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

Supreiie Coun, U.S.

Nos. 13-1421 & 14-163 FILED

IN THE 201

Supreme Court of the Cuited Seep e500

BANK OF AMERICA, N.A., PETITIONER,

V.

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 LOAN SYNDICATIONS AND

TRADING ASSOCIATION, AMERICAN

BANKERS ASSOCIATION, SECURITIES

INDUSTRY AND FINANCIAL MARKETS

ASSOCIATION, AND THE CLEARING HOUSE

ASSOCIATION L.L.C. AS AMICI CURIAE

IN SUPPORT OF PETITIONER

ELLIOT GANZ RONALD J. MANN

LOAN SYNDICATIONS AND Counsel of Record

TRADING ASSOCIATION 435 West 116th Street

366 Madison Avenue New York, NY 10027

Fifteenth Floor (212) 854-1570

New York, NY 10017 rmann@law.columbia.edu

S55) SSS-Se88 IRA D. HAMMERMAN

JOSEPH R. ALEXANDER KEVIN CARROLL

THE CLEARING HOUSE SECURITIES INDUSTRY AND

ASSOCIATION L.L.C. FINANCIAL MARKETS

450 West 33rd Street ASSOCIATION

New York, NY 10001 1101 New York Ave., N.W.

(202) 612-9234 Washington, DC 20005

(202) 962-7300

WALSON-EPES PRINTING CO., INC. — (202) 789-0006 — WASHINGTON, D.C. 20002

QUESTION PRESENTED

Whether Section 506(d) of the Bankruptcy Code

authorizes a bankruptcy court to compel the holder of

a mortgage to relinquish the mortgaged property to

the debtor, free of the lien, without full payment of the

debt.

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QUESTION PRESENTED

TABLE OF CONTENTS

SPCC eee eee eee eee eee

TABLE OF CONTENTS ..............-:.ccsssescesssesceees

et anh hin ee ene ee ee

INTEREST OF AMICI CURIAE .......................

SUMMARY OF ARGUMENT ........00000.......eeee.

I.

IT.

Stripping off Inferior Liens Would

Disrupt a Large Sector of the Commercial

Lending Market That Justifiably Has

Relied on This Court’s Interpretation of

the Bankruptcy Code ......................cccce0ee0e

The Bankruptcy Laws of this Country

That Preceded the Bankruptcy Code of

1978 Have Never Compelled the Holder

of a Mortgage to Surrender the

Mortgaged Property to the Bankrupt

While the Debt Remained Unpaid. ..........

A. The Temporary Bankruptcy Acts of

the Nineteenth Century Did Not

Impair the Rights of Secured

I a aa

B. The Bankruptcy Act of 1898 Left

NE CII oc ancnccasunteiccricesmenincase

C. The Chandler Act of 1938 Had No

Substantive Effect on Liens................

D. The Frazier-Lemke Act Did Limit the

Value of a Creditor’s Lien, but This

Court Held It Unconstitutional ..........

PUP IR IIIT cish cs ceteicsincciracci.entasphielasinien pleaasheninnidesicainesn

20

22

iv

TABLE OF AUTHORITIES

CASES Page(s)

Bank of America Nat! Trust & Sav. Ass’n

v. 203 North LaSalle Street Partnership,

526 U.S. 434 (1999)... 8

Bellows v. Jenness,

48 U.S. (7 How.) 612 (1849)... 11

BFP v. Resolution Trust Corp.,

511 U.S. 531 (1994). 8

Bruner v. Sherley & Sherley,

27 Miss. (5 Cushm.) 407 a 11-12

Bush v. Cooper,

26 Miss. (4 Cushm.) 599 en 12-13

Butner v. United States,

440 US. 48 (1978)... ccccecccesescseeces 9

Case v. Los Angeles Lumber Products Co.,

SUS U.S. 106 (1989)... eccececcc 20

City of Richmond v. Bird :

DR MS WOO CI vires cceeca cance. 15

Dewsnup v. Timm,

902 U.S. 410 (1992)... passim

Dudley v. Easton,

104 U.S. (14 Otto) 99 (1881)... 13-14

Evans v. Rounsaville,

42 S.E. 100 (Ga. 1902) 00 16

Everett v. Judson,

228 U.S. 474 (1913)... 15

Ex parte Foster,

9 Fed. Cas. 508 (C.C.D. Mass. 1842)........ 11

Vv

TABLE OF AUTHORITIES—Continued

Page(s)

Goggin v. Division of Labor Law

Enforcement,

ee Ss Be Ci iicccicsnmncincidesideee 19

Hewit v. Berlin Machine Works,

Bs Bf | Rha een 16

In re Hambright,

11 Fed. Cas. 314 (W.D.S.C. 1869) ......... a 14

Isaac v. Hobbs Tie & Timber Co.,

ts Se) eee 18

Kansas City Terminal Railway v. Central

Union Trust,

BEE UA. Qi Ce incicnstsvesitsccesnassstuniiain 20

Kittredge v. Warren,

DG FE e. ee COD vicannctacstscccsvearseammaannain 13

Leighton v. Kelsey,

Be Bs Be Ci evcccnecesesiccsosnssbtienninanndanade 10-13

Long v. Bullard,

SET WT. GRY Ci ekciiciverincencimine 14-15

Louisville, E. & St. Louis Railway v.

Wilson,

py ge Bg) | Senne Ie 5

Louisville Joint Stock Land Bank v.

Radford,

BBO UD. GES (IGBDE) wvcsesscscscscsescsscsoces 9-10, 19, 21

Mattocks v. Baker,

2 F. (2 Hask.) 455 (D. Me. 1880) .............. 14

Northern Pacific Railway v. Boyd,

ie FO fy | Re ee ne 20

vi

TABLE OF AUTHORITIES—Continued

Page(s)

Norton’s Assignee v. Boyd,

44 US. (3 How.) 426 (1845)...0000 11

Oppenheimer v. Oldham,

178 F.2d 386 (5th Cir. 1949)..................... 19

Penn v. Calhoun,

EE EEE WIT Pessscscccccncsecdscccsctcovesecocce 5

RadLAX Gateway Hotel, LLC v.

