nos. 13-1421, 14-163 supreme court of the united statesnos. 13-1421, 14-163 supreme court of the...

Nos. 13-1421, 14-163

Supreme Court of the United States

BANK OF AMERICA, N.A.,Petitioner,

—v.—

DAVID B. CAULKETT,Respondent.

BANK OF AMERICA, N.A.,Petitioner,

—v.—

EDELMIRO TOLEDO-CARDONA,Respondent.

ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS

FOR THE ELEVENTH CIRCUIT

BRIEF FOR AMICI CURIAE PROFESSORS

JAGDEEP S. BHANDARI, SUSAN BLOCK-LIEB, LINDA

COCO, JESSICA DAWN GABEL, KENNETH N. KLEE,

GEORGE W. KUNEY, LOIS R. LUPICA, LAWRENCE

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

MARIE T. REILLY, KEITH SHARFMAN, AND

MICHAEL SOUSA IN SUPPORT OF RESPONDENTS

d

RICHARD LIEB

Counsel of Record

RESEARCH PROFESSOR OF LAW

ST. JOHNS UNIVERSITY

SCHOOL OF LAW

8000 Utopia Parkway

Jamaica, New York 11439

(212) 479-6020

(718) 990-1923

[email protected]

Attorney for Amici Curiae

ProfessorsFebruary 19, 2015

hawkec

Preview Stamp

www.supremecourtpreview.org

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64548 • COOLEY • USSC TCA • Client cx • 2-17-15

TABLE OF AUTHORITIES . . . . . . . . . . . . . . . . . . iii

INTEREST OF AMICI . . . . . . . . . . . . . . . . . . . . . . . 1

SUMMARY OF ARGUMENT . . . . . . . . . . . . . . . . 2

ARGUMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

I. UNDER THIS COURT’S PRE-CODEJURISPRUDENCE, A MORTGAGE THAT HAS NO UNDERLYINGCOLLATERAL VALUE MAY BE STRIPPED OFF AND THEREBYELIMINATED . . . . . . . . . . . . . . . . . . . . . . . 8

A. DEWSNUP DOES NOT PRECLUDETHE STRIPOFF OF A VALUELESSJUNIOR MORTGAGE . . . . . . . . . . . . . 8

B. THIS COURT’S WELL SETTLEDPRE-CODE JURISPRUDENCEALLOWS STRIPPING OFFWHOLLY UNDERWATERJUNIOR MORTGAGES . . . . . . . . . . . . 10

C. PETITIONER AND ITS AMICI’SPOSITION IS NOT SUPPORTEDBY RADFORD . . . . . . . . . . . . . . . . . . . . . 13

D. LONG V. BULLARD DID NOTESTABLISH A PRINCIPLE THATLIENS PASS THROUGHBANKRUPTCY UNAFFECTED . . . . 16

TABLE OF CONTENTSPAGE

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II. SECTION 506(d) REFLECTS THISCOURT’S JURISPRUDENCE UNDERWHICH A VALUELESS JUNIORMORTGAGE MAY BE STRIPPEDOFF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

A. JUST AS CONGRESS PROVIDEDFOR STRIPPING OFF JUNIORMORTGAGES IN REORGANIZATIONCASES IN THE PRE-CODE ERA, IT DID SO IN SECTION 506(d) . . 19

1. The Bankruptcy Code onlyprotects liens to the extent of the collateral’s value . . . . 19

2. The multiplicity of lien avoidance and modificationprovisions bears on the notionthat section 506(d) authorizesstripoffs of valueless juniormortgages . . . . . . . . . . . . . . . . . . . 22

B. PETITIONER READS SECTION506(d) ONLY TO VOID A LIENTHAT SECURES A CLAIMDISALLOWED UNDER SECTION502(b)(1). CONGRESS WOULDNOT ENACT A PROVISION THATIS SUPERFLUOUS . . . . . . . . . . . . . . . . 24

III. BANKRUPTCY’S UNDERLYING GOAL TO PROVIDE DEBTORS WITH A FRESH START IS IMPORTANT IN CHAPTER 7 . . . . . . 26

CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

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Bryan v. Easton Tire Co., 262 Ark. 731 (1978) . . . . . . . . . . . . . . . . . . . . . . 25

Burlingham v. Crouse, 228 U.S. 459 (1913) . . . . . . . . . . . . . . . . . . . . . . 26

Carpenter v. Longan, 83 U.S. (16 Wall) 271 (1872) . . . . . . . . . . . . 25

City of Richmond v. Bird, 249 U.S. 174 (1919) . . . . . . . . . . . . . . . . . . . . . . 18

Coon v. Shry, 209 Cal. 612 (1930) . . . . . . . . . . . . . . . . . . . . . . 25

Cooper Indus., Inc. v. Aviall Svcs., Inc., 543 U.S. 157 (2004) . . . . . . . . . . . . . . . . . . . . . . 26

Dewsnup v. Timm, 502 U.S. 419 (1992) . . . . . . . . . . . . . . . . . . . . .passim

Ecker v. Western Pac. R. R. Corp., 318 U.S. 448 (1943) . . . . . . . . . . . . . . . . . . . . .passim

Emil v. Hanley, 318 U.S. 515, 521 (1943) . . . . . . . . . . . . . . . . 19

Fassett v. Mulock, 5 Colo. 466 (1880) . . . . . . . . . . . . . . . . . . . . . . . . 25

Flyer v. Sullivan, 134 N.Y.S.2d 521 (App. Div. 1st Dep’t. 1954) . . . . . . . . . . . . . . 25

Harmon v. United States through Farmers Home Administration, 101 F.3d 574 (8th Cir. 1996) . . . . . . . . . . . . 20, 24

TABLE OF AUTHORITIESPAGE(S)Cases:


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In re 620 Church Street Bldg. Corp.,299 U.S. 24 (1936) . . . . . . . . . . . . . . . . . . . . . .passim

In re Adams Apple, Inc., 829 F.2d 1484 (9th Cir. 1987) . . . . . . . . . . . 23

In re Bartlett, 168 B.R. 488 (Bankr. D.N.H. 1994) . . . . . 28

In re Briggs Transp. Co., 780 F.2d 1339 (8th Cir. 1985) . . . . . . . . . . . 21

In re Cummings, 214 B.R. 126 (D.N.J. 1997) . . . . . . . . . . . . . . 20

In re Gledhill, 164 F.3d 1338 (10th Cir. 1999) . . . . . . . . . 20

In re Golden Plan of Calif., Inc., 829 F.2d 705 (9th Cir. 1986) . . . . . . . . . . . . 20

