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

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[~ Supreme Court

FILE x U.S.

JAN 16 2015

FFICE OF THE CLERK

Nos. 13-1421 and 14

Bn the Supreme Court of the Gnited States

BANK OF AMERICA, N.A.,

Petitioner,

Vv.

DAVID B. CAULKETT,

Respondent.

BANK OF AMERICA, N.A.,

Petitioner,

Vv.

EDELMIRO TOLEDO-CARDONA,

Respondent.

On Writs of Certiorari to the United States

Court of Appeals for the Eleventh Circuit

BRIEF OF COMMUNITY BANKERS

ASSOCIATION OF ILLINOIS AS AMICUS

CURIAE IN SUPPORT OF PETITIONER

Of Counsel: John Collen, Esq.

Michael G. Cortina, Esq. Counsel of Record

William S. Hackney, Esq. SmithAmundsen LLC

150 N. Michigan Avenue

Suite 3300

Chicago, IL 60601

(312) 455-3901

jcollen@salawus.com

Counsel for Amicus Curiae

Community Bankers Association of Illinois

Becker Gallagher Cincinmati,OH Washington, D.C. 800.890.5001

TABLE OF CONTENTS

TABLE OF AUTHORITIES iii

INTEREST OF AMICUS CURIAE ]

SUMMARY OF ARGUMENT 4

A. Factual Background 4

B. Reasons To Reverse The Court Below 4

ARGUMENT 6

POINT I: DEWSNUP PRECLUDES STRIPPING-

OFF LIENS 6

POINT II: JUNIOR LIENS ARE PROPERTY

RIGHTS THAT REQUIRE PROTECTION 10

A. A Wholly Underwater Lien is a Valuable

Property Right. 10

B. Stripping-Off Liens Raises Constitutional

Concerns. 12

C. The Policy of the Bankruptcy Code is to

Protect Liens. 16

D. Lien Stripping in Chapter 13 and Chapter 11

Cases Does Not Support Lien Strip-Offs in

Chapter 7 Cases. 17

POINT III: ALLOWING A LIEN TO BE

STRIPPED-OFF BASED ON A JUDICIAL

DETERMINATION OF VALUE RISKS

UNJUSTLY VOIDING LIENS THAT

IN REALITY ARE NOT WHOLLY

UNDERWATER 20

POINT IV: LENDERS HAVE A SETTLED

EXPECTATION THAT LIENS WILL PASS

THROUGH BANKRUPTCY UNAFFECTED — 25

CONCLUSION 29

ili

TABLE OF AUTHORITIES

CASES

Air Line Pilots Association, International v. O’Neill,

499 U.S. 65 (1991) 17

Atlantic Sounding Co., Inc. v. Townsend,

496 F.3d 1282 (11th Cir. 2007) 9

Bank of America National Trust and Savings

Association v. 203 North LaSalle _ St.

Partnership,

526 U.S. 434 (1999) 24, 25

BFP v. Resolution Trust Corp.,

511 U.S. 531 (1994) 28

CSX Transportation, Inc. v. Georgia State Board of

Equalization,

552 U.S. 9 (2007) 23

In re Caliguri,

431 B.R. 324 (Bankr. E.D.N.Y. 2010) 9

Cohen v. De La Cruz,

523 U.S. 213 (1998) 28

In re Davis,

716 F.3d 331 (4th Cir. 2013) 17

Dewsnup v. Timm,

502 U.S. 410 (1992) passim

In re Dickerson,

222 F.3d 924 (11th Cir. 2000) 22, 23

Farrey v. Sanderfoot,

500 U.S. 291 (1991) 25

Folendore v. United States Small Business

Administration,

862 F.2d 1537 (11th Cir. 1989) 9

Humphrey’s Executor v. United States,

295 U.S. 602 (1935) 14

Illinois Brick Co. v. Illinois,

431 U.S. 720 (1977) 28

Johnson v. Home State Bank,

501 U.S. 78 (1991) 26

In re Jug End in the Berkshires, Inc.,

46 B.R. 892 (Bankr. D. Mass. 1985) 21

Laskin v. First National Bank of Keystone,

222 B.R. 872 (9th Cir. BAP 1998) 8

Long v. Bullard,

117 U.S. 617 (1886) 25

Louisville Joint Stock Land Bank v. Radford,

295 U.S. 555 (1935) 12, 13, 14

McNeal v. GMAC Mortgage, LLC,

735 F.3d 1263 (11th Cir. 2012) 9

Minnesota Co. v. National Co.,

70 U.S. 332 (1865) 27

In re Morysville Body Works, Inc.,

86 B.R. 51 (Bankr. E.D. Pa. 1988) 23

In re Murel Holding Corp.,

75 F.2d 941 (2d Cir. 1935) 15

Nobleman v. American Savings Bank,

508 U.S. 324, 113 S.Ct. 2106, 124 L.Ed.2d 228

(1993) 22

Palomar v. First American Bank,

722 F.3d 992 (7th Cir. 2013) 8, 18, 25, 26

Payne v. Tennessee,

501 U.S. 808 (1991) 27

In re Pistritto,

2005 WL 906370 (Bankr. D. Del. 2005) 8,9

In re R & H Investment Co., Inc.,

46 B.R. 114 (Bankr. D. Conn. 1985) 21

RadLAX Gateway Hotel, LLC v. Amalgamated

Bank,

132 S.Ct. 2065 (2012) 24, 25

In re Rogers Development Corp.,

2 B.R. 679 (Bankr. E.D. Va. 1980) 23

Rushton v. Commissioner of Internal Revenue,

498 F.2d 88 (5th Cir. 1974) 22

Ryan v. Homecomings Financial Network,

253 F.3d 778 (4th Cir. 2001) 8, 10

Silverman v. Commissioner of Internal Revenue,

538 F.2d 927 (2d Cir. 1976) 21

In re Stone & Webster, Inc.,

286 B.R. 532 (Bankr. D. Del. 2002) 20

Swanson v. Citibank, N.A.,

614 F.3d 400 (7th Cir. 2010) 21, 23

In re Swiatek,

31 B.R. 26 (Bankr. D. Del. 1999)

In re Talbert,

344 F.3d 555 (6th Cir. 2003)

United Savings Association of Texas v. Timbers of

Inwood Forrest, Ltd.,

484 U.S. 365 (1988)

Wright v. Central Life Ins. Co.,

311 U.S. 273 (1940)

CONSTITUTION

U.S. Const. amend. V

STATUTES

Former 11 U.S.C. § 203(s)