Amalgamated Bank,

ES 8

Reed v. Bullington,

BP CDEP vvccncesossssosceseccsncsscoesccees 12

Simonson v. Granquist,

a sscsnsnsansevessscooses 18-19

Thompson v. Fairbanks,

MD ieirevecssestsnencessccececarcesees 16

Waller’s Lessee v. Best,

44 US. (3 How.) 111 (1845)..........0000000... 11

Wright v. Vinton Branch of Mountain

Trust Bank,

8, eae 21

Yeatman v. Savings Institution,

95 US. (5 Otto) 764 (1877).......... FE 14

York Mfg. Co. v. Cassell,

ES CE ED coccesacesvsscccscssovesscescsves 15-16

STATUTES

Act of Dec. 19, 1803, ch. 6, 2 Stat. 248 ........ i)

Act of Mar. 3, 1843, ch. 82, 5 Stat. 614........ 9

vil

TABLE OF AUTHORITIES—Continued

Page(s)

Act of June 7, 1878, ch. 160, 20 Stat. 99 ..... i)

Act of Mar. 3, 1933, ch. 204, 47 Stat. 1467

BR gf XS ae ean ee 19

Act of Aug. 28, 1935, ch. 792, 49 Stat. 942... 21

Bankruptcy Act of 1800, ch. 19, 2 Stat. 19.. 9,12

GE, Te, SD ccanntannatecneeniaininelnaticatiintnes 10

Bankruptcy Act of 1841, ch. 9, 5 Stat. 440 ...passim

TR ee eeeo ene eee 10

Bankruptcy Act of 1867, ch. 176, 14 Stat.

IST scciscduiniadbcisicndinciaphiaqeniddansbemansnenaeammealniied passim

Bee) ee es 10

Bankruptcy Act of 1898, ch. 541, 30 Stat.

iil kikenecsinndcaateicicdasimeiabaaminandaanmlinaeaiaal passim

ei Me: SITU ciciciiintinsianicailaeiaaabonaiiinmiadiiinitia 18

OP I, CII etic cia tnaiacaadetccleartacange 15,18

Bankruptcy Code, 11 U.S.C. § 101 et seg..... 4, 8, 20

Chapter 5, 11 U.S.C. 501 et seg.

Be es Oe ietacsctdsanniaaniomadiidcna 6

Oe ie acted hacindacinktacsiesindaedsinblameiea 4,7

bh Tm TSS 3, 6-8

Chapter 11, 11 U.S.C. § 1101 et seg. .....8, 19-20

Chandler Act of 1938, ch. 575, 52 Stat. 840... 17-20

TE Ee eee see 18

fo tie 3S eon 18

TABLE OF AUTHORITIES—Continued

Page(s)

Chapter X, § 101 et seq., 52 Stat. 883 ...... 19

pt |S eer 19

Chapter XI, § 301 et seg., 52 Stat. 905..... 19

Frazier-Lemke Act, ch. 869, 48 Stat. 1289

EE INTO NI og POE SES FST ® 9, 20-21

Be es Ne CD crccisnrcssiccncnitiorintincicenriin 20

MISCELLANEOUS:

Douglas Baird & Robert Rasmussen, Boyd’s

Legacy and Bankruptcy’s Ghost, 1999

Se Ns ID x hietinsnishiintasinaasdnentionsientinsic 20

Charles T. Boone, Law of Mortgages of Real

and Personal Property (1886)................... 5

Edwin C. Brandenburg & William H.

Oppenheimer, Brandenburg on Bank-

ge, , ener 17

Orlando Bump, The Practice in Bank-

ruptcy, with the Bankrupt Law of

the United States as Amended (5th ed.

RR REIS pe ae 14

Peleg Chandler, The Bankrupt Law of the

United States, with an Outline of the

NN CUE cciciactaicaccsesundinonencunenay 13

Collier on Bankruptcy (J. Moore 14th ed.

ee 18

Federal Reserve Statistical Release Z.1,

Financial Accounts of the United States

a 0 6

ix

TABLE OF AUTHORITIES—Continued

Page(s)

William Richard Fisher, The Law of

Mortgage as to the Redemption,

Foreclosure, and Sale in Equity of

Property with the Law of the Priority of

Incumbrancers (1857)............................... 5

Leonard A. Jones, A Treatise on the Law

of Mortgages of Real Property (5th ed.

ES rT en eee Sinidlacilehscinitiibaaladade 5

The Laws of Bankruptcy and the National

Bankruptcy Act of 1898 (W.M. Collier

I a Te accissncacctciciccnintetittnstiinniaiasannzinssis 17

Stephen J. Lubben, A New Understanding

of the Bankruptcy Clause, 64 Case

Western Res. L. Rev. 319 (2013)... 10, 15, 18

Steve Miller, Amid Quest for Yield, 2nd-

Lien Leveraged Loan Issuance Soars,

forbes.com, Mar. 14, 2014, available at

http://www .forbes.com/sites/spleverage/2

014/03/14/amid-quest-for-yield-2nd-lien-

leveraged-loan-issuance-soars/................. 6

Darius H. Pingrey, Treatise on the Law of

Mortgages of Real Property (2nd ed.

ivsdsassumsuninusuenees soe 5

Standard & Poors, Leveraged Commentary

and Data (2015) ........ccecccccccocccccecceee eee. 6

Charles Tabb, The History of the

Bankruptcy Laws in the United States, 5

ABI L. Rev. 5 (1995)..............0............ 10, 15, 18

x

TABLE OF AUTHORITIES—Continued

Page(s)

Charles Warren, Bankruptcy in United

States History (1935)..............0..::ccccceceeeees 10

Charles Hasting Wiltsie & James A. Kerr,

A Treatise on the Law and Practice of

Foreclosing Mortgages on Real Property,

and of Remedies Collateral Thereto, with

ISIE TOSI Net NIP SO HOM 5

INTEREST OF AMICI CURIAE '

The Loan Syndications and Trading Association

(“LSTA”) is a financial trade association whose

mission is to promote a fair, orderly, efficient, and

growing corporate loan market and to provide leader-

ship in advancing and balancing the interests of all

market participants. Its interest in these cases lies in

promoting sensible and effective rules for the liquida-

tion and collection of secured loans. Because its

members frequently purchase debt in the secondary

market, often secured by an inferior lien, their interest

in a reasoned resolution of this problem is paramount.

