Appellate Court Finds Wholly Unsecured Second Mortgage Lien Voidable Under Section 506(d) Of The Bankruptcy Code

In re McNeal (Case No 11-11352, 11th Cir., May 11, 2012 – unpublished) the debtor in her voluntary petition for Chapter 7 Bankruptcy reported that her home was subject to two mortgage liens, a first mortgage in the amount of $176,413 and a second mortgage in the amount of $44,444. The debtor also reported that her home’s fair market value was $141,416, a fact that was not disputed by the parties. The debtor then moved to strip off the second mortgage lien pursuant to 11 U.S.C. § 506(a) and (d) alleging that the debt was wholly unsecured. The bankruptcy court denied debtor’s motion and the debtor unsuccessfully appealed to the district court. In reversing the decision, the appellate court relied upon the plain language of section 506(d) which provides that [t]o the extent that a lien secures a claim against a debtor that is not an allowed secured claim, such lien is void. The appellate court declined to extend the holding in _Dewsnup v. Timm_, 112 S. Ct. 773 (1992), which held that Chapter 7 debtor could not strip down a partially secured lien under § 506(d). The appellate court acknowledged that the Supreme Court reasoning in _Dewsnup v. Timm_ appears to have rejected a plain language analysis to section 506(d), but refused to extrapolate from it. It felt compelled to follow a plain language analysis because the decision in _Dewsnup v. Timm_ disallowed only a strip down of a partially unsecured mortgage lien and did not address a strip off of a wholly unsecured lien. Accordingly, the appellate court concluded that the second mortgage lien was voidable under section 506(d).

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