Amicus Curiae Brief — Bank of America, N.A. v. Toledo-Cardona, 135 S. Ct. 677 (2014) (No. 14-163)

Nos. 13-1421, 14-163

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=

preme Gourt of the Hn

——_

BANK OF AMERICA, N.A.,

Petitioner,

-—-V,-—

Davip B. CAULKETT,

tts Se ae ae Respondent.

BANK OF AMERICA, N.A.,

Petitioner,

~-- VY --—

EDELMIRO TOLEDO-CARDONA,

Respondent.

ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS

FOR THE ELEVENTH CIRCUIT

-

BRIEF FOR AMICI CURIAE PROFESSORS

JAGDEEP S. BHANDARI, SUSAN BLOCK-LIEB, LINDA

COCO, JESSICA DAWN GABEL, KENNETH N. KLEE,

GEORGE W. KUNEY, LOIS R. LUPICA, LAWRENCE

PONOROFF, C. SCOTT PRYOR, NANCY B. RAPOPORT,

MARIE T. REILLY, KEITH SHARFMAN, AND

MICHAEL SOUSA IN SUPPORT OF RESPONDENTS

RICHARD LIEB

Counsel of Record

RESEARCH PROFESSOR OF LAW

St. JOHNS UNIVERSITY

SCHOOL OF LAW

8000 Utopia Parkway

Jamaica, New York 11439

(212) 479-6020

(718) 990-1923

lim@stjohns.edu

Attorney for Amici Curiae

February 19, 2015 Professors Library of Congress

“Law Library

ae ata oan

TABLE OF AUTHORITIES

INTEREST OF AMICI

SUMMARY OF ARGUMENT

ARGUMENT

&

TABLE OF CONTENTS

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UNDER THIS COURT'S PRE-CODE

JURISPRUDENCE, A MORTGAGE

THAT HAS NO UNDERLYING

COLLATERAL VALUE MAY BE

STRIPPED OFF AND THEREBY

ELIMINATED

A. DEWSNUP DOES NOT PRECLUDE

THE STRIPOFF OF A VALUELESS

JUNIOR MORTGAGE

B. THis COURT’S WELL SETTLED

PRE-CODE JURISPRUDENCE

ALLOWS STRIPPING OFF

WHOLLY UNDERWATER

JUNIOR MORTGAGES

C. PETITIONER AND ITS AMICI'S

POSITION IS NOT SUPPORTED

BY RADFORD

“evr eeeeteneeeeneeneee eee *®

D. LONG V. BULLARD Di1D NoT

ESTABLISH A PRINCIPLE THAT

LIENS PASS THROUGH

BANKRUPTCY UNAFFECTED....

10

13

16

ll

PAGE(S)

Il. SECTION 506(d) REFLECTS THIS

COURT'S JURISPRUDENCE UNDER

WHICH A VALUELESS JUNIOR

MORTGAGE MAY BE STRIPPED

Gos tha okie chennedae kovNanackedeees 19

A. JUST AS CONGRESS PROVIDED

FOR STRIPPING OFF JUNIOR

MORTGAGES IN REORGANIZATION

CASES IN THE PRE-CODE ERA,

It Dip SO IN SECTION 506(qd) .. 19

1. The Bankruptcy Code only

protects liens to the extent

of the collateral’s value.... 19

2. The multiplicity of lien

avoidance and modification

provisions bears on the notion

that section 506(d) authorizes

stripoffs of valueless junior

SO cub uxwussGenvasuees 22

B. PETITIONER READS SECTION

506(d) ONLY TO VOID A LIEN

THAT SECURES A CLAIM

DISALLOWED UNDER SECTION

502(b)(1). CONGRESS WOULD

NOT ENACT A PROVISION THAT

BD Ba PO nko vk oc dcscouns 24

Ill. BANKRUPTCY’S UNDERLYING

GOAL TO PROVIDE DEBTORS

WITH A FRESH START IS

IMPORTANT IN CHAPTER 7...... 26

8 En ee eer iy ee 29

il

TABLE OF AUTHORITIES

Cases: PAGE(S)

Bryan v. Easton Tire Co.,

Ee PAs PE CREE 2 bcc cece cancnvessencns 25

Burlingham v. Crouse,

EPs. MRED coc descccuvescsccccces 26

Carpenter v. Longan,

S53 U.8. (16 Wan B71 (187B) ...... 0.0. 25

City of Richmond v. Bird,

SOO TG. 176 CADID) 2... 000s ccccccecccsc: 18

Coon v. Shry,

Grins TER CEE noc ckcccsuesssvvicbess 25

Cooper Indus., Inc. v. Aviall Sves., Inc.,

res ET PED ve cuscncnsencncecpevne 26

Dewsnup v. Timm,

EE Ere OU CUD cc cc cncedscccessseve passim

Ecker v. Western Pac. R. R. Corp.,

ol ook Be! Po. | > | ere passim

Emil v. Hanley,

318 U.S. 515, 521 (1943)

Fassett v. Mulock,

Ge; MI UND cc apccccesccecteuevenss 25

Flyer v. Sullivan,

134 N.Y.S.2d 521

CA. Tee. THE WeOe t. TDGSE) .. 2. ccc cccsse 25

Harmon v. United States through Farmers

Home Administration,

101 F.3d 574 (8th Cir. 1996) ............ 20, 24

lV

PAGE(S)

In re 620 Church Street Bldg. Corp.,

EGO U.B. BO CIGGS) cc cdkcccsvsiianee ee passim

In re Adams Apple, Inc.,

829 F.2d 1484 (9th Cir. 1987)........... 23

In re Bartlett,

168 B.R. 488 (Bankr. D.N.H. 1994)..... 28

In re Briggs Transp. Co.,

780 F.2d 1339 (8th Cir. 1985)........... 21

In re Cummings,

214 B.R. 196 (DO: N.d. LOST ids ease 20

Inre Gledhill, _

164 F.3d 1338 (10th Cir. 1999) ......... 20

In re Golden Plan of Calif., Inc.,

829 F.2d 705 (Oth Cir. 1986) .........c6. 20

In re Hann,

476 B.R. 344 (1st Cir. B.A.P 2012)..... 24

In re Pond,

$63 F.3d 1232 (24 Civ. SOOT? sicciccas sees 22

Jackson ex dem. Curtis v. Bronson,

19 Johns. 325 (N.Y. Sup. Ct. 1822)..... 25

Jordan v. Sayre,

B34 Fie. 1 CUGOS). ...<eecstcsacko ee 25

Katchen v. Landy,

363 1.8. SES (iGO® . 0. cccuvesieuee ee 24

Kelly v. United States,

826 F.2d 1029 (Fed. Cir. 1987).......... 26

PAGE(S)

