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

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## Record

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

## Text

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

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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

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385016_0341%3A14. Public record. Not legal advice.