Moreover, as a nationwide group with members under

the jurisdiction of virtually every federal court of

appeals, LSTA has a unique interest in ensuring

regularity and predictability throughout the circuits,

and especially in uniform rules that promote efficient

bankruptcy administration.

The American Bankers Association (“ABA”) is the

largest national trade association of the banking

industry in the country. It represents banks and

holding companies of all sizes in each of the fifty states

and the District of Columbia, including community,

regional, and money center banks. The ABA also

represents savings associations, trust companies, and

savings banks. ABA members hold approximately

95% of the United States banking industry's domestic

assets. The ABA frequently appears in litigation,

either as a party or amicus curiae, in order to protect

' This brief was not authored in whole or in part by counsel

for a party. No person other than the amici made a monetary

contribution intended to fund the preparation or submission of

this brief. All parties have consented to the filing of this brief.

2

and promote the interests of the banking industry and

its members.

The Securities Industry and Financial Markets

Association (“SIFMA”) is a member-driven association

that brings together the shared interests of hundreds

of securities firms, banks, and asset managers.

SIFMA’s mission is to develop policies and practices

that strengthen financial markets and encourage

capital availability, job creation and economic growth

while building trust and confidence in the financial

industry. SIFMA is the U.S. regional member of

the Global Financial Markets Association. SIFMA’s

interest in the stability and availability of capital gives

it a strong interest in cases, like this one, that have

the potential for adverse systemic impact on commer-

cial lending markets.

Established in 1853, The Clearing House is the

oldest banking association and payments company in

the United States. It is owned by the world’s largest

commercial banks, which collectively hold more than

half of all U.S. deposits and employ over one million

people in the United States and more than two million

people worldwide. The Clearing House Association

L.L.C. is a nonpartisan advocacy organization that

represents the interests of its owner banks by develop-

ing and promoting policies to support a safe, sound,

and competitive banking system that serves custom-

ers and communities. Its affiliate, The Clearing House

Payments Company L.L.C., which is regulated as a

systemically important financial market utility, owns

and operates payments technology infrastructure that

provides safe and efficient payment, clearing, and

settlement services to financial institutions, and leads

innovation and thought leadership activities for the

next generation of payments. It clears almost $2

3

trillion each day, representing nearly half of all

automated clearing house, funds transfer, and check

image payments made in the United States. See The

Clearing House’s web page at www.theclearinghouse.

org.

These cases present the question whether Section

506(d) gives a bankruptcy court the authority to

compel the holder of a mortgage to relinquish property

to the debtor, free of the lien, without payment in full

of the debt. Since this Court’s rejection of an almost

identical claim twenty years ago in Dewsnup v. Timm,

502 U.S. 410 (1992), a framework of reliance built

upon that decision has spread throughout the Nation’s

financial markets. To overturn that framework now —

more than two decades later — would destabilize

markets still recovering from the economic stresses of

the last several years. Amici have a direct interest in

the stability of that framework; we hope this brief will

help the Court understand the disruption to

commercial expectations that would follow a reversal

of course.

SUMMARY OF ARGUMENT

1. Inferior liens are now, and have been for more

than a century, an integral part of the Nation’s

mortgage lending markets. Although the particular

cases before the Court involve inferior liens on resi-

dential property, inferior liens are vital to commercial

markets as well. The decision in these cases inevitably

will ripple through that broader market.

The lenders that advance funds in that market have

operated for decades against the backdrop of this

Court’s decision in Dewsnup. Taken on its own terms,

the analysis of Dewsnup applies as directly to inferior

liens as it does to the first lien at issue in Dewsnup

4

itself. Indeed, a contrary rule in this situation would

be even more remarkable than it would have been in

Dewsnup, because it would allow a borrower to retain

collateral without paying anything to the lender. A

ruling that validated “lien-stripping” in this context

would cause marked and unanticipated disruption to

a central sector of our Nation’s still-fragile commercial

and consumer lending markets.

2. As long as the Nation has had bankruptcy laws,

their basic premise has been that “liens pass through

bankruptcy unaffected.” The details of those laws

have changed substantially as the role of the bank-

ruptcy process in managing financial distress has

grown, but with a single exception (promptly held

unconstitutional by this Court), no statute, outside the

reorganization context, has ever compelled a mortgage

lender to surrender its collateral to the debtor while

the loan remains unpaid. The argument that Section

506 of the Bankruptcy Code implicitly allows the

bankruptcy court to strip off a creditor’s lien — based

solely on the result of a current appraisal, and without

the procedural protections that cabin the reorganiza-

tion chapters ~ is so foreign to traditional practice that

it cannot be countenanced.

ARGUMENT

I. Stripping off Inferior Liens Would Disrupt

a Large Sector of the Commercial Lending

Market That Justifiably Has Relied on

This Court’s Interpretation of the

Bankruptcy Code.

There is nothing novel or unusual about taking

multiple liens to secure different loans on the same

piece of real estate. To the contrary, it has been a

common practice in this country for more than a

5)

century. This Court’s own decisions provide a glimpse

of that practice. E.g., Penn v. Calhoun, 121 U.S. 251

(1887) (adjudicating priority of second lien against

proceeds of a foreclosure sale); Louisville, E. & St.

Louis Railway v. Wilson, 138 U.S. 501 (1891) (adjudi-

cating propriety of receiver deducting expenses from

foreclosure proceeds due to holder of second lien).

More broadly, the ubiquity of inferior liens in the 19th

Century is plain from the pervasive discussion of the

subject in the treatises of the day, which reference

hundreds of reported opinions resolving disputes

between competing lienholders.* Inferior liens are

neither novel nor innovative; they are a cornerstone of

lending practice.