Knight v. C.1.R.,

I ED on cnc wcccccusedccvces 26

Long v. Bullard,

ee COD coves ececccecs 5, 16,17, 18

Louisville Joint Stock Land Bank v. Radford,

ee ee passim

Marrama v. Citizens Bank of Mass.,

Ee 27

Matter of Gifford,

668 F.34 466 (7th Cir. 1982) ............ 21

Matter of Lindsey,

Sue fae Lee (7tm Cir. 1987) ............ 24

Schleuter Co., Inc. v. Sevigny,

564 N.W.2d 309 (S.D. 1997)............. 25

Sullivan v. Stroop,

CE | 21

United Sav. Assn. of Tex. v. Timbers of

Inwood Forest Assoc., Ltd.,

CO 21

United States v. Ron Pair Enterprises, Inc.,

489 U.S. 235 (1989) ............. 0... cee. 20

Vanston Bondholders Protective Cmte.

v. Green,

OE OE cases eesceseoece 24

Wade v. Bradford,

39 F.3d 1126 (10th Cir. 1994)........... 22

Wright v. Union Central Life Ins. Co.,

EE UD. ccc ccccccccecccces 14

Wright v. Union Central Life Ins. Co.,

RE Ee RUD cacccvcccnccccccces 3,11, 14

vl

PAGE(S)

Statutes:

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Se Sees SE adv knnsuensedssguedsededaaseaa 21

RE Was SEE ovcndesacesecaasceeaecueceusvel 21

Se ees ee EE ED is cc veenesnedussGhaduenss 23

OD Cees EE he6n¢0cenbcdevsssacnns coeeunaes 6

CD Rees te ED oe encnntavekdeckexuanthet 24

age Fk So Sr Ere passim

DS ees eI ca cnenindecceieneuseneeas passim

BE aia e 0 0 04 sc 0ccecexeéesecsdsawines 20

2S Dees ED ce ccunsesenesscsacenssaansad 20

DD ios es a neon ecswoccenkeseckecties passim

ES RR eae CED 6.660 dc vadececeavevensheus 23

11 U.S.C. § 522(f).. 2... eee c cece ccccecceeeee 23

DE Rees Te OED 0 accosevecconsed sab nenceunys 23

BRS Bem fo Pere ey eee 23

De ite NUD nce ccccensrpcessasissucdcasi 23

SF Weis SD 4 cn ccaneswoccaeagussebacnet) 23

PE UGG. 0 GOD... oo cccecccceccccaccscsneseves 23

DE Sees I ha oie esate nctisecdarseonseges 23

ORs Rom Bet 3 eee 4

Bankruptcy Act of 1898 § 67d............... 18

Bankruptcy Act of 1898 § 75 subs.(3)....... 11

vil

PAGE(S)

Bankruptcy Act of 1898 § 77B............... 11

Legislative History:

Sea; CR, GOW. DPD CEU UR vc vcccsvudsbeeces 22, 26

Other Authorities:

5 Collier on Bankruptcy, § 77.17 (14th ed.

1978, first published in 1943)........... 13

Steve Miller, Amid Quest For Yield,

2nd-Lien Leveraged Loan Issuance

Soars (Forbes.com March 14, 2014),

available at http://tinyurl.com/

I i icel< caso ckaeeeeeuaeo ces vaeemnin 7

INTEREST OF AMICI'

The amici* are a group of law professors who

have devoted their careers to the study and

teaching of bankruptcy law. Their interest is to

encourage the Court to apply the Bankruptcy

Code (the “Code”)’ in light of its overall structure

and to read its provisions consistently, thereby

providing predictability for future cases. The

amici are keenly interested in this appeal because

the outcome of the issue before the Court will have

an impact on an enormous number of business and

' Pursuant to Rule 37 of the Rules of this Court. the

amici file this brief with the written consent of both parties,

which are on file with the Clerk. No person or entity includ-

ing the amici or their counsel made a monetary contribution

for the preparation or submission of this brief.

* The amici are the following law professors who teach

at the law schools indicated next to their names: Jagdeep S.

Bhandari, Florida Coastal College of Law; Susan Block-Lieb.

Fordham University School of Law: Linda Coco, Barry

University School of Law; Jessica Dawn Gabel, Georgia

State University College of Law; Kenneth N. Klee, UCLA

School of Law; George W. Kuney, University of Tennessee

College of Law; Lois R. Lupica, University of Maine Schoo!

of Law; Lawrence Ponoroff, University of Arizona James E.

Rogers College of Law; C. Scott Pryor, Regent University

School of Law; Nancy B. Rapoport, University of Nevada

William S. Boyd School of Law; Marie T. Reilly, Penn State

University Dickenson School of Law; Keith Sharfman, St.

John’s University School of Law; and Michael Sousa,

University of Denver Sturm College of Law. The positions

taken in this brief are theirs alone and may not be attributed

to their law schools or any law firms with which they are

affiliated or clients whom they represent in unrelated

matters.

% All references in this brief to numbered sections are

to the Bankruptcy Code, 11 U.S.C.

2

individual debtors seeking a fresh start under

chapter 7 of the Code. Chapter 7 debtors often

hold property, including their homes, subject to a

first mortgage and sometimes also subject to a

valueless junior mortgage. The amici believe that

the correct view of section 506(d) of the Code is

that it provides for stripping off a wholly valueless

junior mortgage in a chapter 7 case, thereby

furthering the debtor’s opportunity for a fresh

start.

SUMMARY OF ARGUMENT

When the collateral for a claim secured by a

second mortgage lacks sufficient value to provide

full payment of the first mortgage claim, it should

not be treated as an “allowed secured claim” under

section 506(d) of the Code. This is because such a

claim constitutes an unsecured claim, not a

secured claim under the clear definitions of

“secured claim” and “unsecured claim” in section

506(a) of the Code. This reading of the Code is

supported by a pre-Code practice under which

valueless junior mortgages were stripped off.

Decades before the enactment of the Code, this

Court’s jurisprudence regarding the treatment of

junior secured creditors in bankruptcy cases

established that their rights were limited to the

value of the collateral securing their claims. This

was the established practice in reorganization

cases, under which valueless junior mortgages

were terminated, in recognition of the fact that

they had no value that needed protection.

During the pre-Code era, the cases before this

Court in which liens passed through bankruptcy

3

involved first mortgage liens, whereas in several

other cases addressed by this Court it held that

worthless junior mortgage liens should be treated

as unsecured claims. As held in Wright v. Union

Central Life Ins. Co., 311 U.S. 273, 278 (1940)

(herein “Union Central”), a junior mortgage is

entitled to protection only to the extent of the

value of the collateral. However, Dewsnup v.