Former 11 U.S.C. § 207(c)(10)

11 U.S.C. § 361

11 U.S.C. § 506(a)

11 U.S.C. § 506(a)(1)

11 U.S.C. § 506(d)

11 U.S.C. § 1111(b)

11 U.S.C. § 1111(b)(1)(B)Gi)

11 U.S.C. § 1129(a)(7)

11 U.S.C. § 1129(a)(7)(A)(Gii)

11 U.S.C. § 1129(b)(2)

11 U.S.C. § 1129(b)(2)(A)G)

14,15

6, 7,8

6, 7, 8, 9, 17

18, 19

vil

11 U.S.C. § 1129(bX2)A)(ii) 19

11 U.S.C. § 1129(b\2)(A)(iii) 15, 19

11 U.S.C. § 1322(b)(2) 17

205 ILCS 5/5(15) 1

Ill. Public Act 88-4 l

LEGISLATIVE HISTORY

HR Rep. No. 95-595 (1978) 26

H.R. Rep. No. 595, 1978 U.S. Code Cong.

& Ad.News 16

OTHER AUTHORITIES

The Appraisal of Real Estate, 14 ed. (Appraisal

Institute, 2013) 21

http://www.corelogic.com/about-us/news/corelogic-

reports-946,000-residential-properties-

regained-1-trillion-dollars-in-total-equity-in-q2-

2014.aspx 11

http://www.federalreserve.gov/econresdata/

releases/mortoutstand/current.htm 11

A New Look at Second Liens, Federal Reserve Bank

of New York, Staff Report 569 (Aug. 2012) 3

United States Census Bureau, http://factfinder.cens

us.gov/faces/tableservices/jsf/pages/productvie

w.xhtml?pid=ACS_13_1YR_B25081&prodType

=table 2

viii

United States Census Bureau, www.census.gov/

popest/data/state/totals/2014/index.html 2

Zillow Real Estate Research, www.zillow.com/resea

rch/ 2014-q2-negative-equity-report-7465/ 10

INTEREST OF AMICUS CURIAE’

The Community Bankers Association of Illinois

(“CBAI”’, or “Amicus Curiae CBAI”) is a not-for-profit

trade organization that was formed in 1974 to

represent the interests of community banks.

Community banks are state and federally chartered

banks, typically with only one or very few (under five)

branches, which primarily serve the interests of

consumers and small businesses within a relatively

small geographical area or community.

Illinois historically prohibited branch banking, and

it was not until 1993 that all restrictions on branch

banking were removed. II]. Public Act 88-4 (1993) now

codified at 205 ILCS 5/5(15). As a result, there are

hundreds of community banks. Most are small banks,

but all are vitally important to the communities they

serve. They are not all, however, confined only to rural

areas or small towns. Many community banks are

located in metropolitan areas, including in the City of

Chicago.

CBAI represents approximately 400 financial

institutions in Illinois, which comprise approximately

' Respondents have filed with this Court a blanket consent to

amicus briefs. Petitioner has furnished a written consent to the

filing of this brief, and a copy of that consent has been filed with

this Court concurrently with the filing of this brief. No counsel for

a party authored any part of this brief. No person, other than the

Amicus Curiae CBAI or its counsel, has made a monetary

contribution toward the preparation or submission of this brief.

The law firm of SmithAmundsen LLC is an associate member of

CBAI. The below signed Counsel of Record, as well as the

individuals who are identified as Of Counsel, are partners in the

firm of SmithAmundsen LLC.

70% of all bank and thrift charters in Illinois. CBAI

also represents 150 associate members, consisting

primarily of vendors that provide services to financial

institutions, such as accountants, attorneys, and

information technology providers. CBAI’s statement of

purpose declares, among other things, that “CBAI

member banks and associate members share a common

belief that community banks must survive, due to their

role as primary lenders to consumers and small

businesses that create more new jobs than other sector

of our economy.” Its mission statement accordingly

provides, among other things: “The CBAI is dedicated

to keeping community bangs competitive for the benefit

of their customers and communities they serve through

delivery of quality education, effective political

representation, and essential products and services.”

CBAI’s member banks, with clientele consisting

mostly of consumers and small businesses, often lend

money and take back junior mortgages on real estate to

secure such loans. CBAI very conservatively estimates

that there is at least $9.6 billion of outstanding debt

secured by junior mortgages in Illinois,’ and the actual

* CBAI does not keep records of its members’ collective aggregate

second mortgage lending activity. Diligent research has found no

published source estimating aggregate junior mortgage debt in

Illinois. However, according to the U.S. Census Bureau, there

were an estimated 15,773,702 housing units in the United States

subject to some form of junior lien in 2013. United States Census

Bureau, http-//factfinder.census.gov/faces/tableservices/jsf/pages/

productview.xhtml?pid=ACS_13_1YR_B25081&prodType=table.

Illinois has 4.072% of the population of the United States, United

States Census Bureau, www.census.gov/popest/data/state/totals/

2014/index.html, and CBAI estimates that Illinois should

according)y have about 4% of junior liens, which works out to

amount could be as high as $32 billion.’ Nationally, the

bulk of second liens are in the form of home equity

lines of credit (“HELOCs”) which take the form of

revolving debt, and the balance is in the form of closed-

end second liens (“CESs”).*

CBAI is deeply concerned that a substantial portion

of junior liens would be jeopardized by upholding the

Eleventh Circuit Court of Appeals’ decisions below that

permit wholly underwater junior liens to be stripped-off

or voided in bankruptcy. Nationwide, second liens

represent an amount of money equaling more than one-

half of all bank capital.® In addition, to the national

impact, there would be significant and disproportionate

impact upon community banks. Owing: to their

generally small size, community banks are least

equipped to withstand the adverse impact of any lien

being voided. Accordingly, for the foregoing practical

reason and for the legal reasons argued below, Amicus

642,305 units. Very conservatively estimating the average second

mortgage to be $15,000.00, the resulting junior indebtedness in

Illinois is $9,634 ,575,000.00.

