Dewsnup's determination that stripping down the primary lien on the debtor's residence is impermissible under Chapter 7 applies "with equal force and logic" to the stripping off of a secondary lien. In re Talbert, 344 F.3d 555, 556 (6th Cir. 2003); see also Ryan v. Homecomings Fin. Network, 253 F.3d 778, 779 (4th Cir. 2001) ("Because we find that the Supreme Court's reasoning in Dewsnup . is equally applicable to 'strip offs' as to 'strip downs,' we hold that a debtor may not strip off an unsecured but allowed lien pursuant to Section 506(d)."); In re Laskin, 222 B.R. 872 (B.A.P. 9th Cir. 1998) (same). This court finds Ryan and Talbert persuasive, and for the reasons stated therein, the bankruptcy court's judgment is affirmed.

A recent decision of the Eleventh Circuit on analogous facts, In re McNeal, 2012 WL 1649853 (11th Cir. May 11, 2012) (per curiam), adopted the position advanced here by the Palomars. McNeal is unpublished and thus non-precedential. See 11th Cir. R. 36-2 ("Unpublished opinions are not considered binding precedent, but they may be cited as persuasive authority."). The McNeal panel explained that it was bound to follow a pre-Dewsnup Eleventh Circuit decision holding that "strip offs" are permitted in Chapter 7 cases, Folendore v. U.S. Small Bus. Admin., 862 F.2d 1537 (11th Cir. 1989), unless "the intervening Supreme Court decision," Dewsnup, was "clearly on point." McNeal, 2012 WL 1649853, at *2. The panel determined that "[b]ecause Dewsnup disallowed only a 'strip down' of a partially secured mortgage lien and did not address a 'strip off' of a wholly unsecured lien, it is not 'clearly on point' with the facts in Folendore or with the facts at issue in this appeal." Ibid. Accordingly, the Eleventh Circuit panel determined that it was bound by Folendore and did not consider whether the reasoning of Dewsnup (as opposed to its precise holding) would otherwise have required a different result. Ibid. ("that the reasoning of an intervening high court decision is at odds with that of our prior decision is no basis for a panel to depart from our prior decision").

Folendore is not binding here, and in light of the particular legal context in which McNeal was decided, the decision is not persuasive and does not affect this court's conclusion that the bankruptcy court's judgment should be affirmed.

United States District Judge


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