In re Hann, 476 B.R. 344 (1st Cir. B.A.P. 2012). . . . . 24

In re Pond, 252 F.3d 122 (2d Cir. 2001) . . . . . . . . . . . . . 22

Jackson ex dem. Curtis v. Bronson, 19 Johns. 325 (N.Y. Sup. Ct. 1822) . . . . . 25

Jordan v. Sayre, 24 Fla. 1 (1888). . . . . . . . . . . . . . . . . . . . . . . . . . . 25

Katchen v. Landy, 382 U.S. 323 (1966) . . . . . . . . . . . . . . . . . . . . . . 24

Kelly v. United States, 826 F.2d 1029 (Fed. Cir. 1987). . . . . . . . . . 26


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Knight v. C.I.R., 552 U.S. 181 (2008) . . . . . . . . . . . . . . . . . . . . . . 26

Long v. Bullard, 117 U.S. 617 (1886) . . . . . . . . . . . . . . .5, 16, 17, 18

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

Marrama v. Citizens Bank of Mass., 549 U.S. 365 (2007) . . . . . . . . . . . . . . . . . . . . . . 27

Matter of Gifford,669 F.2d 468 (7th Cir. 1982) . . . . . . . . . . . . 21

Matter of Lindsey,823 F.2d 189 (7th Cir. 1987) . . . . . . . . . . . . 24

Schleuter Co., Inc. v. Sevigny,564 N.W.2d 309 (S.D. 1997) . . . . . . . . . . . . . 25

Sullivan v. Stroop,496 U.S. 474, 484 (1990) . . . . . . . . . . . . . . . . 21

United Sav. Assn. of Tex. v. Timbers ofInwood Forest Assoc., Ltd.,484 U.S. 365 (1988) . . . . . . . . . . . . . . . . . . . . . . 21

United States v. Ron Pair Enterprises, Inc.,489 U.S. 235 (1989) . . . . . . . . . . . . . . . . . . . . . . 20

Vanston Bondholders Protective Cmte. v. Green, 329 U.S. 156 (1946) . . . . . . . . . . . . . . . . . . . . . . 24

Wade v. Bradford,39 F.3d 1126 (10th Cir. 1994) . . . . . . . . . . . 22

Wright v. Union Central Life Ins. Co.,304 U.S. 502 (1938) . . . . . . . . . . . . . . . . . . . . . . 14

Wright v. Union Central Life Ins. Co., 311 U.S. 273 (1940) . . . . . . . . . . . . . . . . . . .3, 11, 14


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Statutes:

11 U.S.C. § 103 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

11 U.S.C. § 361 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

11 U.S.C. § 362 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

11 U.S.C. § 364(d)(1) . . . . . . . . . . . . . . . . . . . . . . . . . 23

11 U.S.C. § 502 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

11 U.S.C. § 502(b)(1) . . . . . . . . . . . . . . . . . . . . . . . . . 24

11 U.S.C. § 506 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .passim

11 U.S.C. § 506(a) . . . . . . . . . . . . . . . . . . . . . . . . . . .passim

11 U.S.C. § 506(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

11 U.S.C. § 506(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

11 U.S.C. § 506(d) . . . . . . . . . . . . . . . . . . . . . . . . . . .passim

11 U.S.C. § 510(c)(1) . . . . . . . . . . . . . . . . . . . . . . . . . 23

11 U.S.C. § 522(f) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

11 U.S.C. § 543(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

11 U.S.C. § 545 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

11 U.S.C. § 547(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

11 U.S.C. § 548(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

11 U.S.C. § 552 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

11 U.S.C. § 724 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

11 U.S.C. § 1123(a)(5)(E) . . . . . . . . . . . . . . . . . . . . 4

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

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


viiPAGE(S)

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

Legislative History:

H.R. Rep. No. 95-595 (1977) . . . . . . . . . . . . . . . . . 22, 26

Other Authorities:

5 Collier on Bankruptcy, ¶ 77.17 (14th ed. 1978, first published in 1943). . . . . . . . . . . 13

Steve Miller, Amid Quest For Yield, 2nd-Lien Leveraged Loan Issuance Soars (Forbes.com March 14, 2014), available at http://tinyurl.com/nk9zhvx . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7


INTEREST OF AMICI 1

The amici2 are a group of law professors whohave devoted their careers to the study andteaching of bankruptcy law. Their interest is toencourage the Court to apply the BankruptcyCode (the “Code”)3 in light of its overall structureand to read its provisions consistently, therebyproviding predictability for future cases. Theamici are keenly interested in this appeal becausethe outcome of the issue before the Court will havean impact on an enormous number of business and

64548 • COOLEY: Amici • USSC • 3rd Proof

1 Pursuant to Rule 37 of the Rules of this Court, theamici file this brief with the written consent of both parties,which are on file with the Clerk. No person or entity includ-ing the amici or their counsel made a monetary contributionfor the preparation or submission of this brief.

2 The amici are the following law professors who teachat the law schools indicated next to their names: Jagdeep S.Bhandari, Florida Coastal College of Law; Susan Block-Lieb,Fordham University School of Law; Linda Coco, BarryUniversity School of Law; Jessica Dawn Gabel, GeorgiaState University College of Law; Kenneth N. Klee, UCLASchool of Law; George W. Kuney, University of TennesseeCollege of Law; Lois R. Lupica, University of Maine Schoolof Law; Lawrence Ponoroff, University of Arizona James E.Rogers College of Law; C. Scott Pryor, Regent UniversitySchool of Law; Nancy B. Rapoport, University of NevadaWilliam S. Boyd School of Law; Marie T. Reilly, Penn StateUniversity Dickenson School of Law; Keith Sharfman, St.John’s University School of Law; and Michael Sousa,University of Denver Sturm College of Law. The positionstaken in this brief are theirs alone and may not be attributedto their law schools or any law firms with which they areaffiliated or clients whom they represent in unrelatedmatters.

3 All references in this brief to numbered sections areto the Bankruptcy Code, 11 U.S.C.

individual debtors seeking a fresh start underchapter 7 of the Code. Chapter 7 debtors oftenhold property, including their homes, subject to afirst mortgage and sometimes also subject to avalueless junior mortgage. The amici believe thatthe correct view of section 506(d) of the Code isthat it provides for stripping off a wholly valuelessjunior mortgage in a chapter 7 case, therebyfurthering the debtor’s opportunity for a freshstart.

SUMMARY OF ARGUMENT

When the collateral for a claim secured by asecond mortgage lacks sufficient value to providefull payment of the first mortgage claim, it shouldnot be treated as an “allowed secured claim” undersection 506(d) of the Code. This is because such aclaim constitutes an unsecured claim, not asecured claim under the clear definitions of“secured claim” and “unsecured claim” in section506(a) of the Code. This reading of the Code issupported by a pre-Code practice under whichvalueless junior mortgages were stripped off.