Timm, 502 U.S. 410 (1992) (herein “Dewsnup”), in

addressing the treatment of a first mortgage,

relied on the pre-Code case law under which first

mortgages backed by some collateral value could

survive a bankruptcy. Notably, Dewsnup lacks any

discussion of this Court’s carefully developed pre-

Code jurisprudence authorizing the stripoff of

valueless second mortgages. See In re 620 Church

Street Bldg. Corp., 299 U.S. 24 (1936) (herein

“Church Street”); Ecker v. Western Pac. R. R.

Corp., 318 U.S. 448 (1943) (herein “Ecker”).

A half-century later, this Court, in Dewsnup,

addressed the treatment under the Code of a

partially secured first mortgage. In holding that a

first mortgage could not be stripped down under

section 506(d), the Court did not address whether

a valueless second mortgage could be stripped off

and did not cite this Court’s groundbreaking pre-

Code decisions under which valueless second

mortgages were stripped off. In Dewsnup, this

Court held that when a claim’s collateral covered

32.5% of the first mortgage debt, the mortgage

could not be stripped down to its value under

section 506(d) in a chapter 7 case. The Court,

however, candidly acknowledged that it was

inclined to rule otherwise and to read “allowed

secured claim” in section 506(d) in accordance

with section 506(a). The Court also carefully

4

limited its holding to the “strip down” issue posed

where a mortgage is backed by some collateral

value, stating that its resolution of the issue posed

by “other facts” would “await their resolution on

another day.” Jd. at 416-17. This Court is

presented with an opportunity to consider in this

case “other facts” that give rise to whether its

theory in Dewsnup should be applied in resolving

the treatment of a valueless second mortgage

under section 506(d). The amici submit that the

Court’s analysis in Dewsnup for rejecting strip

downs of partially secured first mortgages does

not apply to require the survival after bankruptcy

of a valueless second mortgage.

In construing the text of section 506 as

ambiguous, the Court in Dewsnup relied on what

it said was “the pre-Code rule that liens pass

through bankruptcy unaffected.” Dewnsup, 502

U.S. at 417. However, this Court’s pre-Code

jurisprudence on the treatment of mortgages in

bankruptcy cases makes clear that liens did not

always pass through bankruptcy unaffected, and

indeed that valueless mortgages were stripped off

under a bankruptcy statute. Although the Court’s

jurisprudence allowing the stripoff of valueless

second mortgages developed in reorganization

cases, the Court’s underlying theory was based on

the valuelessness of the mortgaged property, not

because the case sought reorganization. The

Court’s stripoff theory is no less applicable in a

chapter 7 case than in cases under other chapters

of the Code, although section 1123(a)(5)(E)

expressly authorizes the modification of liens

under a chapter 11 reorganization plan.

The Court in Dewsnup also relied on Louisville

Joint Stock Land Bank v. Radford, 295 U.S. 555

D

(1935) (herein “Radford”), without citation to the

important opinions of this Court that followed

closely after Radford during the 1930s and 1940s.

As the amici show, Union Central, Church Street,

and Ecker negated Radford. These later decisions

rejected Radford’s focus on the property rights of

a first mortgage holder, and its original contract

bargain, and instead were informed by a debtor's

entitlement to a fresh start implemented by the

discharge provision of the bankruptcy law. The

Court in Dewsnup also relied on Long v. Bullard,

117 U.S. 617 (1886) (herein “Long”), which held

that a debtor’s discharge in bankruptcy only

discharged his personal liability for the mortgage

debt, but did not discharge the mortgage itself.

Long, however, did not establish a principle or

rule of law that a mortgage could not be voided for

a reason other than the discharge. Indeed, Long

never stated that liens pass through bankruptcy

unaffected. Although that case did not establish

that there was a practice for liens to pass through

bankruptcy unaffected, later cases misread it for

that principle, without examining the pre-Code

decisions of this Court under which junior

mortgages were voided.

The amici urge this Court to apply its early

decisions allowing liens to be stripped off as the

basis for reading section 506(d) as authorizing the

voiding of a valueless second mortgage.

Furthermore, under the Code as enacted in 1978,

liens clearly do not pass through bankruptcy

unaffected. Contrary to petitioner's contention, no

mandate can be found in the Code for liens to pass

through bankruptcy unaffected. which is

underscored by the numerous provisions of the

Code under which liens are modified or even

6

removed. Indeed, such other provisions provide

for affecting mortgages in various ways, without

regard to whether the collateral has value to cover

the debt. Section 506 was written to deal with the

very situation in which liens are undersecured or

wholly unsecured and are not covered by these

other lien-affecting provisions. Section 506(a), as a

part of the overall structure of the Code in regard

to the treatment of liens, establishes for purposes

of other Code provisions, including section 506(d),

that a claim secured by a lien on property is a

“secured claim” only to the extent of the value of

the property.

Moreover, petitioner’s contention that 506(d)

exists solely to void secured claims that are

disallowed under section 502, is facially

erroneous. Reading 506(d) in such a manner would

render it supefluous, because by operation of law a

lien is already void if the underlying claim is

unenforceable. This Court is loath to read a

statute in such a manner.

The Code’s “limited to value” theory is strongly

supported by the fresh start objective of its

discharge provision. A debtor's fresh start should

not be impaired by treating a valueless mortgage

as if it has value. A discha ge is designed to free

honest debtors from their dischargeable unsecured

debt so as to give them an opportunity for a fresh

start. Many holders of first mortgages enter into

post-bankruptcy agreements revising their claims

providing, among other arrangements, for

deferred payments or reducing the amount of the

claim. There is good reason to encourage the

making of such agreements. They enbance the

debtor’s opportunity for a fresh start by enabling

7

the debtor to retain his or her property. They also

benefit first mortgagees because such agreements

offer them a chance to effect a larger recovery

than otherwise, and to avoid the cost, delay, and

uncertainty of a mortgage foreclosure proceeding.

However, such a post-bankruptcy agreement

cannot be effectuated without the consent of the

second mortgage holder. This is good reason to

allow the stripoff of a valueless second mortgage.

The denial of a right to strip off a wholly

underwater second mortgage would only serve to

allow its holder, until it could extract some

payment on its valueless mortgage, to stand in the

way of a new agreement between the debtor and

the first mortgagee revising the mortgage debt.

Petitioner's amici do not offer a cogent economic

basis for precluding stripoffs of valueless junior

mortgages. The amicus brief of its amici, Loan

Syndications and Trading Association, et al.

(herein together, “LSTA”) opposes allowing

stripoffs. It relies primarily on a short article in a

periodical, which states that there is a demand by

private equity investment firms for junior

mortgages because “[i]n today’s yield-starved

landscape, second-lien loans are an oasis of

relatively high margins.” LSTA’s amicus brief at 6

n. 4 (citing Forbes.com article, March 14, 2014).