* The Federal Reserve Bank estimated that, in 2012, aggregate

national junior mortgage debt was in excess of $800 billion. A New

Look at Second Liens, Federal Reserve Bank of New York, Staff

Report 569 (Aug. 2012), at 1. Assuming Illinois’ ratable share of

that debt to be 4%, in accordance with its share of the national

population, n.1, supra, the resulting amount of second mortgage

debt in Illinois is about $32 billion.

* Ibid.

° A New Look At Second Liens, supra, n. 3, at 1.

Curiae CBAI joins Petitioner in respectfully urging

reversal of the decisions below.

SUMMARY OF ARGUMENT

A. Factual Background

In each of these consolidated cases’, Petitioner held

a second lien on Respondents’ respective residences. In

each case, the court below voided (“stripped-off”)

Petitioner's junior lien based on a _ judicial

determination that the lien had no monetary value at

the time of the debtor’s discharge in bankruptcy. The

debtors, however, retained their respective properties

to which the liens had previously been attached.

Petitioner, accordingly, lost the opportunity to recover

any of its indebtedness from possible future

appreciation of the properties. Had Petitioner’s liens

been allowed to pass through bankruptcy unaffected, in

accordance with century-old practice, Petitioner would

have had a chance to recover something in the future,

rather than being judicially sentenced to recover

nothing. Petitioner was therefore deprived of a

valuable right, even though, at a particular moment in

time, its liens supposedly would have recovered no

value from a liquidation sale.

B. Reasons To Reverse The Court Below

CBAI respectfully submits that for the following

reasons, a lien cannot be stripped-off, and a creditor

—

® Bank of America, N.A. v. Caulkett, Case No. 13-1421, hereinafter

sometimes “Caulkett” and Bank of America N.A., v. Edelmiro

Toledo-Cardona, Case No. 14-163, hereinafter sometimes “Toledo-

Cardona”

cannot be denied future possible recovery merely

because, at a single moment in time, that lien is

judicially determined to have no recoverable value.

First, stripping-off liens is precluded by this Court's

decision in Dewsnup v. Timm, 502 U.S. 410 (1992)

(“Dewsnup”). As shown within, Dewsnup forbids

stripping-down a lien, and its rationale equally

precludes stripping-off a lien.

Second, stripping-off junior liens removes valuable

property rights. That, in turn, implicates

constitutional concerns. The Fifth Amendment to the

Constitution of the United States provides, in relevant

part, “No person shall be ... deprived of ... property

without due process of law; nor shall private property

be taken for public use, without just compensation.”

U.S. Const. amend. V. Further, stripping-off valuable

property rights violates Congressional policy to protect

lienholders. Finally, even though liens may be stripped

in Chapter 13 and Chapter 11 reorganization cases, it

does not follow that they may be stripped in Chapter 7

liquidation cases for the reasons discussed infra.

Third, lienholders have a settled expectation, in

reliance on this Court’s prior cases, including Dewsnup,

that liens will pass through bankruptcy unaffected.

That expectation strongly militates against now

permitting liens to be stripped-off.

Each of the above reasons, which are elaborated

infra, is alone a sufficient reason to reverse the

decision below of the Eleventh Circuit.

ARGUMENT

POINT I:

DEWSNUP PRECLUDES

STRIPPING-OFF LIENS

The question posed in Dewsnup was, “|mjay a

debtor ‘strip down’ a creditor’s lien on real property to

the value of the collateral, as judicially determined,

when the value is less than the amount of the claim

secured by the lien?” Dewsnup, 502 U.S. at 411-412.

At issue were conflicting interpretations of § 506(d),

which provides, in relevant part: “To the extent that a

lien secures a claim against the debtor that is not an

allowed secured claim, such lien is void ...”. 11 U.S.C.

§ 506(d).’ The Petitioner in Dewsnup argued that

under § 506(a), a claim is secured only to the extent of

the (judicially determined) value of the lienholder’s

interest and is otherwise unsecured.’ Petitioner then

proceeded to infer that, to the extent the claim is

unsecured under § 506(a), it is not an “allowed secured

claim” under § 506(d). See Dewsnup, 502 U.S. at 414.

’ All references to sections or chapters are to those of the United

States Bankruptcy Code, 11 U.S.C. § 101 et seq.

* 11 U.S.C. § 506(aX1) provides, in part: “An allowed claim of a

creditor secured by a lien on property in which the estate has an

interest, or that is subject to setoff under section 553 of this title,

is a secured claim to the extent of the value of such creditor's

interest ... and is an unsecured claim to the extent that the value

of such creditor’s interest ... is less than the amount of such

allowed claim.”

Respondent, on the other hand, argued that § 506(d) is

not “rigidly tied” to § 506(a) because § 506(a) classifies

claims for distribution purposes, while the avoidance

provision of § 506(d) is “directed to the time at which

foreclosure is to take place.” Id., 502 U.S. at 415.

This Cour’ squarely resolved that conflict: “We hold

that § 506(d) does not allow petitioner to ‘strip down’

respondents’ lien ...” Id., 502 U.S. at 417 (emphasis

added). The Court relied heavily on the absence of

express Congressional intent to abrogate the pre-Code

rule that liens pass through bankruptcy unaffected.

“ ..given the ambiguity in the text, we are not

convinced that Congress intended to depart from

the pre-Code rule that liens pass through

bankruptcy unaffected.”

Dewsnup, 502 U.S. at 417.

Further, in finding it “not plausible” to think Congress

had impliedly created a new remedy, this Court stated:

“ _.. to attribute to Congress the intention to

grant a debtor the broad new remedy against

allowed claims to the extent that they become

‘unsecured’ for purposes of § 506(a) without the

new remedy’s being mentioned somewhere in

the Code itself or in the annals of Congress is

not plausible, in our view, and is contrary to

basic bankruptcy principles.”

Dewsnup, 502 U.S. at 420.

The only factual difference between these instant

cases and Dewsnup is that in Dewsnup, the Petitioner

sought to reduce (strip-down) the value of the lien to an

amount less than the debt but greater than zero,

whereas in these cases, the Eleventh Circuit stripped-

off liens by reducing their value to zero. But that

factual difference does not change the outcome, given

the ratio decidendi in Dewsnup. It makes no sense to

say that Congress created no implied remedy of

stripping down a lien, but that the very same statutes

do create an implied remedy of stripping off a lien. It

is as if a rule forbidding wounding were understood to

allow killing.