Decades before the enactment of the Code, thisCourt’s jurisprudence regarding the treatment ofjunior secured creditors in bankruptcy casesestablished that their rights were limited to thevalue of the collateral securing their claims. Thiswas the established practice in reorganizationcases, under which valueless junior mortgageswere terminated, in recognition of the fact thatthey had no value that needed protection.

During the pre-Code era, the cases before thisCourt in which liens passed through bankruptcy

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involved first mortgage liens, whereas in severalother cases addressed by this Court it held thatworthless junior mortgage liens should be treatedas unsecured claims. As held in Wright v. UnionCentral Life Ins. Co., 311 U.S. 273, 278 (1940)(herein “Union Central”), a junior mortgage isentitled to protection only to the extent of thevalue of the collateral. However, Dewsnup v.Timm, 502 U.S. 410 (1992) (herein “Dewsnup”), inaddressing the treatment of a first mortgage,relied on the pre-Code case law under which firstmortgages backed by some collateral value couldsurvive a bankruptcy. Notably, Dewsnup lacks anydiscussion of this Court’s carefully developed pre-Code jurisprudence authorizing the stripoff ofvalueless second mortgages. See In re 620 ChurchStreet Bldg. Corp., 299 U.S. 24 (1936) (herein“Church Street”); Ecker v. Western Pac. R. R.Corp., 318 U.S. 448 (1943) (herein “Ecker”).

A half-century later, this Court, in Dewsnup,addressed the treatment under the Code of apartially secured first mortgage. In holding that afirst mortgage could not be stripped down undersection 506(d), the Court did not address whethera valueless second mortgage could be stripped offand did not cite this Court’s groundbreaking pre-Code decisions under which valueless secondmortgages were stripped off. In Dewsnup, thisCourt held that when a claim’s collateral covered32.5% of the first mortgage debt, the mortgagecould not be stripped down to its value undersection 506(d) in a chapter 7 case. The Court,however, candidly acknowledged that it wasinclined to rule otherwise and to read “allowedsecured claim” in section 506(d) in accordancewith section 506(a). The Court also carefully

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limited its holding to the “strip down” issue posedwhere a mortgage is backed by some collateralvalue, stating that its resolution of the issue posedby “other facts” would “await their resolution onanother day.” Id . at 416–17. This Court ispresented with an opportunity to consider in thiscase “other facts” that give rise to whether itstheory in Dewsnup should be applied in resolvingthe treatment of a valueless second mortgageunder section 506(d). The amici submit that theCourt’s analysis in Dewsnup for rejecting stripdowns of partially secured first mortgages doesnot apply to require the survival after bankruptcyof a valueless second mortgage.

In construing the text of sect ion 506 asambiguous, the Court in Dewsnup relied on whatit said was “the pre-Code rule that liens passthrough bankruptcy unaffected.” Dewnsup, 502U.S. at 417. However, this Court ’s pre-Codejurisprudence on the treatment of mortgages inbankruptcy cases makes clear that liens did notalways pass through bankruptcy unaffected, andindeed that valueless mortgages were stripped offunder a bankruptcy statute. Although the Court’sjurisprudence allowing the stripoff of valuelesssecond mortgages developed in reorganizationcases, the Court’s underlying theory was based onthe valuelessness of the mortgaged property, notbecause the case sought reorganization. TheCourt’s stripoff theory is no less applicable in achapter 7 case than in cases under other chaptersof the Code, although sect ion 1123(a)(5) (E)expressly authorizes the modification of liensunder a chapter 11 reorganization plan.

The Court in Dewsnup also relied on LouisvilleJoint Stock Land Bank v. Radford, 295 U.S. 555

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(1935) (herein “Radford”), without citation to theimportant opinions of this Court that followedclosely after Radford during the 1930s and 1940s.As the amici show, Union Central, Church Street,and Ecker negated Radford. These later decisionsrejected Radford’s focus on the property rights ofa first mortgage holder, and its original contractbargain, and instead were informed by a debtor’sentitlement to a fresh start implemented by thedischarge provision of the bankruptcy law. TheCourt in Dewsnup also relied on Long v. Bullard,117 U.S. 617 (1886) (herein “Long”), which heldthat a debtor’s discharge in bankruptcy onlydischarged his personal liability for the mortgagedebt, but did not discharge the mortgage itself.Long, however, did not establish a principle orrule of law that a mortgage could not be voided fora reason other than the discharge. Indeed, Longnever stated that liens pass through bankruptcyunaffected. Although that case did not establishthat there was a practice for liens to pass throughbankruptcy unaffected, later cases misread it forthat principle, without examining the pre-Codedecisions of this Court under which juniormortgages were voided.

The amici urge this Court to apply its earlydecisions allowing liens to be stripped off as thebasis for reading section 506(d) as authorizing thevoiding of a valueless second mortgage.Furthermore, under the Code as enacted in 1978,liens clearly do not pass through bankruptcyunaffected. Contrary to petitioner’s contention, nomandate can be found in the Code for liens to passthrough bankruptcy unaffected, which isunderscored by the numerous provisions of theCode under which liens are modified or even

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removed. Indeed, such other provisions providefor affecting mortgages in various ways, withoutregard to whether the collateral has value to coverthe debt. Section 506 was written to deal with thevery situation in which liens are undersecured orwholly unsecured and are not covered by theseother lien-affecting provisions. Section 506(a), as apart of the overall structure of the Code in regardto the treatment of liens, establishes for purposesof other Code provisions, including section 506(d),that a claim secured by a lien on property is a“secured claim” only to the extent of the value ofthe property.

Moreover, petitioner’s contention that 506(d)exists solely to void secured claims that aredisal lowed under sect ion 502, is facial lyerroneous. Reading 506(d) in such a manner wouldrender it supefluous, because by operation of law alien is already void if the underlying claim isunenforceable. This Court is loath to read astatute in such a manner.