The interest of the LSTA amici in the investment

opportunities and large profits for their

constituencies is understandable, but does not

demonstrate that allowing stripoffs in chapter 7

cases will produce the dire consequences they

suggest will result. Indeed, the United States,

which filed an amicus brief in Dewsnup because of

its keen interest in first mortgages, chose not to

file an amicus brief in this case. The silence of the

8

United States in this case suggests that the

concern of petitioner’s amici with allowing the

stripoff of valueless junior mortgages is

unwarranted. The concerns of LSTA and their

constituencies should be directed to the Congress,

not this Court.

ARGUMENT

POINT I

UNDER THIS COURT’S PRE-CODE

JURISPRUDENCE, A MORTGAGE THAT

HAS NO UNDERLYING COLLATERAL

VALUE MAY BE STRIPPED OFF AND

THEREBY ELIMINATED

A. DEWSNUP DOES NOT PRECLUDE THE STRIP-

OFF OF A VALUELESS JUNIOR MORTGAGE

There was a pre-Code practice under which

wholly underwater junior mortgages were stripped

off in bankruptcy. This practice implemented this

Court’s pre-Code jurisprudence that developed

under reorganization statutes enacted by

Congress in the 1930s. As analyzed by the Court,

a wholly underwater junior mortgage had no

value, and thus needed no protection. The Court’s

theory was based on the valuelessness of such a

mortgage, not because the question as to the treat-

ment of a secured claim arose under a reorganization

statute. The Court’s jurisprudence applies equally

in a bankruptcy case for liquidation. A valueless

junior mortgage does not gain value because the

question of its treatment arises in a liquidation

case, or lacks value only when addressed in a

reorganization case. A valueless junior mortgage

should thus be subject to a stripoff in any case

under the bankruptcy law.

9

There is a difference between a valueless second

mortgage and a first mortgage backed by at least

some value. It is most unusual for the foreclosure

of a mortgage to yield proceeds in an amount

sufficient to cover even the entire amount of the

first mortgage on the property. Second mortgages

are generally just out of the money. This Court’s

decision in Dewsnup should be understood in that

light. In Dewsnup, the mortgagee’s claim of

approximately $120,000 was backed by mortgaged

property valued by the court at $39,000, or only

32.5% of the debt. See Dewsnup, 502 U.S. at 413.

Dewsnup addressed a partially secured claim. The

treatment of a wholly unsecured claim was not

before the Court, and its opinion neither reached

that issue nor addressed it. This issue is among

those left by the Court in Dewsnup for resolution

on another day. See Id. at 417.

Although Dewsnup poses a very different issue

than is presented by this case, petitioner and its

amici, LSTA, rely on Dewsnup’s approach to the

treatment of first mortgages backed by collateral

as dispositive of this case. They mistakenly urge

that Dewsnup applies because of a claimed pre-

Code practice for liens to pass through bankruptcy

unaffected. That assertion is wrong on its face

because of the pre-Code practice under which

wholly underwater second mortgages were

extinguished and thus did not pass through

bankruptcy at all. Dewsnup’s recognition of the

pre-Code practice should be limited to the

treatment of first mortgages, which may have

often survived bankruptcy. Moreover, petitioner

and its amici also mistakenly assert this Court’s

1935 decision in Radford as controlling precedent.

Radford, like Dewsnup, did not address the

10

treatment of a valueless mortgage. More

importantly, Radford’s statement that a

mortgagee could “insist upon full payment before

giving up his security,” 295 U.S. at 580, was

dictum, and Radford was itself negated by a series

of decisions of this Court rendered shortly

thereafter. See Point I.B infra.

B. THIS COURT’S WELL SETTLED PRE-CODE

JURISPRUDENCE ALLOWS STRIPPING OFF

WHOLLY UNDERWATER JUNIOR MORTGAGES

Beginning in the 1930s, this Court heard

several bankruptcy appeals involving the rights of

secured creditors whose collateral under junior

mortgages was secured by property whose value

was not sufficient even to cover the senior

mortgage on the property. Under the Court's

jurisprudence developed in several ground-

breaking opinions, a junior mortgagee’s rights

were held to be limited to the value of the

collateral, as determined by the court in the

bankruptcy case. See, e.g., Church Street, 299 U.S.

at 27. When the value of the property was

insufficient even to pay the amount of a first

mortgage on the property. this Court squarely

held that a junior mortgage, lacking any collateral

value, could be stripped off entirely and thereby

eliminated. A valueless mortgage claim was thus

treated for what it was, namely an unsecured

claim. See, e.g., Ecker. 318 U.S. at 475-76.

By contrast, under Radford, decided in 1935

before this Court formulated its jurisprudence

based on the value of a lien, first mortgage liens

were viewed as enforceable after bankruptcy

based on the amount due. Significantly, however,

Radford’s earlier “full payment” view was negated

11

by several decisions of this Court that limited the

rights of the creditor under a mortgage to the

value of the property as determined by the court

in the bankruptcy case. The amici urge that the

Court should read section 506 in light of its pre-

Code decisions, and that there is no basis for the

Court to resurrect Radford’s discarded view that a

mortgage cannot be terminated except by payment

in full, particularly where, as here, the lien at

issue is a wholly underwater junior mortgage.

The first of these groundbreaking decisions was

Church Street, decided in 1936. The Court held

that because the subject property was worth only

55% of the amount due on a first mortgage claim,

a second mortgage had no collateral value to

protect it, and the holders thus had no right to

receive any distribution on their claims in a

reorganization under section 77B of the former

Bankruptcy Act. See Church Street, 299 U.S. at

27. As analyzed by this Court: “Here the

controlling finding is not only that there was no

equity in the property above the first mortgage,

but that petitioners’ claims were appraised by the

court as having ‘no value.’ There was no value to

be protected.” Jd.

Four years later, in Union Central, a case

applying section 75, subs.(3) of the Bankruptcy

Act as enacted in 1935, this Court held that the

rights of a secured party were limited to the value

of the collateral. See Union Central, 311 U.S. at

278. In that case the Act contained conflicting

provisions. Under one provision, the debtor

elected to redeem the subject property from a

mortgage in the amount of $15,903.68 for the

$6,000 value found by the bankruptcy court, and

asserted its right to be discharged from an

12

obligation to pay the unpaid balance of the debt.

