Hey, the Sun Is Hot and the Water's Fine: Why Not Strip Off that Lien?
46 Pages Posted: 29 Aug 2013
Date Written: August 27, 2013
In this article, I revisit a subject that I first addressed in a 1997 publication; namely, the proper characterization of secured claims in bankruptcy. The current treatment was prompted by the first circuit court of appeal decision to address the question over which the lower courts are sharply divided. In Branigan v. Davis, the U.S. Fourth Circuit decided that a wholly underwater lien against the debtors’ primary residence could be stripped off in a so-called “Chapter 20” case, notwithstanding (1) the Supreme Court’s 1992 decision in Dewsnup v. Timm, and (2) the 2005 amendments to Chapter 13, which were clearly designed to bolster the stability of “secured claims” in bankruptcy. This leads narrowly to a discussion of the last remaining bastion of prohibition against strip off of unsecured liens — in Chapter 7 cases, and more generally to an analysis of the difference between secured debt under conventional state law principles and the federal Bankruptcy Code. I conclude that there is an important difference between the two, which can be explicated in terms of whether the focus is on the status of the claim (the bankruptcy approach) or the nature of the claimant (the state law ideation). I conclude that that the bankruptcy courts have the authority to develop public policy and a uniform federal rule in this area without running afoul of prior Supreme Court precedent, The Erie doctrine, or the Fifth Amendment to the federal Constitution.
Keywords: bankruptcy, lien, secured claims,Chapter 7, unsecured liens
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