Today, inferior liens play a crucial role in any

number of markets. These cases involve a second lien

in the context of a residential mortgage loan, a type of

2 E.g., Charles T. Boone, Law of Mortgages of Real and Per-

sonal Property §§ 66-72 (1886) (discussing effects of registration,

notice, and agreement on priority between competing mortgage

lenders); William Richard Fisher, The Law of Mortgage as to the

Redemption, Foreclosure, and Sale in Equity of Property with the

Law of the Priority of Incumbrancers ch. vii (1857) (discussing

priority between competing mortgage lenders); Leonard A. Jones,

A Treatise on the Law of Mortgages of Real Property chs. xii-xiii

(5th ed. 1894) (discussing effects of registration and notice

on priority between competing mortgage lenders); Darius H.

Pingrev, Treatise on the Law of Mortgages of Real Property chs.

xviii, xxvi, (2nd ed. 1893) (discussing effects of registration on

priority between competing mortgage lenders and the right of a

junior lienholder to be subrogated to the rights of senior

lienholder); 1 Charles Hasting Wiltsie & James A. Kerr, A

Treatise on the Law and Practice of Foreclosing Mortgages on

Real Property, and of Remedies Collateral Thereto, with Forms

ch. vii (1897) (discussing procedures for foreclosures on property

burdened by junior liens).

6

loan that is not at ali unusual.’ But inferior liens

are common in the commercial arena as well.

Notwithstanding the capital constraints related to the

recent economic downturn, lenders use inferior liens

to protect billions of dollars of new loans each year.‘

More than $40 billion of such loans are presently

outstanding.® The backdrop against which the Court

considers these cases should include the commonplace

use of inferior liens in the commercial context as well

as the residential context directly at issue. The stakes.

of these cases are high, for their resolution will affect

lending decisions of both kinds.

No lender reasonably could have doubted the appli-

cation of Dewsnup to inferior liens — underwater or

not. As a glance at the Dewsnup opinion demon-

strates, neither a lien’s priority nor the value of the

collateral that secures it has any relation to the logic

that grounded this Court’s opinion in Dewsnup. The

Court explained that Section 506(d) invalidated liens

only when the underlying claims were disallowed

under Bankruptcy Code § 502: “[Pletitioner [can not]

‘strip down’ respondent’s lien, because respondent’s

claim is secured by a lien and has been fully allowed

pursuant to § 502.” Dewsnup, supra, 502 U.S. at 417.

Thus, lenders had every reason to rely on the Court’s

observation “that the creditor’s lien stays with the real

property until the foreclosure. That is what was

’ See Federal Reserve Statistical Release Z.1, Financial

Accounts of the United States tbl. L-218, ll. 1, 23, at 107 (Dec. 11,

2014) (data on second liens in the residential market).

* E.g., Steve Miller, Amid Quest for Yield, 2nd-Lien Leveraged

Lean Issuance Soars, forbes.com, March 14, 2014, available

at http//www .forbes.com/sites/spleverage/2014/03/14/amid-quest-

for-yield-2nd-lien-leveraged-loan-issuance-soars/.

® Standard & Poors, Leveraged Commentary and Data (2015).

7

bargained for by the mortgagor and the mortgagee.”

Id. In sum, under the reasoning of the Dewsnup

Court, the only criterion necessary for a lien to survive

the application of Section 506 is the allowance of the

underlying claim. The value an appraiser finds for

the collateral at the time of bankruptcy is wholly

irrelevant.

Indeed, from the perspective of commercial expec-

tations, the proposed intrusion on the lienholder’s

interest in these cases would be even more remarkable

than the intrusion that Dewsnup rejected. The “strip-

ping down” at issue in Dewsnup would have left the

lien in place, permitting a foreclosure if the borrower

failed to pay the reduced debt. By contrast, the

“stripping off” that respondents seek would invalidate

petitioner's liens entirely without any payment at

all.

The destabilizing effects of an adverse decision in

these cases on the $40 billion-dollar market for

commercial loans secured by inferior liens are

apparent. Lenders to businesses with volatile assets

would need to reckon with the likelihood that their

liens could be stripped off at any point in time when

the value of the collateral fell far enough to justify an

appraisal by a bankruptcy judge that would leave their

loan wholly “underwater” — preventing any recovery on

the loan even if the value of the collateral recovered

(or if the appraisal simply was mistaken). Because

inferior-lien loans, by definition, reach closer to the

margin of collateral value than first-lien loans,

concerns about limitations on the customary remedies

of the lenders that rely on them are even more chilling

than they are in the first-lien context.

Although these cases involve Chapter 7 filings, the

effects of lien-stripping under Section 506(d) on the

8

reorganization of troubled businesses would be even

starker. To be sure, a bankrupt firm has the ability in

a Chapter 11 plan to limit a secured lender’s recovery

to the value of its collateral. But Chapter 11 sanctions

such a limitation only in the context of the highly

structured process for plan confirmation, which pro-

vides numerous substantive and procedural protec-

tions for the lender. See, e.g., RadLAX Gateway Hotel,

LLC v. Amalgamated Bank, 132 S. Ct. 2065, 2069-73

(2012). Automatic lien stripping under Section 506(d),

by contrast, would allow the debtor immediately to

eliminate the rights of the inferior lienholder, solely on

the basis of a judicial valuation, without any recourse

to the market tests this Court has found so central

to the Chapter 11 process. See Bank of America Nat'l

Trust & Sav. Ass’n v. 203 North LaSalle Street

Partnership, 526 U.S. 434 (1999). In a context where

small mistakes in the valuation of collateral could cost

lenders tens of millions of dollars, the Court should

hesitate before overturning the justifiably long-settled

expectations of the affected parties.

li. The Bankruptcy Laws of this Country

That Preceded the Bankruptcy Code of

1978 Never Compelled the Holder of a

Mortgage to Surrender the Mortgaged

Property to the Bankrupt While the Debt

Remains Unpaid.