See Id. at 276. After the debtor attempted to

exercise this right, the mortgagee asserted

another provision of the Act, which granted the

mortgagee a right to compel a public sale of the

property. See Jd. at 276-77. In reconciling this

statutory inconsistency, this Court ruled that the

debtor's right to purchase prevailed, observing

that the Act was intended to protect distressed

debtors—in that case farmers—‘“faced with the

disaster of forced sales and an oppressive burden

of debt.” Jd. at 278. Specifically, the Court held

that the debtor had the right to purchase the

property at its value as determined by the court,

observing that “[t]here is no constitutional claim

of the creditor to more than that.” Jd. This result

was reached even though the Act afforded a debtor

three years to decide whether to elect to purchase

the property, because during this period the rights

of the creditor were protected “to the extent of the

value of the property.” Jd. Rejecting “narrow

formalistic interpretations which disregard the

spirit and the letter of the Act,” the Court held

that the debtor was entitled to have the value of

the property fixed by the court and to redeem at

that value. Jd. at 279, 281. To deny the debtor's

right to redeem at the value fixed by the court

“would be to rewrite the Act.” Jd. at 281.

Union Central was soon followed by this Court’s

decision in Ecker, which, relying on Church Street,

held that the claims of creditors holding junior

mortgages could be written off because the entire

value of the properties had been exhausted by

senior mortgages and thus were valueless. Ecker,

318 U.S. at 475-76. In so holding, the Court stated

that the mere possibility that the property might

13

have increased earning power in the future did

not require that the junior mortgagees be provided

with an equity security by means of which they

could share in a possible future increase in value.

See Id. at 476. As stated in the leading treatise on

pre-Code bankruptcy law, an underwater mortgage

may be “appraised out, [i.e. stripped off] because a

forced sale would leave nothing for it, even though

there may be value behind the junior claims on a

going concern basis.” 5 Collier on Bankruptcy, *

77.17, p. 583 (14th ed. 1978, first published in

1943) (citing Church Street and Ecker).

C. PETITIONER’S AND ITS AMICIrS POSITION IS

NoT SUPPORTED BY RADFORD

Union Central, Ecker, and Church Street

represent an important part of this Court’s

jurisprudence regarding the treatment of liens

under the bankruptcy law. Indeed, in light of

these decisions, it should not have been a surprise

that section 506 was written to incorporate the

well-established pre-Code doctrine under which

valueless junior mortgages were stripped off.

Despite the holdings of these cases, petitioner and

its amici do not discuss or even cite the decisions

in Union Central, Ecker and Church Street.

Instead, they urge the Court to rely on the dictum

in its earlier 1935 decision in Radford. Unlike its

subsequent decisions that stripped off wholly

underwater junior mortgages, Radford expressed

the view that a mortgagee was entitled to the

benefit of its bargain with the debtor, stating:

“The right of the mortgagee to insist upon full

payment before giving up his security has been

deemed of the essence of a mortgage.” 295 U.S. at

580. Radford’s view, however, in addition to

14

having been later negated, was merely dictum.

The Court's holding was that the retroactive

application: of the statute at issue to pre-existing

mortgages Violated the Fifth Amendment's

prohibition against impairing the obligations of

contracts. See Id. at 589. In not perpetuating

Radford’s dictum, this Court rejected Radford's

view that a mortgage continues to exist until full

payment of the debt it secures and may be

foreclosed, instead recognizing the reality that a

wholly underwater junior mortgage is an

unsecured claim.

Indeed, Union Central represents the antithesis

of the position taken by the United States in its

amicus brief filed in Dewsnup, upon which the

Court relied in that case. There, the United States

cited Radford as “|t]he best illustration of the

clear understanding of the inviolability of liens in

bankruptcy proceedings.” United States’ Amicus

Br. for Resp. at 26. By sharp contrast, in an

earlier decision in the Union Central case, this

Court stated that “[p]roperty rights do not gain

any absolute inviolability in the bankruptcy court

because [they are] created and protected by state

law.” Wright v. Union Central Life Ins. Co., 304

U.S. 502, 517 (1938) (emphasis added). Indeed,

the Court made clear that Congress “may

authorize the bankruptcy court to affect [state

law] property rights, provided the limitations of

the due process clause are observed.” Jd. Reliance

by petitioner and its amici on Radford as

demonstrative of a pre-Code “payment in full”

entitlement of secured creditors missed the mark.

Invoking Dewsnup, LSTA’s amicus brief

misstates pre-Code bankruptcy law by stating

that nothing in the old Acts empowered courts “to

15

compel a lienholder—holding a senior lien or a

junior lien, regardless of the collateral’s value—to

release its collateral to the debtor while its loan

remained unpaid.” LSTA’s amicus brief at 9. In an

attempt to support that position, they too rely on

Radford. See Id. (“this Court promptly invalidated

the only statute that purported to grant that

power.”) (citing Radford, 295 U.S. at 581-82). The

petitioner itself relies on Radford in the same

improper manner: “the ‘right of the mortgagee to

insist upon full payment before giving up his

security has been deemed of the essence of a

mortgage’ throughout the history of bankruptcy

law.” Pet. Br. at 23 (citing Radford, 295 U.S. at

580). Particularly, petitioners rely on Radford,

arguing that “before the enactment of the

Bankruptcy Code it was settled law that liens

passed through liquidation proceedings

unaffected, regardless of the value of the

collateral securing them.” Pet. Br. at 30 (citing

Dewsnup, 502 U.S. at 418; Radford, 295 U.S. at

579).

Even though Union Central negated Radford's

rule that a creditor is entitled to full satisfaction

of its debt before its mortgage may be affected,

nowhere in petitioner’s account of pre-Code

history is Union Central mentioned. Likewise,

Union Central is absent from petitioner's amici’s

discussion of “the treatment of liens under the

various federal bankruptcy statutes that

predated” the Code. LSTA’s amicus brief at 8.

Dewsnup also did not cite Union Central.This

omission may be explained by the fact that the

treatment of valueless liens was not before the

Court in Dewsnup, and because the Court there

relied on Radford, which involved a primary

16

mortgage that was supported by substantial

value.

The amici urge the Court not to rely on

Radford’s negated dictum, particularly in this

case involving a junior mortgage that is

completely underwater, unlike the senior

mortgage in Radford that was backed by

substantial collateral value. Indeed, the Court

should read section 506 as it was written, just as

this Court read the earlier bankruptcy acts in its

major pre-Code opinions that superseded Radford.

The petitioner and its amici offer no plausible

reason for calling on the Court to rehabilitate

Radford and to reject the established pre-Code

practice allowing wholly underwater mortgages to

be stripped off.

D. LONG V. BULLARD D1Ipb Not ESTABLISH A

PRINCIPLE THAT LIENS PASS THROUGH

BANKRUPTCY UNAFFECTED

The amici urge that Long v. Bullard, upon

which petitioner and its amici also rely heavily,

does not, as claimed by petitioner and its amici,

establish a general principle that liens pass

through bankruptcy unaffected. Although some

more recent cases have relied on Long for that

principle, Long did not so hold and did not

articulate that principle. In Long, a creditor

loaned money to the debtor, a portion of the

proceeds of which were “used to pay off the

incumbrance on the homestead.” 117 U.S. at 619.