Indeed, every United States Circuit Court of

Appeals which has considered the issue, except for the

Court of Appeals for the Eleventh Circuit, has

concluded that Dewsnup forbids stripping-off liens.

See, Ryan v. Homecomings Financial Network, 253

F.3d 778, 782-783 (4th Cir. 2001) (“Ryan”) (lien may

not be stripped-off pursuant to provisions of §§ 506(a)

and (d)); In re Talbert, 344 F.3d 555, 560-561 (6th Cir.

2003) (Dewsnup applies “with equal force and logic”

and a Chapter 7 debtor may not strip-off a valueless

junior lien), and Palomar v. First American Bank, 722

F.3d 992, 994 (7th Cir. 2013) (the only lien that can be

voided by § 506(d) in whole or in part is a lien securing

a claim rejected in whole or in part; statute has “no

application” to a case where the junior lienholder has

an allowed claim).”

* Cases holding that Dewsnup forbids stripping-off liens exist at

the sub-circuit level in a number of important jurisdictions. See,

notably, Laskin v. First National Bank of Keystone, 222 B.R. 872

(9th Cir. BAP 1998). See also, In re Swiatek, 31 B.R. 26 (Bankr.

D. Del. 1999) (Dewsnup reasoning applies whether a lien is

partially or wholly unsecured); In re Pistritto, 2005 WL 906370 at

*2 (Bankr. D. Del. 2005) (“courts in this Circuit generally conclude

Notably, in the decisions below, the court did not

engage in an exegesis of Dewsnup, but instead relied on

McNeal v. GMAC Mortgage, LLC, 735 F.3d 1263 (11th

Cir. 2012) (“McNeal”) (per curiam), which reaffirmed

the Eleventh Circuit’s pre-Dewsnup decision in

Folendore v. United States Small Business

Administration, 862 F.2d 1537 (11th Cir. 1989)

(“Folendore”) to conclude that a wholly unsecured claim

is voidable under § 506(d)."° In McNeal, the court

below held that, as a matter of its own internal

jurisprudence regarding stare decisis,“ ... a later panel

may depart from an earlier panel's decision only when

an intervening Supreme Court decision is ‘clearly on

point’.”. McNeal, 735 F.3d at 1265. The Eleventh

Circuit went on to hold that Dewsnup was “not ‘clearly

on point” because Dewsnup addressed “only” a strip

down “and did not address a ‘strip off” IJd. at 1265.

Quoting one of its earlier cases, the Eleventh Circuit

Court of Appeals then said:

“(T]hat the reasoning of an intervening high

court decision is at odds with that of our prior

decision is no basis for a panel to depart from

our prior decision.”

Id., quoting Atlantic Sounding Co., Inc. v. Townsend,

496 F.3d 1282, 1284 (11th Cir. 2007). The decisions

that a debtor may not strip off a lien in a Chapter 7 case under

section 506(d).”); In re Caliguri, 431 B.R. 324 (Bankr. E.D.N-Y.

2010).

The opinion below in Caulkett is unpublished, and is included as

Appendix A the Certiorari Petition in Caulkett. The opinion below

in Toledo-Cardona is unpublished, and is included as Appendix A

to the Certiorari Petition in Toledo-Cardona.

below were thus predicated entirely on intra-circuit

stare decisis rules, and not upon any analysis of how

the reasoning of Dewsnup does or does not apply to

stripping-off liens. Plainly, however, in light of

Dewsnup, the decisions below should be reversed.

POINT II:

JUNIOR LIENS ARE PROPERTY RIGHTS

THAT REQUIRE PROTECTION

A. A Wholly Underwater Lien is a Valuable

Property Right.

Amicus Curiae CBAI submits that a wholly

underwater junior lien is still demonstrably a valuable

property right. Property values fluctuate; a junior lien

which is wholly underwater today may acquire value as

the underlying property appreciates in the future. As

the court noted in Ryan, “we are acutely aware that in

the volatile, modern real estate market, substantial

price variations do occur with weekly or monthly

regularity.” Ryan, supra, 253 F.3d at 783. The Ryan

court’s observation is empirically proven by the decline

in negative homeowner equity that is accompanying

the current economic recovery:

“ ..the national negative equity rate continued to

decline in Q2 2014, falling to 17 percent, down

14.4 percentage points from its peak (31.4

percent) in the first quarter of 2012.” Negative

equity has fallen for nine consecutive quarters

as home values have risen.”

Zillow Real Estate Research, www.zillow.com/research/

2014-q2-negative-equity-report-7465/.

Given aggregate mortgage debt of over $13 trillion”,

the cited decline in negative equity represents perhaps

as much as $1 trillion dollars of now recoverable value

that was not available only two years ago. The cited

decline in negative equity also means that about 7

million mortgages which were underwater barely over

two years ago are no longer underwater today.” A

substantial number of both first and second mortgages

have gone from being undersecured to being fully

secured, including presumably some second mortgages

that formerly were wholly unsecured.

A lienholder’s property right to take advantage of

future increases in value of the property was

recognized in Dewsnup,

“Any increase over the judicially determined

valuation during bankruptcy rightly accrues to

the benefit of the creditor, not to the benefit of

the debtor and not to the benefit of other

unsecured creditors ... who had nothing te do

with the mortgagor-mortgagee bargain.”

Dewsnup, 502 U.S. at 417.

'' Aggregate national mortgage indebtedness is in excess of $13

trillion as of the third quarter of 2014. See, http://www.

federalreserve.gov/econresdata/releases/mortoutstand/current.htm.

‘* There were approximately 49.5 million residential properties

with mortgages at the end of the second quarter of 2014. See,

http//www.corelogic.com/about-us/news/corelogic-reports-946 ,000-

residential-properties-regained- 1-trillion-dollars-in-total-equity-in-

q2-2014.aspx. Consequently, a 14.4 percentage point decline in the

negative equity rate implies that over 7 million residential!

mortgages have gone from underwater to fully secured.

Because future appreciation may create realizable

value, it is fundamentally fallacious to confuse a lien’s

liquidation value at a particular moment in time with

the value of the property right which that lien

represents. Amicus Curiae CBAI submits that because

a lien’s value transcends its momentary monetary

liquidation value, a lien having a current judicially

determined (that is to say, hypothetical) value of $0 is

nevertheless entitled to protection.