The Court has emphasized that a “sense of history

is needed to appreciate” the context of the Bankruptcy

Code. BFP v. Resolution Trust Corp., 511 U.S. 531,

540 (1994). Accordingly, we thought it would be useful

to the Court’s deliberations to discuss the treatment of

liens under the various federal bankruptcy statutes

that predated the adoption of the Bankruptcy Code of

1978. As the discussion below demonstrates, none of

9

those statutes gave bankruptcy courts the power to

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; this Court promptly invalidated the only

statute that purported to grant that power. See

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

555, 581-82 (1934).° Rather, as in so many other areas,

federal bankruptcy legislation has deferred to state

law for the definition of the rights and interests of

secured creditors. See Butner v. United States, 440

U.S. 48 (1978). Under state law, of course, a creditor’s

lien is discharged only by repayment of the debt or a

foreclosure sale.

A. The Temporary Bankruptcy Acts of the

Nineteenth Century Did Not Impair the

Rights of Secured Creditors

Before adoption of the first permanent bankruptcy

act in 1898, Congress passed temporary bankruptcy

statutes in 1800,’ 1841,° and 1867,° each in response

to a national financial crisis. See Louisville Joint

6 Before the adoption of the original Frazier-Lemke Act (ch.

869, 48 Stat. 1289 (1934), held unconstitutional in Louisville

Joint Stock Land Bank, supra), “none [of our national bankruptcy

acts had] sought to compel the holder of a mortgage to surrender

to the bankrupt either the possession of the mortgaged property

or the title, so long as any part of the debt thereby secured

remained unpaid.” /d. at 581-82.

’ Bankruptcy Act of 1800, ch. 19, 2 Stat. 19 (repealed by Act of

Dec. 19, 1803, ch. 6, 2 Stat. 248).

® Bankruptcy Act of 1841, ch. 9, 5 Stat. 440 (repealed by Act of

Mar. 3, 1843, ch. 82, 5 Stat. 614).

® Bankruptcy Act of 1867, ch. 176, 14 Stat. 517 (repealed by

Act of June 7, 1878, ch. 160, 20 Stat. 99).

10

Stock Land Bank, supra, 295 U.S. at 581-82."°

Although the drafting of the statutes differed

markedly, none had any substantive effects on liens."'

First, the 1800 Act provided: “[Nlothing contained

in this act, shall be taken, or construed to invalidate,

or impair any lien existing at the date of this act, upon

the lands or chattels of any person who may have

become'a bankrupt.” § 63, 2 Stat. at 36. Similarly, the

1841 Act provided: “[Njothing in this act contained

shall be construed to annul, destroy, or impair * * *

any liens, mortgages, or other securities on property,

real or personal, which may be valid by the laws of the

States respectively, and which are not inconsistent

with the provisions of the [sections of the statute

describing preferences and disallowed claims].” § 2,5

Stat. at 442. Finally, the 1867 Act provided: “[Nlo

mortgage of any vessel or of any other goods or

chattels, made as security for any debt or debts, in

good faith and for present considerations and other-

wise valid, and duly recorded, pursuant to any statute

of the United States, or of any State, shall be

invalidated or affected herby.” § 14, 14 Stat. at 523."

‘0 See generally Charles Warren, Bankruptcy in United States

History 10-126 (1935); Charles Tabb, The History of the

Bankruptcy Laws in the United States, 5 ABI L. Rev. 5, 14-15,

16-21 (1995); Stephen J. Lubben, A New Understanding of the

Bankruptcy Clause, 64 Case Western Res. L. Rev. 319, 343-48,

360-65, 373-78 (2013).

'! See Louisville Joint Stock Land Bank, supra, 295 U.S. at 582

(footnote omitted) (“The earlier bankruptcy acts created some

exemptions of unencumbered property; but none had attempted

to enlarge the rights or privileges of the mortgagor as against the

mortgagee.”).

“% Although the language of the 1867 Act protecting liens was

less explicit than the language of the earlier statutes, the courts

recognized that Ҥ 14 of the bankrupt law of 1867 * * * is

11

The courts took those statutes at face value, apply-

ing them most frequently in disputes over whether a

particular interest was sufficiently choate to amount

to alien. E.g., Ex parte Foster, 9 Fed. Cas. 508 (C.C.D.

Mass. 1842) (per Story, J.) (concluding that prejudg-

ment attachment did not create a lien for purposes of

the 1841 Act); Waller’s Lessee v. Best, 44 U.S. (3 How.)

111, 120 (1845) (per Taney, C.J.) (Because delivery of

a writ of execution to a sheriff perfects a lien under

Kentucky law, “the creditor is not deprived of this lien

by an act of bankruptcy on the part of the debtor

committed [later].”). There was never any doubt that

the liens remained unimpaired by the bankruptcy

filing. To the contrary, the cases are replete with

descriptions of the continuing robustness of the lien

after bankruptcy; the underlying theme is that the

bankruptcy process takes the liens as it finds them

under applicable State law."®

equivalent in effect to a provision in express terms for [liens’]

preservation — such as was made * * * in the bankrupt law of

1841.” Leighton v. Kelsey, 57 Me. 85, 90 (1869). Indeed, the

Leighton court thought the principle calling for the preservation

of liens was so clearly defined in earlier cases that it professed

that “one can enter the same field now only as a disciple and

copyist.” Id.

* E.g., Norton’s Assignee v. Boyd, 44 U.S. (3 How.) 426, 436

(1845) (per Taney, C.J.) (“It is quite clear that the liens and

mortgages which are valid under the state law must be protected

by the District Court of the United States sitting in bankruptcy,

and it will not be pretended that the creditor * * * would not have

been entitled, under any and all circumstances, to the proceeds of

that property to satisfy (the debt]”); Bellows v. Jenness, 48 US.

(7 How.) 612, 622 (1849) (*[T)he words of the proviso [protecting

liens} are of the most general and expansive character; they are

equivalent to a saving of all liens * * * from any construction of

the act [of 1841] that shall in any wise annul, destroy, or impair

them”); Bruner v. Sherley & Sherley, 27 Miss. (5 Cushm.) 407,

12

Although litigation under the 1800 Act seems to

have been sparse, by the time jurists confronted cases

under the 1841 Act, they recognized a crisp distinction

between the in personam liability of the bankrupt

(discharged in the bankruptcy proceeding) and the in

rem liability of the collateral (which passed through

the bankruptcy unaffected). The following discussion

from the Mississippi Supreme Court, considering the

effect of a bankruptcy discharge on a mortgage

reflected in a deed of trust, is illustrative:

The first question to be settled is, whether the

discharge of the appellant from the debt, by

his certificate as a bankrupt, extinguished

the deed in trust.