With the payoff of the existing mortgage, the

mortgage received by the creditor as security for

the loan became a first mortgage. Long did not

involve and did not address the treatment of a

valueless junior mortgage under the bankruptcy

17

law. The issue before the Court was “the effect of

the discharge in bankruptcy upon the right of [a

creditor] to enforce a lien upon the property in

existence at the time of the commencement of the

proceedings in bankruptcy.” /d. at 620. Holding

that the discharge did not release the lien, the

Court deemed a state foreclosure proceeding

proper. See Id. at 621. Long stands for the

proposition that a bankruptcy discharge does not

affect a lien that is valid under state law. See Id.

In fact, applying the Court’s holding in Long to

situations involving underwater junior liens is

especially improper, considering Long’s limited

scope. Long did not hold or say that a mortgage

could not be voided for a reason other than a

discharge, for example because of the valueless-

ness of a mortgage. Expanding Long’s holding

beyond its boundary not only misstates the case,

but also inaccurately depicts the pre-Code

jurisprudence of this Court regarding the

treatment of valueless junior liens.

The amici urge that Long does not preclude the

stripoff of a valueless junior mortgage. Although

some much more recent cases view Long as

pronouncing a broad rule that, by virtue of the

pre-Code bankruptcy law, a mortgage survives

bankruptcy unaffected, that statement is incorrect

in light of the established pre-Code practice to

write off valueless junior mortgages. As held by

Long, the discharge of the debtor “did not relieve

the property from the operation of liens created by

contract before the bankruptcy.” Jd. at 621. The

Court’s decision, moreover, did not explain how

liens operate in all circumstances, having only

considered how a first mortgage operated where,

as in Long, the mortgage appeared to have been a

18

fully secured first mortgage. Long’s holding that a

bankruptcy discharge does not by itself operate to

prevent the enforcement of a mortgage, is far more

limited than the broad meaning attributed to it, to

the effect that the bankruptcy law’s protection of a

lien from the operation of a discharge precludes

the termination of a lien under a provision of the

bankruptcy law. Such provisions were sustained

and applied under this Court’s pre-Code

jurisprudence, and section 506 should likewise be

read and applied just as Congress wrote it.

Petitioner's amicus, LSTA, misunderstanding

the text and purpose of section 67d of the

Bankruptcy Act of 1898, also mistakenly argues

that former section 67d operated to preserve liens

after bankruptcy. See LSTA’s amicus brief p. 15.

Former section 67d, which was succeeded by the

fraudulent conveyance provisions of section 548 of

the Code, clearly stated that a lien would not be

affected by the 1898 Act only if the lien was

created in good faith, for a present consideration,

and “not in fraud under this Act.” Section 67d had

nothing whatever to do with undersecured or

wholly unsecured mortgages. Moreover, City of

Richmond v. Bird, 249 U.S. 174 (1919), was

misleadingly cited by LSTA in support of its

section 67d argument. There was no claim in that

case that the lien in question was fraudulently

obtained, this Court having also stated: “It is not

denied that respondents obtained a present valid

lien upon the bankrupt’s goods . . . ; nor is it now

claimed this was annulled by adjudication of

bankruptcy.” Jd. at 175.

Petitioner’s LSTA amici, in urging that the

bankruptcy law bars the stripoff of a mortgage,

also misunderstand the limited effect of a

19

bankruptcy discharge on a mortgage, as explained

in the first edition of Collier quoted by LSTA at

page 17 of their brief. There, Collier merely stated

that if mortgages are valid under state law and

not rendered void by a bankruptcy act, “the bank-

rupt’s discharge will not prevent their enforce-

ment.” There is no basis for subsequent cases to

transform that narrow statement into a global

proposition that reads the bankruptcy discharge

as immunizing mortgages from termination in

accordance with a bankruptcy law provision.

When Congress amends the bankruptcy laws, it

is “not writing on a clean slate.” Emil v. Hanley,

318 U.S. 515, 521 (1943). Congress was presum-

ably aware of the pre-Code practice of stripping off

wholly underwater junior liens. The Code should

thus be understood and read in light of that pre-

Code practice implementing this Court’s pre-Code

jurisprudence.

POINT II

SECTION 506(d) REFLECTS THIS COURT’S

JURISPRUDENCE UNDER WHICH

A VALUELESS JUNIOR MORTGAGE

MAY BE STRIPPED OFF

A. JUST AS CONGRESS PROVIDED FOR

STRIPPING OFF JUNIOR MORTGAGES IN

REORGANIZATION CASES IN THE PRE-CODE

ERA, Ir Dip SO IN SECTION 506(d)

1. The Bankruptcy Code only protects liens

to the extent of the collateral’s value

Under the plain language of section 506(a), a

claim secured by a lien is protected only to the

extent of the value of the collateral. The clear

20

import of section 506(a), a part of the Code section

entitled “Determination of secured status,” is to

bifurcate allowed claims into secured and

unsecured portions. Under section 506(a), a claim

is secured only to the extent of the value of the

property securing the claim. See United States v.

Ron Pair Enterprises, Inc., 489 U.S. 235, 239

(1989) (stating “a claim is secured only to the

extent of the value of the property on which the

lien is fixed.”). This portion of the claim, secured

up to the value of the coliateral, is referred to

throughout the Code as an “allowed secured

claim.” See, e.g., Harmon v. United States through

Farmers Home Admin., 101 F.3d 574, 584 (8th Cir.

1996); In re Cummings, 214 B.R. 126, n.1 (D.N.d.

1997). The remainder of the allowed claim is

treated and defined by section 506(a) as an

“unsecured claim.” As such, it does not enjoy the

protections afforded to a “secured claim.”

Section 506(a)’s bifurcation directive should be

carried into section 5064), just as the courts have

carried section 506(a) into sections 506(b) and (c).

See, e.g.. In re Gledhill. 164 F.3d 1338, 1340 (10th

Cir. 1999) (applying the section 506(a) definition

of allowed secured claim to section 506(b)); Jn re

Golden Plan of Calif., Inc., 829 F.2d 705, 712 (9th

Cir. 1986) (applying the section 506(a) “defin[ition

of] allowed secured claim” to section 506(c)). It

defies normal rules of statutory construction to

hold that “allowed secured claim” holds one

meaning in sections 506(a)—(c), and a different

meaning in section 506(d). See Dewsnup, 502 U.S.

at 422 (Scalia, J.. dissenting) (“We have often

invoked the ‘normal rule of statutory construction

that’ ‘identical words used in different parts of the

same act are intended to have the same

21

meaning.) (citing Sullivan v. Stroop, 496 U.S.