B. Stripping-Off Liens Raises Constitutional

Concerns.

Dewsnup was not expressly decided on

constitutional grounds. Rather, as discussed above,

this Court resolved the issue of statutory construction

on the basis of preserving the pre-Code practice that

liens pass through bankruptcy unaffected, citing both

policy considerations and a lack of expressed

Congressional intent to abrogate pre-Code practice.

However, Dewsnup was decided in the context of a

constitutional backdrop that liens are to be protected

against judicial (i.e., government) takings. This Court’s

cognizance of that constitutional! background is implicit

in Dewsnup’s mention, 502 U.S. at 419, of Louisville

Joint Stock Land Bank v. Radford, 295 U.S. 555 (1935)

(“Radford”) (per Brandeis, J.), discussed below. And

while this Court can easily resolve the instant case in

Petitioner’s favor merely by applying the analysis in

Dewsnup, Amicus Curiae CBAI submits that the

constitutional significance of property rights in

bankruptcy reinforces that strip-offs should not be

allowed in Chapter 7 cases.

In Radford, this Court considered’ the

constitutionality of portions of the Frazier-Lemke Act,

former 11 U.S.C. § 203(s). In particular, paragraph 7

of that Act provided, among other things, for a 5-year

judicial stay of foreclosure proceedings with an option

for the debtor to acquire full title and possession of

mortgage property (as well as to obtain a bankruptcy

discharge) by paying over the appraised value of the

property. See, Radford, 295 U.S. at 575-576. Writing

for a unanimous Court, Justice Brandeis bluntly

recognized that the Frazier-Lemke Act’s “avowed object

is to take from the mortgagee rights in the specific

property held as security; and to that end ‘to scale

down the indebtedness’ [i.e., strip-down the lien] to the

present value of the property.” Radford, 295 U.S. at

594. The Court then invalidated the Frazier-Lemke

Act on constitutional grounds:

“The province of the Court is limited to deciding

whether the Frazier-Lemke Act ... as applied

has taken from the bank without compensation,

and given to Radford, rights in specific property

which are of substantial value ... As we conclude

that the act as applied has done so, we must

hold it void; for the Fifth Amendment commands

that, however great the nation’s need, private

property shall not be thus taken even for a

wholly public use without just compensation.”

Radford, 295 U.S. at 601-602.

Amicus Curiae CBAI recognizes that the reach of

Radford may be somewhat uncertain. That case

involved the passage of a statute after the creation of

a lien, where the statute modified lienholder rights. No

such intervening statute is present in these cases.

Amicus Curiae CBAI also recognizes that cases

subsequent to Radford seem to focus on protection of

lien value existing at the time of bankruptcy. See,

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

(no constitutional right beyond protection of the value

of the property).'* See also, United Savings Association

of Texas v. Timbers of Inwood Forrest, Ltd., 484 U.S.

365, 377 (1988) (under § 1129(b)(2), “undersecured

creditor’s ‘interest’ is regarded (properly) as solely the

value of the collateral”).* And Amicus Curiae CBAI

recognizes that this Court chose not to predicate its

holding in Dewsnup directly upon Radford’s

constitutional analysis, although nothing in Dewsnup

prevents or precludes so applying Radford then or to

these cases.

That having been said, there is no dispute that a

lien is a property right, and that its value is entitled to

protection as a constitutional matter. See, Wright,

'S Wright involved a statutory construction issue whether a

debtor’s right to redeem could be defeated by a creditor’s right to

compel sale. 311 U.S. at 278. It was not necessary to the holding

in Wright for the Court to say there was no constitutional right

beyond protecting the value of the property; it would have been

enough to have said that constitutional minima for an underwater

first lien are satisfied by preservation of value. A statement

beyond that is dictum, and should not be considered as an implied

holding that wholly underwater liens have no right to

constitutional protection. See, Humphrey’s Executor v. United

States, 295 U.S. 602, 626 (1935) (*Humphrey’s”) (expressions

beyond the point involved do not come within the rule of stare

decisis).

'* Timbers involved whether an undersecured creditor is entitled

to immediate foreclosure or accrual of post-petition interest on its

claim. The referenced remark was a dictum, per Humphrey’s,

n. 13, supra, particularly since the word ‘properly was put in

parentheses.

supra, 311 U.S. at 278. See also, In re Murel Holding

Corp., 75 F.2d 941, 942 (2d Cir. 1935) (“Murel”) (per

Hand, J.) (“adequate protection” requirement of former

11 U.S.C. § 207(c)(10) must conform to constitutional

limitations).’° However, just because a junior lien has

no realizable monetary value at a given moment in

time does not entail that such a lien encompasses no

rights and has no value worthy of protection. It is not

inconsistent with the jurisprudence of this Court to

date to say that the right to future aporeciation in lien

value is a right entitled to protection on constitutional

grounds, and that such right may not be removed by

judicial fiat.

At a minimum, the foregoing discussion illustrates

a constitutional backdrop which reinforces why

Dewsnup should be applied to forbid lien strip-offs and

show the enormous stakes involved in protecting junior

liens even if they are (momentarily) wholly

underwater. Of course, nothing precludes this Court

from reversing the court below on constitutional

grounds.

" Notably, Judge Hand’s constitutionally-driven formula that

adequate protection must afford the “indubitable equivalence” of

the lien, Murel, 75 F.2d at 942, was legislatively incorporated twice

into the Bankruptcy Code. Section 361 lists “indubitable

equivalent” as among the means of providing adequate protection.

And Section 1129(bX2XAXiii) lists “indubitable equivalent” as

among the required minimal treatment alternatives for a secured

claim in a cram-down situation.

C. The Policy of the Bankruptcy Code is to

Protect Liens.

Further, whatever the constitutional backdrop,

drafters of the Code were explicit that they desired

statutory protections for liens as a matter of policy:

“It is not intended to be confined to the

constitutional protection required, however. The

section, and the concept of adequate protection,

is based as much on policy grounds as on

constitutional grounds.”

H.R. Rep. No. 595 at 339, 1978 U.S. Code Cong. &

Ad.News at 6295.

The legislative history goes on to state:

“Secured creditors should not be deprived of the

benefit of their bargain. There may be situations

in bankruptcy where giving a secured creditor

an absolute right to his bargain may be

impossible or seriously detrimental to the

bankruptcy laws. Thus, this section recognized

the availability of alternate means of protecting

a secured creditor's interest. Though the

creditor might not receive his bargain in kind,

the purpose of the section is to insure that the

secured creditor receives in value essentially

what he bargained for.”