It is insisted, on his behalf, that the deed

was but a mere incident to the debt, and that

whatever discharged the debt necessarily

destroyed the deed, because the security

could not exist where the debt, which was

its foundation and support, was discharged.

*+*+ +

[That] objection is fully met by the second

section of the bankrupt act of Congress of

1841, which [makes] it manifest that, while

the privilege was granted to the debtor to be

personally discharged from the debt, any

security which the creditor might have,

consisting of a lien on property, was left in as

full force as though the debtor had never been

408-09 (1854) (explaining that despite a discharge under the 1841

Act, liens “were continued in full operation”); Reed v. Bullington,

49 Miss. 223, 228 (1873) (“The bankrupt law, as we have seen,

preserves the lien of a creditor in full vigor * * * ”).

13

discharged from the debt, for the security of

which the lien was made.

Bush v. Cooper, 26 Miss. (4 Cushm.) 599, 611-12

(1853). Although the statutory description of the dis-

charge in the 1841 Act was broad, courts concluded

without exception that the bankruptcy discharge could

have no effect whatsoever on the continued validity of

the lien."*

By the time of the 1867 Act, the topic became a

regular feature of this Court’s docket. Again, the

Court started from the premise that the assignee in

bankruptcy (which held the estate of the bankrupt)

stepped into the debtor’s position with respect to

preexisting liens under applicable State law: “What-

ever the bankrupt could do to make the assigned

property available for the general creditors [the

assignee] may do, but nothing more, except that he

may sue for and recover * * * fraudulent conveyances.”

Dudley v. Easton, 104 U.S. (14 Otto) 99, 103 (1881)

E.g., Bellows, supra, 48 U.S. (7 How.) at 623 (“[T]o give full

effect to all the provisions of the act lof 1841], the bankrupt’s

certificate must be made to operate as a discharge of his person

and future acquisitions, while, at the same time, the mortgagees

* * * shall be permitted to have their satisfaction out of the

property mortgaged * * * ”); Kittredge v. Warren, 14 N.H. 509,

515 (1844) (“[I}f the attachment [lien] is saved by the act [of 1841],

the certificate [of discharge] obtained under the act ought not to

destroy the attachment.”); 1 Peleg Chandler, The Bankrupt Law

of the United States, with an Outline of the System § 8, at 16

(1842) (explaining that a lien “within the meaning of the law * *

* would not be affected by the subsequent decree of bankruptcy

or discharge of the debtor”); Leighton, supra, 57 Me. at 89 (“[T)he

provisions in the bankrupt act [of 1867] are not to be so construed

as to prevent the rendition of {a judgment to perfect the lien] in

all cases where [the lien was acquired more than four months

before the bankruptcy proceeding].”).

14

(per Waite, C.J.) (emphasis added); see Yeatman v.

Savings Institution, 95 U.S. (5 Otto) 764, 767 (1877)

(per Harlan, J.) (“The established rule is that the

assignee takes the title subject to all equities, liens, or

incumbrances, whether created by operation of law or

by act of the bankrupt, which existed against the

property in the hands of the bankrupt.”)."°

As it happens, litigation under the Act of 1867

afforded the Court an opportunity to consider the

specific question at issue here — whether a bankruptcy

discharge vitiates not only the debt but also the lien

given to secure it. The issue was squarely presented

in the oft-cited decision in Long v. Bullard, 117 U.S.

617 (1886). The debtor in that case had filed for

bankruptcy under the Act of 1867, and retained

ownership of his homestead after that proceeding.

When the holder of a pre-bankruptcy mortgage sought

to foreclose, Long argued (much like respondents) that

the bankruptcy discharge had vitiated not only the

debt but also the lien. When the lower court rejected

that claim, the Court concluded that “there cannot be

a doubt of the correctness of the decision.” The Court

offered the matter-of-fact explanation that Bullard’s

6 See also, e.g., In re Hambright, 11 Fed. Cas. 314, 315

(W.D.S.C. 1869) (“What is meant by the expression ‘estate of the

bankrupt” Evidently such property and rights of the bankrupt as

the bankrupt act [of 1867] vests in the assignee. The assignee

can take nothing more than the bankrupt himself had in any

case, except the case of a fraudulent conveyance.”); Mattocks v.

Baker, 2 F. (2 Hask.) 455, 455 (D. Me. 1880); Orlando Bump, The

Practice in Bankruptcy, with the Bankrupt Law of the United

States as Amended § 20, at 375 (5th ed. 1872) (“When it speaks

of the estate of the bankrupt, it means such estate with all

the incumbrances existing upon it at the time of the bankruptcy

*_**? yy

15

“security was preserved notwithstanding the bank-

ruptcy of his debtor.” Long, supra, 117 U.S. at 621.

B. The Bankruptcy Act of 1898 Left Liens

Unimpaired.

Although the Bankruptcy Act of 1898, ch. 541, 30

Stat. 544, wrought great changes in bankruptcy

practice,'® it did not alter the traditional preservation

of liens. Section 67d codified the baseline rule:

Liens given or accepted in good faith and not

in contemplation of or in fraud upon this Act,

and for a present consideration, which have

been recorded according to law, if record

thereof was necessary in order to impart

notice, shall not be affected by this Act.

30 Stat. 564. The language was plain and direct, and

courts understood it as Congress wrote it. “Section

67d * * * declares that liens given or accepted in good

faith and not in contemplation of or in fraud upon this

act, shall not be affected by it.” City of Richmond v.

Bird, 249 U.S. 174, 177 (1919)."”

‘6 See, e.g., Lubben, supra, 64 Case Western Res. L. Rev. at

385-90 (summarizing important changes introduced in 1898);

Tabb, supra, 3 ABI L. Rev. at 23-26 (same).