The Code’s “limited to value” theory is stronglysupported by the fresh start objective of itsdischarge provision. A debtor’s fresh start shouldnot be impaired by treating a valueless mortgageas if it has value. A discharge is designed to freehonest debtors from their dischargeable unsecureddebt so as to give them an opportunity for a freshstart. Many holders of first mortgages enter intopost-bankruptcy agreements revising their claimsproviding, among other arrangements, fordeferred payments or reducing the amount of theclaim. There is good reason to encourage themaking of such agreements. They enhance thedebtor’s opportunity for a fresh start by enabling

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the debtor to retain his or her property. They alsobenefit first mortgagees because such agreementsoffer them a chance to effect a larger recoverythan otherwise, and to avoid the cost, delay, anduncertainty of a mortgage foreclosure proceeding.However, such a post-bankruptcy agreementcannot be effectuated without the consent of thesecond mortgage holder. This is good reason toallow the stripoff of a valueless second mortgage.The denial of a r ight to str ip of f a whollyunderwater second mortgage would only serve toallow its holder, until it could extract somepayment on its valueless mortgage, to stand in theway of a new agreement between the debtor andthe first mortgagee revising the mortgage debt.

Petitioner’s amici do not offer a cogent economicbasis for precluding stripoffs of valueless juniormortgages. The amicus brief of its amici, LoanSyndications and Trading Association, et al.(herein together, “LSTA”) opposes al lowingstripoffs. It relies primarily on a short article in aperiodical, which states that there is a demand byprivate equity investment f irms for juniormortgages because “[i]n today’s yield-starvedlandscape, second-l ien loans are an oasis ofrelatively high margins.” LSTA’s amicus brief at 6n. 4 (citing Forbes.com article, March 14, 2014).The interest of the LSTA amici in the investmentopportunit ies and large prof its for theirconstituencies is understandable, but does notdemonstrate that allowing stripoffs in chapter 7cases will produce the dire consequences theysuggest will result. Indeed, the United States,which filed an amicus brief in Dewsnup because ofits keen interest in first mortgages, chose not tofile an amicus brief in this case. The silence of the

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United States in this case suggests that theconcern of petitioner’s amici with allowing thestripoff of valueless junior mortgages isunwarranted. The concerns of LSTA and theirconstituencies should be directed to the Congress,not this Court.

ARGUMENTPOINT I

UNDER THIS COURT’S PRE-CODEJURISPRUDENCE, A MORTGAGE THAT

HAS NO UNDERLYING COLLATERALVALUE MAY BE STRIPPED OFF AND

THEREBY ELIMINATEDA. DEWSNUP DOES NOT PRECLUDE THE STRIP-

OFF OF A VALUELESS JUNIOR MORTGAGE

There was a pre-Code practice under whichwholly underwater junior mortgages were strippedoff in bankruptcy. This practice implemented thisCourt’s pre-Code jurisprudence that developedunder reorganization statutes enacted byCongress in the 1930s. As analyzed by the Court,a wholly underwater junior mortgage had novalue, and thus needed no protection. The Court’stheory was based on the valuelessness of such amortgage, not because the question as to the treat-ment of a secured claim arose under a reorganizationstatute. The Court’s jurisprudence applies equallyin a bankruptcy case for liquidation. A valuelessjunior mortgage does not gain value because thequestion of its treatment arises in a liquidationcase, or lacks value only when addressed in areorganization case. A valueless junior mortgageshould thus be subject to a stripoff in any caseunder the bankruptcy law.

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There is a difference between a valueless secondmortgage and a first mortgage backed by at leastsome value. It is most unusual for the foreclosureof a mortgage to yield proceeds in an amountsufficient to cover even the entire amount of thefirst mortgage on the property. Second mortgagesare generally just out of the money. This Court’sdecision in Dewsnup should be understood in thatl ight. In Dewsnup , the mortgagee’s claim ofapproximately $120,000 was backed by mortgagedproperty valued by the court at $39,000, or only32.5% of the debt. See Dewsnup, 502 U.S. at 413.Dewsnup addressed a partially secured claim. Thetreatment of a wholly unsecured claim was notbefore the Court, and its opinion neither reachedthat issue nor addressed it. This issue is amongthose left by the Court in Dewsnup for resolutionon another day. See Id. at 417.

Although Dewsnup poses a very different issuethan is presented by this case, petitioner and itsamici, LSTA, rely on Dewsnup’s approach to thetreatment of first mortgages backed by collateralas dispositive of this case. They mistakenly urgethat Dewsnup applies because of a claimed pre-Code practice for liens to pass through bankruptcyunaffected. That assertion is wrong on its facebecause of the pre-Code practice under whichwholly underwater second mortgages wereextinguished and thus did not pass throughbankruptcy at all. Dewsnup’s recognition of thepre-Code practice should be l imited to thetreatment of first mortgages, which may haveoften survived bankruptcy. Moreover, petitionerand its amici also mistakenly assert this Court’s1935 decision in Radford as controlling precedent.Radford , l ike Dewsnup , did not address the

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treatment of a valueless mortgage. Moreimportantly, Radford ’ s statement that amortgagee could “insist upon full payment beforegiving up his security,” 295 U.S. at 580, wasdictum, and Radford was itself negated by a seriesof decis ions of this Court rendered shortlythereafter. See Point I.B infra.

B. THIS COURT’S WELL SETTLED PRE-CODEJURISPRUDENCE ALLOWS STRIPPING OFFWHOLLY UNDERWATER JUNIOR MORTGAGES

Beginning in the 1930s, this Court heardseveral bankruptcy appeals involving the rights ofsecured creditors whose collateral under juniormortgages was secured by property whose valuewas not suff ic ient even to cover the seniormortgage on the property. Under the Court’sjurisprudence developed in several ground-breaking opinions, a junior mortgagee’s rightswere held to be l imited to the value of thecollateral, as determined by the court in thebankruptcy case. See, e.g., Church Street, 299 U.S.at 27. When the value of the property wasinsufficient even to pay the amount of a firstmortgage on the property, this Court squarelyheld that a junior mortgage, lacking any collateralvalue, could be stripped off entirely and therebyeliminated. A valueless mortgage claim was thustreated for what it was, namely an unsecuredclaim. See, e.g., Ecker, 318 U.S. at 475–76.

By contrast, under Radford, decided in 1935before this Court formulated its jurisprudencebased on the value of a lien, first mortgage lienswere viewed as enforceable after bankruptcybased on the amount due. Significantly, however,Radford’s earlier “full payment” view was negated

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by several decisions of this Court that limited therights of the creditor under a mortgage to thevalue of the property as determined by the courtin the bankruptcy case. The amici urge that theCourt should read section 506 in light of its pre-Code decisions, and that there is no basis for theCourt to resurrect Radford’s discarded view that amortgage cannot be terminated except by paymentin full, particularly where, as here, the lien atissue is a wholly underwater junior mortgage.