Id. (emphasis added).

Most bluntly, the way to not deprive a wholly

underwater junior lien of the benefit of the bargain is

to let the lien pass through bankruptcy unaffected.

Even if such passing-through is not constitutionally

required, it nevertheless would reflect the policy of the

Code. Outcomes which harmonize with Congressional

policy and interest are to be preferred. See e.g., Air

Line Pilots Association, International v. O'Neill, 499

U.S. 65 (1991) (criticizing court below for failing to take

into account strong public policy arguments). The

decisions below should accordingly be reversed.

D. Lien Stripping in Chapter 13 and Chapter

11 Cases Does Not Support Lien Strip-Offs

in Chapter 7 Cases.

Provisions in chapters of the Bankruptcy Code other

than Chapter 7 that ostensibly permit lien stripping do

not form compelling rationales to permit lien strip-offs

in a Chapter 7 case. At the outset, lien stripping

outside of Chapter 7 is not done under § 506(d), but is

done under specific provisions of Chapters 13 and 11

which are not now before the Court and which were not

before the Court in Dewsnup. At a statutory level, lien

stripping not done under § 506(d) is simply inapposite

to this case. Nevertheless, Chapter 13 and Chapter 11

provisions will now be addressed.

To the extent lien strip-offs are permitted in

Chapter 13 cases,” the Court of Appeals for the

Seventh Circuit has clearly explained why that would

not justify lien strip-offs in a Chapter 7 case:

‘© Chapter 13 prohibits lien stripping on mortgages which are the

debtor’s principle residences, 11 U.S.C. § 1322(bX2), but ostensibly

permits it for other liens. Notably, although § 1322(bX2) does not,

on its face, specifically permit the strip-off of a wholly underwater

junior lien, many courts have concluded that such strip-offs are

permissible. See generally, cases catalogued in Jn re Davis, 716

F.3d 331, 334-35 (4th Cir. 2013).

“The strip-off right in a Chapter 13 is a partial

offset to the advantages that Chapter 13,

relative to Chapter 7, grants creditors, such as

access to a larger pool of assets because the

debtor must commit all disposable income for

three to five years to repaying unsecured debts...

The difference between Chapter 13 (also

Chapter 11) and Chapter 7 is the difference

between reorganization and liquidation.”

Palomar v. First American Bank, supra, 722 F.3d 992,

995 (7th Cir. 2013) (“Palomar”) (per Posner, J.)

Amicus Curiae CBAI notes that, in constitutional

terms, Judge Posner’s analysis suggests that Chapter

13 provides compensation (in the form of greater access

to assets) for the taking of the lien. Chapter 7, of

course, does not provide compensation, which is one

reason why there are significant constitutional

concerns with lien strip-offs in Chapter 7 cases even if

strip-offs are permitted in Chapter 13 cases.

Nor are ostensible lien stripping provisions in

Chapter 11 a true argument for permitting strip-offs in

a Chapter 7 case. In the first place, Palomar's

distinction, supra, between reorganization and

liquidation is instructive. Chapter 11, like Chapter 13,

is a reorganization which arguably affords at least

some level of compensation for lien taking. Further, in

a Chapter 11 case, a secured creditor may make the

election provided by § 1111(b), which, in turn, entitles

the lienholder to the treatment statutorily required by

§ 1129(b)(2).’’ Fundamentally, while this allows a lien

to be stripped-down, it does not address stripping-off a

lien.

It is true that there is no right to make the

§ 1111(b) election if the lien is of “inconsequential

value.” 11 U.S.C. § 1111(b)(1)(B)G). Amicus Curiae

CBAI submits, however, that the loss of the section

1111(b) election for liens of inconsequential value is not

a warrant for lien strip-offs in Chapter 7 cases. Loss of

the right to make the § 1111(b) election if the lien is of

“inconsequential value” does not entail that voiding a

wholly underwater lien is allowed. Loss of the election

entails loss of the right for the claim to be treated

under the Chapter 11 plan in accordance with the

requirements of § 1129(b)(2). However, the loss of

specific claim treatment is not the same as losing the

lien. Indeed, since, under Dewsnup a lien with value

cannot be stripped-down, and must pass through

bankruptcy unaffected, the creditor’s lien that has

positive (but “inconsequential”) value must pass

through for the plan to comply with the requirement of

§ 1129(a\(7A)ii) that the creditor receive at least

which it would in a Chapter 7 liquidation case.'® See,

'' If the property is sold, the creditor must be allowed to credit bid.

11 U.S.C. § 1129(bX2KAXii). If the property is retained by the

debtor, the secured lender either gets the “indubitable equivalent”,

11 U.S.C. § 112% b\2KAXiii), or must retain its lien and receive

cash payments equaling the amount of the claim with a present

_ value equal to the lien. 11 U.S.C. § 1129(bX2A)(i).

* 11 U.S.C. § 1129(aX7AXii) sets forth that among the

requirements for confirmation of a Chapter 11 plan, that the

holder of an impaired claim who has not accepted the plan “will

receive or retain under the plan on account of such claim or

In re Stone & Webster, Inc., 286 B.R. 532, 545 (Bankr.

D. Del. 2002) (best interest of creditors test of

§ 1129(a)(7) is a “guaranty” to each claim holder that it

will receive at least as much in reorganization as it

would receive in a liquidation).

Nor can it be argued that wholly underwater junior

liens can be stripped-off in Chapter 11. That argument

begs the question now before the Court: whether such

liens can be stripped-off in Chapter 7. Only when that

issue is resolved can it be known if the best interest of

creditors test of § 1129(a)(7) permits such liens to be

stripped-off under a Chapter 11 plan.

In sum, lien stripping provisions in Chapters 13 and

11 do not provide a warrant for stripping-off liens in

Chapter 7 cases. Accordingly, the decisions below

should be reversed.

POINT II:

ALLOWING A LIEN TO BE STRIPPED-OFF

BASED ON A JUDICIAL DETERMINATION OF

VALUE RISKS UNJUSTLY VOIDING LIENS

THAT IN REALITY ARE NOT WHOLLY

UNDERWATER

Dewsnup clearly forbids stripping-down a lien if

that lien has one cent or more of realizable value. Such

a lien may pass through bankruptcy unaffected, and

the lienholder may benefit from future appreciation.