474, 484 (1990)).

Before Dewsnup, courts understood that, under

the Code, liens were protected only to the extent

of the value of collateral, and not to the full extent

of the claim. See, e.g., In re Briggs Transp. Co.,

780 F.2d 1339, 1347 (8th Cir. 1985) (“[A]s a

secured creditor, it will be paid in full up to the

lien value of the collateral.”); Matter of Gifford,

669 F.2d 468, 480 (7th Cir. 1982) (“Historically,

lien rights have entitled their holders to the value

of collateral and no more in bankruptcy.”). In

United Sav. Assn. of Tex. v. Timbers of Inwood

Forest Assoc., Ltd., this Court suggested that liens

are only protected up to the collateral’s value. 484

U.S. 365, 372 (1988) (herein “Timbers”). In

Timbers, this Court held that undersecured

creditors are not entitled to be compensated under

section 362 for the delay in foreclosing on their

collateral caused by the automatic stay. See Id. at

379. Thus, the Court in Timbers understood that

what was protected by the provision for adequate

protection under se-tion 361 is the value of the

collateral, and nothing else. In reaching this

conclusion, Timbers used section 506(a)’s

definition of “value of such creditor's interest” in

section 506(a), i.e. “the value of the collateral,” in

reaching the conclusion that the phrase “value of

such entity’s interest” in section 361 has the same

meaning as provided by section 506(a). Jd. at 372.

Timbers, therefore, strongly suggests that section

506(d) must be construed in the same manner,

namely by only protecting a claim secured by

property to the extent of the value of the property.

Even after Dewsnup, courts continued to recognize

that liens are only protected up to the value of the

22

collateral. See, e.g., Wade v. Bradford, 39 F.3d

1126, 1129 (10th Cir. 1994) (stating that

“Dewsnup’s holding cannot be imported into

Chapter 11 cases”); In re Pond, 252 F.3d 122, 127

(2d Cir. 2001) (“[T]o determine whether a lien is

‘secured’ under Section 506(a), a court must

examine the value of the collateral underlying a

lien, not the value of the lien itself.”).

Indeed, Congress itself understood that the

Code was to treat undersecured creditors as

having protection only to the extent of the value of

the collateral, and thus did not protect valueless

junior liens. The House Report in connection with

the Bankruptcy Reform Act of 1978 states: “the

bill makes clear that an undersecured creditor is

to be treated as having a secured claim to the

extent of the value of the collateral, and an

unsecured claim for the balance of his claim

against the debtor.” H.R. Rep. No. 95-595, p. 181

(1977). Furthermore, Congress clearly intended

for such protection to extend throughout the Code.

H.R. Rep. No. 95-595, at p. 356 (“Throughout the

bill, references to secured claims are only to the

claim determined to be secured under this

subsection [506(a)], and not to the full amount of

the creditor’s claim.”).

2. The multiplicity of lien avoidance and

modification provisions bears on the

notion that section 506(d) authorizes

stripoffs of valueless junior mortgages

Congress dealt in a comprehensive way with the

treatment of liens under the Code. To do so, it had

to deal with liens requiring special treatment

other than because of the value of the collateral

supporting them. There are many such provisions

23

in the Code. Section 506(d), on the other hand, is

the provision addressing the treatment of liens

based on the value of the collateral securing a

claim.

Without regard to whether a lien is fully

secured, undersecured, or valueless, multiple

sections of the Code provide directly for lien

avoidance. See, e.g., 11 U.S.C. § 510(c)(1)

(providing for equitable subordination of liens); 11

U.S.C. § 522(f) (providing for the avoidance of a

lien to the extent it impairs an exemption of the

debtor); 11 U.S.C. § 547(b) (providing for the

avoidance of preferential liens); 11 U.S.C. § 548(a)

(providing for the avoidance of a fraudulently

incurred lien).

Numerous other Code sections cover situations

in which certain liens may be subordinated,

modified, or avoided completely. For example,

section 364(d)(1), applicable in chapter 7 by virtue

of section 103, authorizes the subordination of a

pre-petition lien to a new senior mortgage if it is

necessary for a trustee or a debtor in possession to

obtain credit. This results in terminating the

senior priority status of the prior lien and

relegating it to a junior position behind a newly

created senior lien. In re Adams Apple, Inc., 829

F.2d 1484, 1490 (9th Cir. 1987) (“Congress

provided in section 364(d) that pre-petition debts,

even secured interests, may be subordinated by

post-petition obligations ... [I]t indicates a

Congressional willingness to subordinate the

interests of pre-petition creditors to the goal of

rehabilitation.”). Under this provision, a senior

lien may be subordinated. Other special provisions

of the Code dealing with the treatment of liens are

sections 545, 552, and 724.

24

Thus, the old adage that “liens pass through

bankruptcy unaffected” cannot be taken literally

under the Code; that saying is, at best,

misleading. Cases decided both before and after

Dewsnup understood the fact that liens are

regularly affected in bankruptcy. Matter of

Lindsey, 823 F.2d 189, 190 (7th Cir. 1987) (calling

the principle “no better than a half-truth”);

Harmon 101 F.3d at 581 (“[I]t is not even accurate

to say that liens pass through Chapter 7

unaffected.”). Clearly, liens are affected by

bankruptcy in innumerable ways, and thus do not

“pass through bankruptcy unaffected.”

B. PETITIONER READS SECTION 506(d) ONLY

TO VOID A LIEN THAT SECURES A CLAIM

DISALLOWED UNDER SECTION 502(b)(1).

CONGRESS WOULD NOT ENACT A PROVISION

THAT IS SUPERFLUOUS

In its brief, petitioner contends that section

506(d) exists solely to establish the treatment of a

secured claim that is disallowed under section

502, only voiding a lien because the claim it

secures has been disallowed under section 502.

Pet.Op.Br. at 32—33. This argument is fatally

flawed, as section 506(d) would do nothing that

does not already occur under state law, and would

thus render section 506(d) superfluous. Under

section 502(b)(1), a court determines the

enforceability of a disputed claim after notice and

hearing. Part of such a determination involves

adjudicating the enforceability of the claim itself.

Katchen v. Landy, 382 U.S. 323, 329 (1966);

Vanston Bondholders Protective Cmte. v. Green,

329 U.S. 156, 170 (1946); In re Hann, 476 B.R.

344, 355 (lst Cir. B.A.P. 2012). Petitioner

25

erroneously contends that if a secured claim is

disallowed under section 502(b), section 506(d)

exists solely to invalidate the lien securing that

claim. Such an interpretation would render

section 506(d) superfluous, because such a reading

of it would accomplish nothing more than what

state law by itself already does.

