Friday, April 3, 2015

SCOTUS Considers Overturning 1992 Pro-Creditor Bankruptcy Opinion

By Michael Fuller, The Underdog Lawyer ®

Last week, the U.S. Supreme Court heard oral argument in companion cases arising under Section 506 of the Bankruptcy Code.


The issue in both cases was whether consumers may wipe out underwater second mortgage liens in chapter 7 bankruptcy.


What is Lien Stripping?

The practice of "lien stripping" is widespread across the country in chapter 13 bankruptcy. The practice is allowed under chapter 7 of the Bankruptcy Code only in the 11th Circuit.


The Supreme Court's 1992 opinion Dewsnup v. Timm held that mortgage lien rights generally survive chapter 7 bankruptcy.


How Was the Dewsnup Opinion Reached?

The Dewsnup case was decided 6-2.

Justice Thomas took no part in the decision, and Justices Scalia and Souter dissented. Of the six justices that supported the Dewsnup opinion, only one (Kennedy) remains on the Supreme Court.

Commentary

Before oral argument last week, I commented that the case seemed like a no-brainer based on Dewsnup and its progeny.


However, after oral argument, some legal experts now predict the SCOTUS could effectively overturn Dewsnup.


After reviewing the oral argument transcript, I'm updating my prediction to 6-3 in favor of Bank of America, while keeping my fingers crossed.