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

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Amicus Curiae Brief
- **Published:** January 1, 2014

## Text

Nos. 13-1421, 14-163

Rs
=

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:
DD Gee ED da vcecesarcsevecvestiawitanwies 23
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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385016_0341%3A09. Public record. Not legal advice.