The consequence of Respondent’s position, however, is

interest property of a value, as of the effective date of the plan,

that is not less than the amount that such holder would so receive

or retain if the debtor were liquidated under Chapter 7 of this title

on such a date...”

that if the same lien is wholly underwater by one cent,

it can be voided. Thus, a one cent difference in a

judicially determined valuation would make the

difference between preservation of a right and its

complete and permanent loss.

Unfortunately, in the real world, judicial

determinations of value are not inerrant. Such

determination rest on appraisals.

“But errors in appraising a house are common

because ‘real estate appraisal is not an exact

science ... common enough to have created a

market for ‘Real Estate Appraisers Errors &

Omissions insurance policies.”

Swanson v. Citibank, N.A., 614 F.3d 400, 408 (7th Cir.

2010) (“Swanson”) (Posner, J., dissenting in

part)(internal citation omitted).

Indeed, an appraisal, by definition, is an opinion of

value. See, The Appraisal of Real Estate, 14 ed., p 2

(Appraisal Institute, 2013). Frequently, different

methods are employed which lead to disparate results,

which then must be reconciled, leading to a final

opinion expressed across a range of value. Id., 641-646.

Cf, Silverman v. Commissioner of Internal Revenue,

538 F.2d 927, 933 (2d Cir. 1976) (valuation is

necessarily an approximation); Jn re R & H Investment

Co., Inc., 46 B.R. 114, 116 (Bankr. D. Conn. 1985)

(court can only make ‘reasonable estimate’ of value); Jn

re Jug End in the Berkshires, Inc., 46 B.R. 892, 900

(Bankr. D. Mass. 1985) (no property value determined

by appraisal rests on scientific analysis). And opinions,

no matter how informed and educated, can err. Placing

the survival of a right on a process in which errors are

too common is simply antithetical to that right. The

rule urged by Respondent will inevitably result in some

junior liens being voided, even though they are not

wholly underwater, merely because someone estimates

they are wholly underwater.

In a closely related context, even the Eleventh

Circuit Court of Appeals recognized the perils of relying

on the inherently inexact appraisal process. In Jn re

Dickerson, 222 F.3d 924 (11th Cir. 2000), the court

convincingly criticized its own precedent even while

permitting lien stripping in a Chapter 13 context.” It

stated:

“However, were we to decide this issue cn a

clean slate, we would not so hold. We find

persuasive the district court’s reasoning that

providing ‘anti-modification’ protection to junior

mortgagees where the value of the mortgaged

property exceeds the senior mortgagee’s claim by

at least one cent, as prescribed by the Supreme

Court’s decision in Nobleman v. American

Savings Bank, 508 U.S. 324, 113 S.Ct. 2106, 124

L.Ed.2d 228 (1993), but denying that same

protection to junior mortgagees who lack that

penny of equity, places too much weight upon

the valuation process. As we have noted,

‘|[vJaluation outside the actual market place is

inherently inexact.” Rushton v. Commissioner of

Internal Revenue, 498 F.2d 88, 95 (5th Cir.

1974). Given the unavoidable imprecision and

'* See infra., beginning at p. 17 for a discussion of why lien

stripping in Chapter 13 is not a basis for allowing strip-offs in

Chapter 7 cases such as the instant ones now before the Court.

uncertainty of the valuation process, we think

that choosing to draw a bright line at this point

is akin to attempting to draw a bright line in the

fog.”

Id. at 926. (emphasis added).

Nor is simple error in estimating value the only, or

even the largest, risk. Cases frequently occur in which

a court is asked to resolve extremely differing

appraisals. See, e.g., CSX Transportation, Inc. v.

Georgia State Board of Equalization, 552 U.S. 9, 14

(2007) ($4.6 million vs. $7.8 million for real property);

In re Morysville Body Works, Inc., 86 B.R. 51, 52

(Bankr. E.D. Pa. 1988) ($375,000.00 vs. $934,000.00);

Swanson, supra, 614 F.3d at 403 ($170,000.00 v.

$240,000.00). The difficulty with situations where

disparate appraisals are presented is that genuine

accuracy is often impossible. In In re Rogers

Development Corp., 2 B.R. 679, 684-85 (Bankr. E.D. Va.

1980) (“Rogers Development”), the court was faced with

disparate appraisals of $801,000.00 and $704,000.00

and concluded that the difference was properly

attributable to a difference of professional opinion.

Perhaps predictably, the Court split the difference and

found the property to be worth $750,000.00. /d.

Consider, however, a Rogers Development situation in

the world Respondent would create. Assume there is

a $150,000.00 first mortgage and a $50,000.00 junior

mortgage. Further assume that conflicting appraisals

for the property come in at $185,000.00 and

$215,000.00. What is the fate of the second lien?

It is particularly troubling that a second lien could

be lost when it is only dubiously wholly underwater.

Admittedly, the courts do resolve valuation issues

routinely, but this does not mean _ judicial

determinations of value are an optimal means of

determining value. An appraisal is a technique for

estimating value when an actual sale cannot take

place, as in a condemnation proceeding, or, as with

many “fairness opinions,” an actual sale takes place

under non-competitive conditions necessitating some

estimate of how the asset would fare in fully

competitive setting.

Where appraisals can be avoided in deference to the

market, they should be avoided. Bankruptcy presents

many circumstances where reliance on appraisals is

avoided by recourse to the market. In at least two

bankruptcy circumstances, this Court has deferred to

the market to determine value rather than rely on

appraisals. First, in Bank of America National Trust

and Savings Association v. 203 North LaSalle St.

Partnership, 526 U.S. 434 (1999), (“203 N. LaSalle”),

this Court held that a debtor’s equity owners may give

subsequent new value to retain equity (assuming

arguendo an exception to the absolute priority rule)

only if the equity interest is exposed to competing bids

in the market, or others are given the opportunity to

propose a competing plan. See, 526 U.S. at 454 and

458. This Court declined to allow equity to be retained

based on merely a judicial determination (appraisal) of

the value of equity.

Second, in RadLAX Gateway Hotel, LLC v.