The first of these groundbreaking decisions wasChurch Street, decided in 1936. The Court heldthat because the subject property was worth only55% of the amount due on a first mortgage claim,a second mortgage had no collateral value toprotect it, and the holders thus had no right toreceive any distribution on their claims in areorganization under section 77B of the formerBankruptcy Act. See Church Street, 299 U.S. at27. As analyzed by this Court : “Here thecontrolling finding is not only that there was noequity in the property above the first mortgage,but that petitioners’ claims were appraised by thecourt as having ‘no value.’ There was no value tobe protected.” Id.

Four years later , in Union Central , a caseapplying section 75, subs.(3) of the BankruptcyAct as enacted in 1935, this Court held that therights of a secured party were limited to the valueof the collateral. See Union Central, 311 U.S. at278. In that case the Act contained conflictingprovisions. Under one provision, the debtorelected to redeem the subject property from amortgage in the amount of $15,903.68 for the$6,000 value found by the bankruptcy court, andasserted its r ight to be discharged from an

11


obligation to pay the unpaid balance of the debt.See Id. at 276. After the debtor attempted toexercise this r ight , the mortgagee assertedanother provision of the Act, which granted themortgagee a right to compel a public sale of theproperty. See Id. at 276–77. In reconciling thisstatutory inconsistency, this Court ruled that thedebtor’s right to purchase prevailed, observingthat the Act was intended to protect distresseddebtors—in that case farmers—“faced with thedisaster of forced sales and an oppressive burdenof debt.” Id. at 278. Specifically, the Court heldthat the debtor had the right to purchase theproperty at its value as determined by the court,observing that “[t]here is no constitutional claimof the creditor to more than that.” Id. This resultwas reached even though the Act afforded a debtorthree years to decide whether to elect to purchasethe property, because during this period the rightsof the creditor were protected “to the extent of thevalue of the property.” Id . Rejecting “narrowformalistic interpretations which disregard thespirit and the letter of the Act,” the Court heldthat the debtor was entitled to have the value ofthe property fixed by the court and to redeem atthat value. Id. at 279, 281. To deny the debtor’sright to redeem at the value fixed by the court“would be to rewrite the Act.” Id. at 281.

Union Central was soon followed by this Court’sdecision in Ecker, which, relying on Church Street,held that the claims of creditors holding juniormortgages could be written off because the entirevalue of the properties had been exhausted bysenior mortgages and thus were valueless. Ecker,318 U.S. at 475–76. In so holding, the Court statedthat the mere possibility that the property might

12


have increased earning power in the future didnot require that the junior mortgagees be providedwith an equity security by means of which theycould share in a possible future increase in value.See Id. at 476. As stated in the leading treatise onpre-Code bankruptcy law, an underwater mortgagemay be “appraised out, [i.e. stripped off] because aforced sale would leave nothing for it, even thoughthere may be value behind the junior claims on agoing concern basis.” 5 Collier on Bankruptcy, ¶77.17, p. 583 (14th ed. 1978, first published in1943) (citing Church Street and Ecker).

C. PETITIONER’S AND ITS AMICI’S POSITION ISNOT SUPPORTED BY RADFORD

Union Central , Ecker , and Church Streetrepresent an important part of this Court ’sjurisprudence regarding the treatment of liensunder the bankruptcy law. Indeed, in light ofthese decisions, it should not have been a surprisethat section 506 was written to incorporate thewell-established pre-Code doctrine under whichvalueless junior mortgages were stripped off.Despite the holdings of these cases, petitioner andits amici do not discuss or even cite the decisionsin Union Central , Ecker and Church Street .Instead, they urge the Court to rely on the dictumin its earlier 1935 decision in Radford. Unlike itssubsequent decisions that stripped off whollyunderwater junior mortgages, Radford expressedthe view that a mortgagee was entitled to thebenefit of its bargain with the debtor, stating:“The right of the mortgagee to insist upon fullpayment before giving up his security has beendeemed of the essence of a mortgage.” 295 U.S. at580. Radford ’s view, however, in addition to

13


having been later negated, was merely dictum.The Court’s holding was that the retroactiveapplication of the statute at issue to pre-existingmortgages violated the Fifth Amendment ’sprohibition against impairing the obligations ofcontracts. See Id. at 589. In not perpetuatingRadford’s dictum, this Court rejected Radford’sview that a mortgage continues to exist until fullpayment of the debt i t secures and may beforeclosed, instead recognizing the reality that awholly underwater junior mortgage is anunsecured claim.

Indeed, Union Central represents the antithesisof the position taken by the United States in itsamicus brief filed in Dewsnup, upon which theCourt relied in that case. There, the United Statescited Radford as “[t]he best illustration of theclear understanding of the inviolability of liens inbankruptcy proceedings.” United States’ AmicusBr. for Resp. at 26. By sharp contrast, in anearlier decision in the Union Central case, thisCourt stated that “[p]roperty rights do not gainany absolute inviolability in the bankruptcy courtbecause [they are] created and protected by statelaw.” Wright v. Union Central Life Ins. Co., 304U.S. 502, 517 (1938) (emphasis added). Indeed,the Court made clear that Congress “mayauthorize the bankruptcy court to affect [statelaw] property rights, provided the limitations ofthe due process clause are observed.” Id. Relianceby petit ioner and its amici on Radford asdemonstrative of a pre-Code “payment in full”entitlement of secured creditors missed the mark.

Invoking Dewsnup , LSTA’s amicus briefmisstates pre-Code bankruptcy law by statingthat nothing in the old Acts empowered courts “to

14


compel a lienholder—holding a senior lien or ajunior lien, regardless of the collateral’s value—torelease its collateral to the debtor while its loanremained unpaid.” LSTA’s amicus brief at 9. In anattempt to support that position, they too rely onRadford. See Id. (“this Court promptly invalidatedthe only statute that purported to grant thatpower.”) (citing Radford, 295 U.S. at 581–82). Thepetitioner itself relies on Radford in the sameimproper manner: “the ‘right of the mortgagee toinsist upon full payment before giving up hissecurity has been deemed of the essence of amortgage’ throughout the history of bankruptcylaw.” Pet. Br. at 23 (citing Radford, 295 U.S. at580). Particularly, petitioners rely on Radford,arguing that “before the enactment of theBankruptcy Code it was settled law that lienspassed through l iquidation proceedingsunaffected, regardless of the value of thecollateral securing them.” Pet. Br. at 30 (citingDewsnup, 502 U.S. at 418; Radford, 295 U.S. at579).

Even though Union Central negated Radford’srule that a creditor is entitled to full satisfactionof its debt before its mortgage may be affected,nowhere in petit ioner ’s account of pre-Codehistory is Union Central mentioned. Likewise,Union Central is absent from petitioner’s amici’sdiscussion of “the treatment of liens under thevarious federal bankruptcy statutes thatpredated” the Code. LSTA’s amicus brief at 8.Dewsnup also did not cite Union Central.Thisomission may be explained by the fact that thetreatment of valueless liens was not before theCourt in Dewsnup, and because the Court thererelied on Radford , which involved a primary

15


mortgage that was supported by substantialvalue.

