Ever wonder why we can’t strip off unsecured consensual liens in Chapter 7?
Meet Mrs. Dewsnup who filed Chapter 7 and sought to reduce the claim of a junior secured lender on a piece of Utah farmland to the value of the portion of the land available to secure the mortgage. Mrs. Dewsnup went 0-4, losing at every stop from bankruptcy court to Supreme Court.
At issue were two provisions of §506: subsection(a) says that an allowed claim secured by a lien is a secured claim only to the extent of the value of the creditor’s interest in the collateral. Subsection (d) says that a lien securing a claim is void to the extent it isn’t an allowed secured claim. Read the case to see how six members of the court in 1992 concluded that the undersecured portion of the mortgage remained a valid lien on the land despite the text of §506.
Much out of character, I found myself cheering Justice Scalia, who wrote the dissent, as he argued that the “natural reading” of those two sections supported the debtor’s position. Take a look also at the majority’s discussion of the importance it ascribes to legislative history when the Bankruptcy Code is amended, and apply that to our present circumstances.
Image of Cache County Utah courtesy of Ken Lund