January 5, 2016
by Caitlin L. Stayduhar
Martin Leigh PC – USFN Member (Kansas)
The U.S. Supreme Court’s opinion in Dewsnup v. Timm, 502 U.S. 410, 112 S.Ct. 773 (1992), held that Bankruptcy Code § 506(d) does not allow a debtor to avoid a consensual mortgage lien when the value of the collateral is less than the amount of the claim secured by the lien. Dewsnup has been questioned by a number of opinions and publications since its issuance in 1992. On November 20, 2015 the U.S. Bankruptcy Court for the Eastern District of Louisiana further limited the applicability of Dewsnup by holding that a nonconsensual lien is avoidable when insufficient equity exists to secure its debt. [In re Mayer, 2015 Westlaw 7424327 (Bankr. E.D. La. 2015)].
In Mayer the debtor sought to avoid the lien of a writ of execution arising from a money judgment taken against the debtor in state court, basing her argument upon Dewsnup. The bankruptcy court disagreed with the Supreme Court’s analysis, finding that the Supreme Court incorrectly conflated the concept of a “consensual lien” with an “allowed claim.” The bankruptcy court took further issue with Dewsnup’s interpretation of § 506(d), which the bankruptcy court stated would effectively eliminate the application of § 506(d) under any chapter, and prevent the use of § 506(d) for its stated purpose of reducing undersecured claims to the value of the property. In reaching its ultimate decision to limit Dewsnup’s holding to the avoidance of only consensual mortgage liens, the bankruptcy court reiterated the Supreme Court’s directive to apply Dewsnup narrowly, stating that a restricted application was “both warranted and preferable.”
The Mayer decision impacts the holders of an entire class of liens by providing debtors with an argument for avoiding nonconsensual liens that are undersecured. The bankruptcy court’s focus on challenging the Supreme Court’s analysis emphasizes the reluctance of many courts to extend Dewsnup to situations beyond the exact factual scenario of that case, and suggests that courts will continue to limit Dewsnup’s application in the future. As a result, Mayer may bolster the positions of debtors seeking to avoid other types of liens or support an eventual challenge to the Dewsnup holding itself.
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