The amici urge the Court not to rely onRadford ’s negated dictum, particularly in thiscase involving a junior mortgage that iscompletely underwater, unlike the seniormortgage in Radford that was backed bysubstantial collateral value. Indeed, the Courtshould read section 506 as it was written, just asthis Court read the earlier bankruptcy acts in itsmajor pre-Code opinions that superseded Radford.The petitioner and its amici offer no plausiblereason for calling on the Court to rehabilitateRadford and to reject the established pre-Codepractice allowing wholly underwater mortgages tobe stripped off.

D. LONG V. BULLARD DID NOT ESTABLISH APRINCIPLE THAT LIENS PASS THROUGHBANKRUPTCY UNAFFECTED

The amici urge that Long v. Bullard , uponwhich petitioner and its amici also rely heavily,does not, as claimed by petitioner and its amici,establish a general principle that liens passthrough bankruptcy unaffected. Although somemore recent cases have relied on Long for thatprinciple , Long did not so hold and did notarticulate that principle. In Long , a creditorloaned money to the debtor, a portion of theproceeds of which were “used to pay of f theincumbrance on the homestead.” 117 U.S. at 619.With the payoff of the existing mortgage, themortgage received by the creditor as security forthe loan became a first mortgage. Long did notinvolve and did not address the treatment of avalueless junior mortgage under the bankruptcy

16


law. The issue before the Court was “the effect ofthe discharge in bankruptcy upon the right of [acreditor] to enforce a lien upon the property inexistence at the time of the commencement of theproceedings in bankruptcy.” Id. at 620. Holdingthat the discharge did not release the lien, theCourt deemed a state foreclosure proceedingproper. See Id. at 621. Long stands for theproposition that a bankruptcy discharge does notaffect a lien that is valid under state law. See Id.In fact, applying the Court’s holding in Long tosituations involving underwater junior liens isespecially improper, considering Long’s limitedscope. Long did not hold or say that a mortgagecould not be voided for a reason other than adischarge, for example because of the valueless-ness of a mortgage. Expanding Long ’s holdingbeyond its boundary not only misstates the case,but also inaccurately depicts the pre-Codejurisprudence of this Court regarding thetreatment of valueless junior liens.

The amici urge that Long does not preclude thestripoff of a valueless junior mortgage. Althoughsome much more recent cases view Long aspronouncing a broad rule that, by virtue of thepre-Code bankruptcy law, a mortgage survivesbankruptcy unaffected, that statement is incorrectin light of the established pre-Code practice towrite off valueless junior mortgages. As held byLong, the discharge of the debtor “did not relievethe property from the operation of liens created bycontract before the bankruptcy.” Id. at 621. TheCourt’s decision, moreover, did not explain howliens operate in all circumstances, having onlyconsidered how a first mortgage operated where,as in Long, the mortgage appeared to have been a

17


fully secured first mortgage. Long’s holding that abankruptcy discharge does not by itself operate toprevent the enforcement of a mortgage, is far morelimited than the broad meaning attributed to it, tothe effect that the bankruptcy law’s protection of alien from the operation of a discharge precludesthe termination of a lien under a provision of thebankruptcy law. Such provisions were sustainedand applied under this Court ’s pre-Codejurisprudence, and section 506 should likewise beread and applied just as Congress wrote it.

Petitioner’s amicus, LSTA, misunderstandingthe text and purpose of sect ion 67d of theBankruptcy Act of 1898, also mistakenly arguesthat former section 67d operated to preserve liensafter bankruptcy. See LSTA’s amicus brief p. 15.Former section 67d, which was succeeded by thefraudulent conveyance provisions of section 548 ofthe Code, clearly stated that a lien would not beaffected by the 1898 Act only if the lien wascreated in good faith, for a present consideration,and “not in fraud under this Act.” Section 67d hadnothing whatever to do with undersecured orwholly unsecured mortgages. Moreover, City ofRichmond v. Bird , 249 U.S. 174 (1919), wasmisleadingly cited by LSTA in support of itssection 67d argument. There was no claim in thatcase that the lien in question was fraudulentlyobtained, this Court having also stated: “It is notdenied that respondents obtained a present validlien upon the bankrupt’s goods . . . ; nor is it nowclaimed this was annulled by adjudication ofbankruptcy.” Id. at 175.

Petitioner’s LSTA amici, in urging that thebankruptcy law bars the stripoff of a mortgage,also misunderstand the l imited ef fect of a

18


bankruptcy discharge on a mortgage, as explainedin the first edition of Collier quoted by LSTA atpage 17 of their brief. There, Collier merely statedthat if mortgages are valid under state law andnot rendered void by a bankruptcy act, “the bank-rupt’s discharge will not prevent their enforce-ment.” There is no basis for subsequent cases totransform that narrow statement into a globalproposition that reads the bankruptcy dischargeas immunizing mortgages from termination inaccordance with a bankruptcy law provision.

When Congress amends the bankruptcy laws, itis “not writing on a clean slate.” Emil v. Hanley,318 U.S. 515, 521 (1943). Congress was presum-ably aware of the pre-Code practice of stripping offwholly underwater junior liens. The Code shouldthus be understood and read in light of that pre-Code practice implementing this Court’s pre-Codejurisprudence.

POINT IISECTION 506(d) REFLECTS THIS COURT’S

JURISPRUDENCE UNDER WHICH A VALUELESS JUNIOR MORTGAGE

MAY BE STRIPPED OFFA. JUST AS CONGRESS PROVIDED FOR

STRIPPING OFF JUNIOR MORTGAGES INREORGANIZATION CASES IN THE PRE-CODEERA, IT DID SO IN SECTION 506(d)

1. The Bankruptcy Code only protects liensto the extent of the collateral’s value

Under the plain language of section 506(a), aclaim secured by a lien is protected only to theextent of the value of the collateral. The clear

19


import of section 506(a), a part of the Code sectionentitled “Determination of secured status,” is tobi furcate al lowed claims into secured andunsecured portions. Under section 506(a), a claimis secured only to the extent of the value of theproperty securing the claim. See United States v.Ron Pair Enterprises, Inc., 489 U.S. 235, 239(1989) (stating “a claim is secured only to theextent of the value of the property on which thelien is fixed.”). This portion of the claim, securedup to the value of the collateral, is referred tothroughout the Code as an “allowed securedclaim.” See, e.g., Harmon v. United States throughFarmers Home Admin., 101 F.3d 574, 584 (8th Cir.1996); In re Cummings, 214 B.R. 126, n.1 (D.N.J.1997). The remainder of the allowed claim istreated and defined by section 506(a) as an“unsecured claim.” As such, it does not enjoy theprotections afforded to a “secured claim.”

