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Matthew Foley

Matthew Foley

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Lien Stripping: Reconciling the Tenth Circuit’s Opinion in Woolsey, with the Majority Position

A Chapter 13 debtor may modify the rights of some creditors who have a secured interest in the debtor’s property. However, creditors that hold a claim secured by the debtor’s primary residence generally are protected by the so called “anti-modification clause” in Section 1322(b)(2) of the Bankruptcy Code. Thus, creditors that have a secured interest in your home usually cannot have their claim reduced or modified by the bankruptcy plan.

What happens, though, when the current value of a homeowner’s house is less than the balance due on their first mortgage?

Any subordinate mortgage is completely unsecured because the collateral is worthless. In such a case, Federal Circuits have approved “lien stripping,” allowing Chapter 13 debtors to “strip away” these second mortgages. While there is widespread precedent for lien stripping, courts still somewhat struggle over the process. In In re Zimmer, the Ninth Circuit case on the subject, the court eventually sided with the “syllogistic” reasoning of the other Circuits:

Section 1322(b)(2) prohibits modification of the rights of a holder of a secured claim if the security consists of a lien on the debtor’s principal residence. Section 1322(b)(2) permits modification of the rights of an unsecured claimholder. Whether a lien claimant is the holder of a “secured claim” or an “unsecured claim” depends, thanks to § 506(a), on whether the claimant’s security interest has any actual “value”… If a claimant’s lien on the debtor’s homestead has no value at all … the claimant holds an “unsecured claim” and the claimant’s contractual rights are subject to modification by the plan. Zimmer, 313 F.3d 1220, 1225 (9th Cir. 2002).

Thus, if the debtor shows that the value of his principal residence is less than senior liens, the court can determine that the  junior lien is wholly unsecured and subject to being avoided. This leaves only liens which are secured by any portion of the value of the property. (“Any” is important because it is arguable that even “one penny of secured value will protect the creditor’s rights.” Zimmer at 1226.)

Despite the fact that the above reasoning has been approved in every federal appeals court to have reviewed it, the debtors in Woolsey v. Citibank chose not to follow it. In Woolsey, the value of the debtors’ home was well below the balance due on their first mortgage. They prepared a Chapter 13 repayment plan and maintained that their wholly unsecured second mortgage to Citibank was void. At the proceeding, in the face of the precedent in seven Circuits for the debtors to proceed under Section 1322(b)(2) and 506(a) of the Code, the attorneys decided to pursue Section 506(d). Unlike 506(a) which focuses on the definition of “secured” verses “unsecured” claims, 506(d) turns on the meaning of “allowed secured claim.” If Citibank’s claim wasn’t an “allowed secured claim,” 506(d) seems to allow the Woolseys to void the lien. The snag comes about because an “allowed secured claim” for purposes of 506(d) can be completely ‘unsecured” for purposes of 506(a) and 1322(b)(2).

In ruling against the Woosleys, the Tenth Circuit repeatedly stated it was bound by Dewsnup v. Timm, 502 U.S.410 (1992). There, the U.S. Supreme Court concluded “allowed secured claim” means a claim “allowed” under § 502 and “secured” by a lien enforceable under state law. The Woosley court interpreted this to mean “value in the collateral has no bearing on the lien-voiding language of § 506(d): any lien secured under state law must be respected and protected from removal.” Id. at 15.

The court in Woosley asked the parties to brief whether § 1322(b)(2) permits a Chapter 13 debtor to remove a wholly unsecured lien even if § 506(d) does not. In response, the Woolseys “emphatically” announced “[t]here is no Code provision other than 11 U.S.C. §506(d) that declares void a wholly unsecured lien.” Id. at 29.


There is still no discrepancy in the Circuits. The language in 1322(b)(2) and 506(a) has provided the successful arguments. Woolsey shows that until the Supreme Court overrules Dewsnup, there is negative precedent against bringing the claim under 506(d). Furthermore, in light of the Woolsey court’s invitation, debtors should at least attempt the 1322(b)(2) issue.

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