’ Like its decisions interpreting the 1867 Act, the Court's

discussion of the 1898 Act emphasized the principle that the

trustee’s position against secured creditors was no better than

the debtor’s position before the bankruptcy filing. E.g., Everett v.

Judson, 228 U.S. 474, 479 (1913) (discussing intent “to fix the line

of cleavage with reference to the condition of the bankrupt estate

as of the time at which the petition was filed”); York Mfg. Co. v.

Cassell, 201 U.S. 344, 352 (1906) (“Under the provisions of the

bankrupt act the trustee in bankruptcy is vested with no better

title or right to the bankrupt’s property than belonged to the

bankrupt at the time when the trustee’s title accrued. * * * * The

16

As with the earlier acts, the 1898 Act rested on a

fundamental distinction between the discharge of the

debtor’s persona! liability and the preservation of the

liens given to secure the debtor’s obligations. That

distinction was immediately apparent to the earliest

courts to address the new statute:

[D}ebts which, by their nature, are provable

in bankruptcy, are released by a discharge in

bankruptcy; that is to say, a discharge in

bankruptcy releases the bankrupt from a

provable debt * * * and takes away the

creditor's right to proceed against him in

personam. But * * * such a discharge does not

affect a lien on the property of the bankrupt

*** provided the lien is otherwise valid. A

fair construction of the bankrupt act of 1898

leads to the conclusion that the discharge in

bankruptcy * * * released the debt secured by

the mortgage so far as to enforcement by this

creditor in a personal action against [the

debtor], but that discharge in no way affected

the lien which [the lender] held on the

property described in the mortgage.

Evans v. Rounsaville, 42 S.E. 100, 101-02 (Ga. 1902).

trustee * * * stands in the shoes of the bankrupt, and, as between

them, he has no greater right than the bankrupt.”); Thompson v.

Fairbanks, 196 U.S. 516, 526 (1905) (trustee takes “the property

of the bankrupt * * * in the same plight and condition that the

bankrupt himself had it”); Hewit v. Berlin Machine Works, 194

U.S. 296, 302 (1904) (“The present act, like all preceding

bankrupt acts, contemplates that a lien good at [the time of filing]

as against the debtor and as against all of his creditors shall

remain undisturbed.”).

17

The point was so central to operation of the Act that

the first edition of Collier’s treatise on bankruptcy

devoted a separately headed section to it:

Discharge Releases Only the Personal

Liability.—Nothing but the bankrupt’s personal

liability is released by the discharge. Liens upon

his [sic] property are in no way affected.

Whatever their character if they are valid by the

laws of the State and not rendered void by the

provisions of * * * the bankruptcy act, the

bankrupt’s discharge will not prevent their

enforcement. Thus, in actions to foreclose

mortgages the discharge may be pleaded as a

defense to the demand for a judgment for any

deficiency which may exist, but not as a bar to the

foreclosure proceedings.

2 The Laws of Bankruptcy and the National

Bankruptcy Act of 1898, ch. 3, § 17, at 155 (W.M.

Collier en]. ed. 1899) [hereinafter Collier (1st ed.)}."

C. The Chandler Act of 1938 Had No

Substantive Effect on Liens.

Bankruptcy practice underwent another major

revision with the adoption of the Chandler Act of 1938,

'* For a similar contemporaneous viewpoint, see, e.g., 1 Edwin

C. Brandenburg & William H. Oppenheimer, Brandenburg on

Bankruptcy § 1532, at 1121 (4th ed. 1917).

Valid and existing liens on specific property or trusts

therein securing a debt are not impaired by the

discharge.

A discharge in bankruptcy releases the bankruptcy

from a provable debt * * * and takes away the creditor's

right to proceed against him in personam, but it does

not affect a lien on his property * * * provided it is

otherwise valid.

18

ch. 575, 52 Stat. 840, which included a complete

recrafting of the provisions related to liens.'* Again,

those changes left intact the principle that a lender

cannot be compelled to relinquish its collateral to the

borrower until the debt is repaid.”°

Two provisions of the Chandler Act are relevant.

The first is Section 67a, the successor to section 67d of

the 1898 Act. Where the drafters of the 1898 Act had

made the affirmative statement that the statute had

no effect on liens, Section 67a of the Chandler Act

protected liens indirectly, by limiting the statute’s

effects on liens to those obtained “in fraud of the

provisions of this Act,” Chandler Act § 67a(1), 52 Stat.

at 875-76. All agree that the revised drafting “had no

substantive effect,” Dewsnup v. Timm, 502 US. 410,

418 n.1 (1992). Rather, the section was reorganized

because “the draftsmen of the 1938 Act desired

generally to specify only what should be invalid.” Id.

(quoting 4B Collier on Bankruptcy 4 70.70, at 771 (J

Moore 14th ed. 1979) (emphasis of Collier). As Justice

Frankfurter explained, section 67d “was omitted in the

'S For overviews of the “comprehensive” revisions made by the

Chandler Act, see, e.g., Tabb, supra, 3 ABI L. Rev. at 29-30;

Lubben, supra, 64 Case Western Res. L. Rev., at 385-90.

” That is not to say that the 1898 Act left liens unaffected.

The statute had a variety of procedural effects on secured

creditors. Most obviously, the bankruptcy proceeding stayed all

litigation against the debtor, thus bringing to a halt any collection

or foreclosure under state law. See Bankruptcy Act of 1898 § 11,

30 Stat. at 549; Collier (1st ed.), supra, ch. 3, § 11, at 100-14.

Similarly, the bankruptcy court also had considerable control

over the processes for assessing validity of liens, determining

their amount, and liquidating the collateral, at least if the

creditor chose to participate in the proceeding. See Isaac v. Hobbs

Tie & Timber Co., 282 U.S. 734, 737-39 (1931).

19

1938 revision because its wording permitted infer-

ences that by negative implication it disallowed

certain liens not otherwise invalidated by the Act, and

because the substance of the provision was thought to

be preserved in other sections—not because of

disapproval in policy.” Simonson v. Granquist, 389

U.S. 38, 43 (1962) (dissenting opinion).”!