Section 506(a)’s bifurcation directive should becarried into section 506(d), just as the courts havecarried section 506(a) into sections 506(b) and (c).See, e.g., In re Gledhill, 164 F.3d 1338, 1340 (10thCir. 1999) (applying the section 506(a) definitionof allowed secured claim to section 506(b)); In reGolden Plan of Calif., Inc., 829 F.2d 705, 712 (9thCir. 1986) (applying the section 506(a) “defin[itionof] allowed secured claim” to section 506(c)). Itdefies normal rules of statutory construction tohold that “allowed secured claim” holds onemeaning in sections 506(a)–(c), and a differentmeaning in section 506(d). See Dewsnup, 502 U.S.at 422 (Scalia, J., dissenting) (“We have ofteninvoked the ‘normal rule of statutory constructionthat’ ‘identical words used in different parts of thesame act are intended to have the same

20


meaning.’”) (citing Sullivan v. Stroop, 496 U.S.474, 484 (1990)).

Before Dewsnup, courts understood that, underthe Code, liens were protected only to the extentof the value of collateral, and not to the full extentof the claim. See, e.g., In re Briggs Transp. Co.,780 F.2d 1339, 1347 (8th Cir. 1985) (“[A]s asecured creditor, it will be paid in full up to thelien value of the collateral.”); Matter of Gifford,669 F.2d 468, 480 (7th Cir. 1982) (“Historically,lien rights have entitled their holders to the valueof collateral and no more in bankruptcy.”). InUnited Sav. Assn. of Tex. v. Timbers of InwoodForest Assoc., Ltd., this Court suggested that liensare only protected up to the collateral’s value. 484U.S. 365, 372 (1988) (herein “Timbers” ) . InTimbers , this Court held that undersecuredcreditors are not entitled to be compensated undersection 362 for the delay in foreclosing on theircollateral caused by the automatic stay. See Id. at379. Thus, the Court in Timbers understood thatwhat was protected by the provision for adequateprotection under section 361 is the value of thecollateral, and nothing else. In reaching thisconclusion, Timbers used sect ion 506(a) ’sdefinition of “value of such creditor’s interest” insection 506(a), i.e. “the value of the collateral,” inreaching the conclusion that the phrase “value ofsuch entity’s interest” in section 361 has the samemeaning as provided by section 506(a). Id. at 372.Timbers, therefore, strongly suggests that section506(d) must be construed in the same manner,namely by only protecting a claim secured byproperty to the extent of the value of the property.Even after Dewsnup, courts continued to recognizethat liens are only protected up to the value of the

21


collateral. See, e.g., Wade v. Bradford, 39 F.3d1126, 1129 (10th Cir . 1994) (stating that“Dewsnup ’ s holding cannot be imported intoChapter 11 cases”); In re Pond, 252 F.3d 122, 127(2d Cir. 2001) (“[T]o determine whether a lien is‘secured’ under Section 506(a), a court mustexamine the value of the collateral underlying alien, not the value of the lien itself.”).

Indeed, Congress itself understood that theCode was to treat undersecured creditors ashaving protection only to the extent of the value ofthe collateral, and thus did not protect valuelessjunior liens. The House Report in connection withthe Bankruptcy Reform Act of 1978 states: “thebill makes clear that an undersecured creditor isto be treated as having a secured claim to theextent of the value of the collateral, and anunsecured claim for the balance of his claimagainst the debtor.” H.R. Rep. No. 95-595, p. 181(1977). Furthermore, Congress clearly intendedfor such protection to extend throughout the Code.H.R. Rep. No. 95-595, at p. 356 (“Throughout thebill, references to secured claims are only to theclaim determined to be secured under thissubsection [506(a)], and not to the full amount ofthe creditor’s claim.”).

2. The multiplicity of lien avoidance andmodif ication provisions bears on thenotion that section 506(d) authorizesstripoffs of valueless junior mortgages

Congress dealt in a comprehensive way with thetreatment of liens under the Code. To do so, it hadto deal with liens requiring special treatmentother than because of the value of the collateralsupporting them. There are many such provisions

22


in the Code. Section 506(d), on the other hand, isthe provision addressing the treatment of liensbased on the value of the collateral securing aclaim.

Without regard to whether a l ien is ful lysecured, undersecured, or valueless, multiplesections of the Code provide directly for lienavoidance. See, e .g . , 11 U.S.C. § 510(c) (1)(providing for equitable subordination of liens); 11U.S.C. § 522(f) (providing for the avoidance of alien to the extent it impairs an exemption of thedebtor); 11 U.S.C. § 547(b) (providing for theavoidance of preferential liens); 11 U.S.C. § 548(a)(providing for the avoidance of a fraudulentlyincurred lien).

Numerous other Code sections cover situationsin which certain l iens may be subordinated,modified, or avoided completely. For example,section 364(d)(1), applicable in chapter 7 by virtueof section 103, authorizes the subordination of apre-petition lien to a new senior mortgage if it isnecessary for a trustee or a debtor in possession toobtain credit. This results in terminating thesenior priority status of the prior l ien andrelegating it to a junior position behind a newlycreated senior lien. In re Adams Apple, Inc., 829F.2d 1484, 1490 (9th Cir . 1987) ( “Congressprovided in section 364(d) that pre-petition debts,even secured interests, may be subordinated bypost-petition obligations . . . [I]t indicates aCongressional willingness to subordinate theinterests of pre-petition creditors to the goal ofrehabilitation.”). Under this provision, a seniorlien may be subordinated. Other special provisionsof the Code dealing with the treatment of liens aresections 545, 552, and 724.

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Thus, the old adage that “liens pass throughbankruptcy unaffected” cannot be taken literallyunder the Code; that saying is , at best ,misleading. Cases decided both before and afterDewsnup understood the fact that l iens areregularly af fected in bankruptcy. Matter ofLindsey, 823 F.2d 189, 190 (7th Cir. 1987) (callingthe principle “no better than a half-truth”) ;Harmon 101 F.3d at 581 (“[I]t is not even accurateto say that l iens pass through Chapter 7unaffected.” ) . Clearly, l iens are af fected bybankruptcy in innumerable ways, and thus do not“pass through bankruptcy unaffected.”

