September 22, 2019

September 20, 2019

Subscribe to Latest Legal News and Analysis

September 19, 2019

Subscribe to Latest Legal News and Analysis

A Lien Strip Tease from the Supremes re: Bank of America, N.A. v. Caulkett Bankruptcy Litigation

This week’s unanimous Supreme Court decision barring the strip off of wholly unsecured junior liens in chapter 7 cases is one of the stranger recent opinions of the Court.  See Bank of America, N.A. v. Caulkett, No. 13-1421, ___ U.S. ___ (June 1, 2015).  While the result is not particularly surprising, what is unusual is that the Court goes out of its way to question its two decades old decision in Dewsnup and may even be hinting that it is ready to overrule that decision.  See Dewsnup v. Timm, 502 U.S. 410 (1992).

Dewsnup certainly is a great candidate for reversal.  The case held that section 506(d) could not be used in a chapter 7 case to avoid that portion of a secured claim that exceeded the value of the collateral (or “strip down” the lien to the value of the collateral).  In reaching that result, the Dewsnup majority held that the phrase “allowed secured claim” had a different meaning in subsection (d) of section 506 than it did in subsection (a) of the same provision.  Justice Scalia filed a vigorous dissent pointing out that the “allowed secured claim” phrase was a term of art used throughout the Bankruptcy Code and predicting that the Dewsnup approach would breed confusion.  Confusion did result for a while until most courts ignored Dewsnup’s reasoning and limited it to the specific issue it addressed.  The case and its “liens pass through bankruptcy” principle still pop up occasionally to create mischief, most recently in the line of cases requiring that secured creditors actually “participate” in reorganization cases before the plan can avoid their liens.  See, e.g., In re S. White Trans., Inc., 725 F.3d 494 (5th Cir. 2013).

In Caulkett, the Supreme Court was asked whether Dewsnup should be limited to the strip down of partly secured claims or whether it should also protect from avoidance liens that are completely out of the money (a “strip off”).  The Court easily rejected that distinction as “artificial” and applied Dewsnup.

One might expect the Court either to say that Dewsnup was correctly decided and apply it, or to apply it while simply stating that it was bound by the precedent.  What is strange about Caulkett is that Justice Thomas, writing for the full Court, goes out of his way to criticize Dewsnup.  He starts by saying that a “straightforward” reading of section 506(d) supports the strip off approach and pokes fun at the alleged “ambiguity” that Dewsnup addressed as merely involving “self-interested parties [who] . . . disagreed over the term’s meaning.”  He adds a footnote citing criticism by him, Justice Scalia and other judges and academics (three Justices did not join in the footnote).  Finally, he damns Dewsnup with faint praise in the opinion’s penultimate paragraph by stating, “Even if Dewsnup were deemed not to reflect the correct meaning of §506(d), the debtors’ solution would not either.”

Why not just overrule Dewsnup?  That brings us to the strangest aspect of the opinion.  Not once, not twice, but three times in the short seven-page opinion, Justice Thomas states that the debtors did not ask the Court to overrule Dewsnup.  In one passage, Justice Thomas writes, “Despite this criticism, the debtors have repeatedly insisted that they are not asking us to overrule Dewsnup.”  Of course the Court could have overruled Dewsnup without being asked, so why emphasize the debtors’ failure to request it?  Could it be that there is strong support on the Court for overruling Dewsnup, but that some Justices are hesitant to do so without full briefing and argument on the point?

©2019 Greenberg Traurig, LLP. All rights reserved.


About this Author

Businesses faced with changes in the competitive global economy and within their own industries increasingly turn to financial restructuring as an option to reorganize and de-leverage core businesses, shed excess assets for underperforming divisions, and reformulate long-term objectives. Greenberg Traurig's internationally recognized Restructuring & Bankruptcy Practice has broad advisory and litigation experience with the often-complex issues that arise in reorganizations, restructurings, workouts, liquidations, and distressed acquisitions and sales, in both domestic...