Amalgamated Bank, 132 S.Ct. 2065 (2012)(“RadLAX”),

this Court re-affirmed as inviolate the right to credit

bid in sale held under Chapter 11 plans. RadLAX

assures that the lien holder cannot be deprived of the

value of its lien by a judicial determination of that

value, but rather only by the lienholder’s own

assessment of the property’s value and voluntary

decision not to credit bid. Nothing in RadLAX limits it

to senior mortgages or precludes its application to

wholly underwater liens. An underwater junior lien

should be able at a foreclosure sale to pay off the senior

lien and credit bid some or all of the junior debt. That

outcome, of course, reflects the basic bargain between

the mortgagor and mortgagee, and also puts the

lienholder in charge of what investment to make to

protect its interest in property, which is the antithesis

of a government (judicial) decision whether to take

away that interest without compensation.

In short, an important implication of cases such as

RadLAX and 203 N. LaSalle is that judicial

determinations of value are disfavored to limit rights

(or eliminate rights, as Respondent would do in this

case) where a market-based alternative is available. In

this case, such an alternative is available: let the lien

pass through bankruptcy unaffected as has been the

rule for well over a century. The decisions below

should be reversed.

POINT IV:

LENDERS HAVE A SETTLED EXPECTATION

THAT LIENS WILL PASS THROUGH

BANKRUPTCY UNAFFECTED

The principle that liens pass through bankruptcy

unaffected was recognized in, but clearly predates,

Long v. Bullard, 117 U.S. 617, 620-21 (1886). It has

thus been highly settled law for more than 125 years

that liens pass through bankruptcy unaffected. See

also, Dewsnup, 502 U.S. at 418, citing Farrey v.

Sanderfoot, 500 U.S. 291, 297 (1991). Cf, Palomar,

supra, 722 F.3d at 993, describing the principle that

liens pass through bankruptcy unaffected as a

“venerable principle.” The ability to ride-out downward

fluctuations in velue is vital to mitigating creditor risk,

and is thus a factor that affects, in the first instance,

the decision whether to extend credit at all, and in the

second instance, what interest rate to charge.

There can be no doubt that lenders rely on the

“venerable principle” that liens pass_ through

bankruptcy unaffected. Indeed, not only case law but

legislative history buttresses such reliance. Strikingly,

the House Committee Report on the Bankruptcy Code

stated point-blank: “[s]ubsection (d) permits liens to

pass through bankruptcy unaffected.” HR Rep. No. 95-

595 at 357 (1978). Failure to reverse the decisions

below will jeopardize a significant portion of hundreds

of billions of dollars in junior mortgage debt that has

been extended, at least in part, on reliance that liens

pass through bankruptcy unaffected.

It seems inconceivable that any mortgage lender

ever thought it would lose permanently its legal right

to a lien because vicissitudes in the real estate market

temporarily deprived a junior lien of recoverable value.

Instead, lienholders understand that a lien reflects the

basic combining of in personam and in rem relief, which

is a hallmark of bankruptcy, and which was recognized

in a different context by this Court and expressed as

follows: “Rather a bankruptcy discharge extinguishes

only one mode of enforcing a claim — namely, an action

against the debtor in personam — while leaving intact

another — namely, an action against the debtor in rem.”

Johnson v. Home State Bank, 501 U.S. 78, 84 (1991).

Pending the filing of Respondent’s brief, it remains

to be seen if Respondent will explicitly request that

Dewsnup be overruled. But there should be no

mistake: at least implicitly, the Respondent would

overrule Dewsnup in the case of a wholly underwater

lien. Thus, whether as an explicit or implicit matter,

this case implicates the stare decisis treatment of

Dewsnup. As this Court has stated:

“Considerations in favor of stare decisis are at

their acme in cases involving property and

contract rights, where reliance interests are

involved.”

Payne v. Tennessee, 501 U.S. 808, 828 (1991), and see

the numerous cases therein cited.” See also,

Minnesota Co. v. National Co., 70 U.S. 332, 334 (1865):

“...where courts vacillate and overrule their own

decisions on the construction of statutes

affecting the title to real property, their

‘lecisions are retrospective and may affect titles

purchased on the faith of their stability.

Doubtful questions on subjects of this nature,

when once decided, should be considered no

longer d: 1btful or subject to change.”

Lien rights are property rights, and stripping-off a

lien is every bit as severe as compromising title to real

property. Hundreds of billions of dollars in credit

* Payne was acriminal sentencing matter which chose to overrule

a precedent involving, as the Court put it, mere “procedural and

evidentiary rules.” 501 U.S. at 828. However, the holding in

Payne does nothing to negate the proposition for which it is cited

above.

secured by junior liens has been extended by lenders

believing that liens pass through bankruptcy

unaffected, whether or not the junior lien is

temporarily either partially or wholly underwater.

That a lien passes through bankruptcy unaffected is a

longstanding “rule of property” which stands at the

“acme” of considerations of stare decisis. One thing is

certain: the decisions below weakly distinguish the

instant cases from Dewsnup, but express absolutely no

basis for overruling Dewsnup. And reliance interests

strongly mitigate against overruling Dewsnup.

Lastly, this Court has also stated that

“considerations of stare decisis weigh heavily in the

area of statutory construction where Congress is free to

change this Court’s interpretation of its legislation.”

Illinois Brick Co. v. Illinois, 431 U.S. 720, 736 (1977).

Certainly, this reinforces the need to stand by Dewsnup

insofar as Dewsnup was explicitly decided on statutory

construction grounds.

It is clear that case law and legislative history

provide that liens pass through bankruptcy unaffected.

This court has been firm that a “clear, well established”

and “basic” bankruptcy practice should not be eroded

absent a “clear indication of Congressional intent.

Cohen v. De La Cruz, 523 U.S. 213, 221 (1998). The

Court has also said that state law property rights are

not to be abrogated unless it is “clear and manifest”

that Congress so intended. BFP v. Resolution Trust

Corp., 511 U.S. 531, 543-45 (1994).

Accordingly, when reliance interests, stare decisis

considerations, Congressional intent, and rights under

state law are combined, it is manifest that the

decisions below should be reversed.

CONCLUSION

For each and every of the foregoing reasons, the

decision of the Eleventh Circuit Court of Appeals

should be reversed in both of these cases.

Of Counsel:

Respectfully submitted,

John Collen, Esq.

Counsel of Record

SmithAmundsen LLC