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SCOTUS Denies Certiorari In Lien Stripping Case

On March 31, the U.S. Supreme Court denied a petition for a writ of certiorari in an Eleventh Circuit case that raises the issue of whether, under section 506(d) of the Bankruptcy Code, a chapter 7 debtor can “strip off” a junior-lien mortgage when the outstanding debt owed to a senior lienholder exceeds the current value of the collateral. Bank of America v. Sinkfield, 13-700, 2014 WL 1271326 (U.S. Mar. 31, 2014). Here, the debtor’s property was subject to two mortgage liens, with the outstanding amount of the first-priority mortgage exceeding the fair market value of the property. In the bankruptcy court, the debtor filed a motion to strip off the junior lien under section 506(d). Controlling Eleventh Circuit precedent allowed the junior-lien mortgage to be stripped off or voided because it was wholly unsupported by the collateral. The parties stipulated to the facts and the applicability of the precedent, but the holder of the junior lien disputed the correctness of the Eleventh Circuit precedent and reserved the right to appeal its continued viability. In its eventual petition to the Supreme Court, the holder of the junior lien argued that the Eleventh Circuit’s precedent is out of step with every other federal appeals court that has addressed the issue. The junior lien holder explained that, relying on a prior Supreme Court holding that section 506(d) does not permit a chapter 7 debtor to “strip down” a mortgage lien to the current value of the collateral, the Fourth, Sixth, and Seventh Circuits held that section 506(d) similarly does not permit a “strip off.” The Court declined to address the apparent circuit split.

U.S. Supreme Court Lien Stripping