The most important innovation of the Chandler

Act’s treatment of liens was the introduction of new

Chapters X, Chandler Act § 101 et seq., 52 Stat. at 883-

905, and XI, Chandler Act § 301 et seq., 52 Stat. at

905-16.” Those provisions, the predecessors of the

modern Code’s Chapter 11, 11 U.S.C. § 1101 et seg.,

authorized plans of reorganization that could alter the

rights of creditors. See Chandler Act § 216(1), 52 Stat.

at 895-96 (permitting the inclusion “in respect to

creditors * * * , secured or unsecured, * * * [of]

provisions altering or modifying their rights”).

Because those provisions applied only in plans of

reorganization, they would not have compelled a

release to the debtor itself; then as now, the absolute

priority rule would compel the elimination of any

21 See Goggin v. Division of Labor Law Enforcement, 336 U.S.

118, 126-27 (1949) (discussing “the general purpose of Congress

(in adopting the Chandler Act] to safeguard interests under Jiens

perfected before bankruptcy”); Oppenheimer v. Oldham, 178 F.2d

386, 389 (5th Cir. 1949).

* The Chandler Act’s provisions for plans of reorganization

were not entirely novel. Congress had amended the Bankruptcy

Act of 1898 five years earlier to permit “compositions” that

affected the rights of secured creditors. See Act of Mar. 3, 1933,

ch. 204, § 1, 47 Stat. 1467, 1467. See generally Louisville Joint

Stock Land Bank, supra, 295 U.S. at 586 n.16 (discussing those

provisions). Those provisions, however, authorized no

impairment of the unconsenting holder of a mortgage lien. See

id., 295 U.S. at 585-86.

20

equity interest of the original debtor in any case that

impaired the interest of an unconsenting secured

creditor.22 Thus, although it was more intrusive than

its predecessors, the Chandler Act did not go so far as

to compel a creditor to relinquish its collateral to its

borrower until the loan was repaid. More fundamen-

tally, as with present-day Chapter 11, the Chandler

Act permitted modification of a secured creditor's lien

only upon compliance with the procedural and

substantive protections afforded by a plan; it did not

permit the automatic lien-stripping accepted by the

court of appeals.

D. The Frazier-Lemke Act Did Limit the

Value of a Creditor’s Lien, but This

Court Held It Unconstitutional.

To be sure, one pre-Code enactment did purport to

limit the ability of secured creditors to retain their

liens through a bankruptcy proceeding. Enacted in an

effort to stem the flood of farm foreclosures related to

the Great Depression, the Frazier-Lemke Act, ch. 869,

48 Stat. 1289 (1934), sharply limited the remedies

available to mortgage lenders. Among other things,

the statute allowed a borrower to retain a farm, free of

a lien, if the farmer tendered into the court the value

of the property as appraised. Jd. at 1290 (codified

at 11 U.S.C. 5(sX7) (1936)). That provision had only

limited effect, however, because this Court -

emphasizing how far Frazier-Lemke went beyond the

23 See Northern Pacific Railway v. Boyd, 228 U.S. 482, 502-10

(1913); Kansas City Terminal Railway v. Central Union

Trust, 271 US. 445, 453-56 (1926); Case v. Los Angeles Lumber

Products Co., 308 U.S. 106, 114-32 (1939); Douglas Baird &

Robert Rasmussen, Boyd’s Legacy and Bankruptcy’s Ghost, 1999

Sup. Ct. Rev. 393, 397-408.

21

bounds of traditional bankruptcy rules — held the

statute invalid as a taking of the property interests

that lenders held in their collateral. Louisville Joint

Stock Land Bank, supra, 295 U.S. at 589-602.

The centrality of the lender’s right to retain the

entire value of its lien was underscored by the Court’s

treatment a few years later of the revised Frazier-

Lemke Act, ch. 792, 49 Stat. 942 (1935). In concluding

that the revised statute was constitutional, the Court

emphasized that the revised statute preserved “[t}he

right to retain the lien until the indebtedness thereby

secured is paid.” Wright v. Vinton Branch of Mountain

Trust Bank, 300 U.S. 440, 457 (1937). Indeed, the

opinion of Justice Brandeis went out of its way to

emphasize that pre-enactment “[almendments to the

bill subsequent to its introduction plainly demonstrate

careful intention to leave the lien wholly unimpaired.”

Id. at 458 n.2. As Justice Brandeis explained, the

original bill would have obligated the lender to accept

the appraised value of the collateral (the same course

of action that respondents advocate); the statute was

revised before adoption because of concerns that such

an intrusion on the rights of secured lenders would

amount to an unconstitutional taking of property. Id.

Only with that amendment did the statute pass this

Court’s constitutional scrutiny.

One thread runs through all those decisions and the

statutes that they construe: the principle that liens

pass through bankruptcy unaffected — except in the

carefully cabined circumstances of modern-day reor-

ganization proceedings — has deep roots in the common

law, the bankruptcy statutes, and the Constitution.

It applies to all liens, regardless of their priority,

regardless of the value of the collateral that secures

them.

22

CONCLUSION

Rejection of Dewsnup’s application to inferior liens

would fly in the face of historical practice and

destabilize a crucial sector of our all-too-fragile

lending markets. We respectfully submit that the

Court should reverse the decisions of the court of

appeals.

ELLIOT GANZ

LOAN SYNDICATIONS AND

TRADING ASSOCIATION

366 Madison Avenue

Fifteenth Floor

New York, NY 10017

(212) 880-3000

JOSEPH R. ALEXANDER

THE CLEARING HOUSE

ASSOCIATION L.L.C.

450 West 33rd Street

New York, NY 10001

(202) 612-9234

January 2015

Respectfully submitted,

RONALD J. MANN

Counsel of Record

435 West 116th Street

New York, NY 10027

(212) 854-1570

rmann@law.columbia.edu

IRA D. HAMMERMAN

KEVIN CARROLL

SECURITIES INDUSTRY AND

FINANCIAL MARKETS

ASSOCIATION

1101 New York Ave., N.W.

Washington, DC 20005

(202) 962-7300