Under state law, the vitality of a mortgage

depends on the enforceability of the claim it

secures; if a debt is unenforceable, so too is the

lien securing it. Carpenter v. Longan, 83 U.S. (16

Wall) 271, 274 (1872) (“An assignment of the note

carries the mortgage with it, while an assignment

of the latter alone is a nullity . . .”); Coon v. Shry,

209 Cal. 612, 615 (1930) (“[T]he mortgage must

stand or fall with the note ... [A] mortgage or

mortgage lien is a mere incident of the debt or

obligation which it is given to secure. There

cannot be a mortgage if there is no debt or other

obligation to be secured.”) (internal citations

omitted). For instance, any attempt to assign a

lien without assigning the debt underlying it is a

nullity. Jordan v. Sayre, 24 Fla. 1, 19 (1888) (“It is

true that an assignment simply of the mortgage

or of the mortgagee’s interest in the land, without

the debt, is held to be a nullity.”); Flyer v.

Sullivan, 134 N.Y.S.2d 521, 523 (App. Div. Ist

Dep’t. 1954) (citing Jackson ex dem. Curtis v.

Bronson, 19 Johns. 325, 326 (N.Y. Sup. Ct. 1822));

Fassett v. Mulock, 5 Colo. 466, 469 (1880);

Schleuter Co., Inc. v. Sevigny, 564 N.W.2d 309,

314 (S.D. 1997); Bryan v. Easton Tire Co., 262

Ark. 731, 732 (1978) (“The note and the mortgage

are inseparable. An assignment of the note

carries the mortgage, while an assignment of a

mortgage alone isa nullity.”).

26

Thus, by operation of state law. a lien is

unenforceable if the underlying claim is

unenforceable under applicable law or any

agreement, and section 506(d) is not required to

invalidate the lien. Therefore, reading section

506(d) as petitioner urges would render that

subsection superfluous. Congress does not write

superfluous or wasteful laws. Knight v. C.1.R., 552

U.S. 181, 190 (2008) (“Thus, accepting the

Trustee's approach ‘would render part of the

statute entirely superfluous, something we are

loath to do.”) (citing Cooper Indus., Inc. v. Aviall

Sucs., Inc., 543 U.S. 157, 166 (2004)); Kelly v.

United States, 826 F.2d 1049, 1052 (Fed. Cir.

1987) (“To [construe a statute in a superfluous

way] would be to say that Congress wrote a

meaningless provision into the law. We will not

attribute such incompetence to Congress.”)

(internal citations omitted).

POINT III

BANKRUPTCY’S UNDERLYING GOAL TO

PROVIDE DEBTORS WITH A FRESH

START IS IMPORTANT IN CHAPTER 7

The pre-Code principle protecting mortgages

only to the extent of the value of the collateral is

supported by the bankruptcy law’s fundamental

goal of providing an honest debtor with a fresh

start. The Court explicitly acknowledged this pre-

Code principle. See, e.g., Burlingham v. Crouse,

228 U.S. 459, 473 (1913) (noting that exemptions

evidence the bankruptcy purpose to give the

debtor a fresh start); see also H.R. Rep. 95-595, at

p. 118 (1977) (“Whether the debtor uses chapter 7,

liquidation, or chapter 13, adjustment of debts of

27

an individual, bankruptcy relief should be

effective, and should provide the debtor with a

fresh start.”); Marrama v. Citizens Bank of Mass..,

549 U.S. 365, 367 (2007) (“The principal purpose

of the Bankruptcy Code is to grant a fresh start

to an honest but unfortunate debtor.”) (internal

citation omitted).

Stripoffs enable debtors to retain their property.

For example, freeing the debtor’s property from a

wholly underwater junior lien would enable the

debtor to negotiate with the primary lender to

reach an agreement that reduces the mortgage

debt to the value of the property and avoids

foreclosure. After a bankruptcy, this could enable

the debtor to retain the property and also yield a

greater recovery by the first mortgagee than could

be otherwise realized in a foreclosure sale. How-

ever, such an agreement cannot be implemented

without the consent of the holder of a junior mort-

gage on the property, and the junior mortgagee is

thus in a position to block such an agreement. The

holder of a valueless junior mortgage, which

would be wiped out by a foreclosure of the first

mortgage, has no economic interest in withholding

its consent, except to block such an agreement until

it is able to extract a payment on its valueless

mortgage. This is good reason to allow the stripoff

of valueless second mortgages. Surely Congress

did not intend to protect the ability of the holder

of such a mortgage to obtain a payment in that

manner, in preference to the debtor's fresh start.

With respect to individuals especially, the

ability to remain in their homes should be

recognized as a more important interest than that

of the holder of a wholly underwater junior

mortgage. Bankruptcy exemption laws protect the

28

debtor’s property, and particularly protect a

debtor’s continued ownership of his or her home.

The purpose of the exemption statutes should

guide the Court’s determination of how mortgages

are treated in bankruptcy cases. See In re Bartlett,

168 B.R. 488, 493-94 (Bankr. D.N.H. 1994)

(noting that at its core, a “fresh start’ is only

feasible if the debtor emerges from bankruptcy

with a means of providing the necessities of li‘e,

including a roof overhead, and the homestead

exemption is directed at making this attainable.”).

In that light, a valueless second mortgage should

be subject to being stripped off as a means of

furthering the debtor’s continued home ownership

and fresh start.

Moreover, as noted earlier, petitioner and its

amici have not offered a cogent economic basis for

precluding stripoffs of valueless junior mortgages

in chapter 7 cases. Their attempt to protect on-

going investment opportunities for private equity

firms by means of high-yield second mortgages

does not support the dire consequences they

predict will result from allowing such stripoffs.

However, no such concern has been expressed in

this case by the United States. The United States

did express a concern for the strip down of first

mortgages in its amicus brief filed in Dewsnup. It

chose not to file an amicus brief in this case,

suggesting that it is not concerned that such

consequences will result from allowing stripoffs of

valueless second mortgages. The concern of

petitioner's amici is unwarranted, and should be

directed to the Congress, not this Court.

29

CONCLUSION

Based on the foregoing and on respondents’

brief, the order appealed from should be affirmed.

Respectfully submitted,

RICHARD LIEB

Counsel of Record

RESEARCH PROFESSOR

ST. JOHN'S UNIVERSITY

SCHOOL OF LAW

8000 Utopia Parkway

Jamaica, New York 11439

(212) 479-6020

(718) 990-1923

llm@stjohns.edu

Attorney for

Amici Curiae Professors

Of Counsel:

STEVEN W. GOLDEN