B. PETITIONER READS SECTION 506(d) ONLYTO VOID A LIEN THAT SECURES A CLAIMDISALLOWED UNDER SECTION 502(b)(1).CONGRESS WOULD NOT ENACT A PROVISIONTHAT IS SUPERFLUOUS

In its brief, petitioner contends that section506(d) exists solely to establish the treatment of asecured claim that is disallowed under section502, only voiding a lien because the claim itsecures has been disallowed under section 502.Pet.Op.Br. at 32–33. This argument is fatallyflawed, as section 506(d) would do nothing thatdoes not already occur under state law, and wouldthus render section 506(d) superfluous. Undersection 502(b)(1) , a court determines theenforceability of a disputed claim after notice andhearing. Part of such a determination involvesadjudicating the enforceability of the claim itself.Katchen v. Landy , 382 U.S. 323, 329 (1966);Vanston Bondholders Protective Cmte. v. Green,329 U.S. 156, 170 (1946); In re Hann, 476 B.R.344, 355 (1st Cir . B.A.P. 2012) . Petit ioner

24


erroneously contends that if a secured claim isdisallowed under section 502(b), section 506(d)exists solely to invalidate the lien securing thatclaim. Such an interpretation would rendersection 506(d) superfluous, because such a readingof it would accomplish nothing more than whatstate law by itself already does.

Under state law, the vitality of a mortgagedepends on the enforceability of the claim itsecures; if a debt is unenforceable, so too is thelien securing it. Carpenter v. Longan, 83 U.S. (16Wall) 271, 274 (1872) (“An assignment of the notecarries the mortgage with it, while an assignmentof the latter alone is a nullity . . .”); Coon v. Shry,209 Cal. 612, 615 (1930) (“[T]he mortgage muststand or fall with the note . . . [A] mortgage ormortgage lien is a mere incident of the debt orobligation which it is given to secure. Therecannot be a mortgage if there is no debt or otherobligation to be secured.”) (internal citationsomitted). For instance, any attempt to assign alien without assigning the debt underlying it is anullity. Jordan v. Sayre, 24 Fla. 1, 19 (1888) (“It istrue that an assignment simply of the mortgageor of the mortgagee’s interest in the land, withoutthe debt, is held to be a null ity.”) ; Flyer v.Sullivan, 134 N.Y.S.2d 521, 523 (App. Div. 1stDep’t. 1954) (citing Jackson ex dem. Curtis v.Bronson, 19 Johns. 325, 326 (N.Y. Sup. Ct. 1822));Fassett v . Mulock , 5 Colo . 466, 469 (1880) ;Schleuter Co., Inc. v. Sevigny, 564 N.W.2d 309,314 (S.D. 1997); Bryan v. Easton Tire Co., 262Ark. 731, 732 (1978) (“The note and the mortgageare inseparable. An assignment of the notecarries the mortgage, while an assignment of amortgage alone is a nullity.”).

25


Thus, by operation of state law, a l ien isunenforceable i f the underlying c laim isunenforceable under applicable law or anyagreement, and section 506(d) is not required toinvalidate the lien. Therefore, reading section506(d) as petitioner urges would render thatsubsection superfluous. Congress does not writesuperfluous or wasteful laws. Knight v. C.I.R., 552U.S. 181, 190 (2008) ( “Thus, accepting theTrustee’s approach ‘would render part of thestatute entirely superfluous, something we areloath to do.’”) (citing Cooper Indus., Inc. v. AviallSvcs., Inc., 543 U.S. 157, 166 (2004)); Kelly v.United States, 826 F.2d 1049, 1052 (Fed. Cir.1987) (“To [construe a statute in a superfluousway] would be to say that Congress wrote ameaningless provision into the law. We will notattribute such incompetence to Congress.” )(internal citations omitted).

POINT IIIBANKRUPTCY’S UNDERLYING GOAL TO

PROVIDE DEBTORS WITH A FRESHSTART IS IMPORTANT IN CHAPTER 7

The pre-Code principle protecting mortgagesonly to the extent of the value of the collateral issupported by the bankruptcy law’s fundamentalgoal of providing an honest debtor with a freshstart. The Court explicitly acknowledged this pre-Code principle. See, e.g., Burlingham v. Crouse,228 U.S. 459, 473 (1913) (noting that exemptionsevidence the bankruptcy purpose to give thedebtor a fresh start); see also H.R. Rep. 95-595, atp. 118 (1977) (“Whether the debtor uses chapter 7,liquidation, or chapter 13, adjustment of debts of

26


an individual , bankruptcy rel ief should beeffective, and should provide the debtor with afresh start.”); Marrama v. Citizens Bank of Mass.,549 U.S. 365, 367 (2007) (“The principal purposeof the Bankruptcy Code is to grant a fresh startto an honest but unfortunate debtor.”) (internalcitation omitted).

Stripoffs enable debtors to retain their property.For example, freeing the debtor’s property from awholly underwater junior lien would enable thedebtor to negotiate with the primary lender toreach an agreement that reduces the mortgagedebt to the value of the property and avoidsforeclosure. After a bankruptcy, this could enablethe debtor to retain the property and also yield agreater recovery by the first mortgagee than couldbe otherwise realized in a foreclosure sale. How-ever, such an agreement cannot be implementedwithout the consent of the holder of a junior mort-gage on the property, and the junior mortgagee isthus in a position to block such an agreement. Theholder of a valueless junior mortgage, whichwould be wiped out by a foreclosure of the firstmortgage, has no economic interest in withholdingits consent, except to block such an agreement untilit is able to extract a payment on its valuelessmortgage. This is good reason to allow the stripoffof valueless second mortgages. Surely Congressdid not intend to protect the ability of the holderof such a mortgage to obtain a payment in thatmanner, in preference to the debtor’s fresh start.

With respect to individuals especially, theabil i ty to remain in their homes should berecognized as a more important interest than thatof the holder of a wholly underwater juniormortgage. Bankruptcy exemption laws protect the

27


debtor’s property, and particularly protect adebtor’s continued ownership of his or her home.The purpose of the exemption statutes shouldguide the Court’s determination of how mortgagesare treated in bankruptcy cases. See In re Bartlett,168 B.R. 488, 493–94 (Bankr. D.N.H. 1994)(noting that at its core, a “‘fresh start’ is onlyfeasible if the debtor emerges from bankruptcywith a means of providing the necessities of life,including a roof overhead, and the homesteadexemption is directed at making this attainable.”).In that light, a valueless second mortgage shouldbe subject to being stripped off as a means offurthering the debtor’s continued home ownershipand fresh start.

Moreover, as noted earlier, petitioner and itsamici have not offered a cogent economic basis forprecluding stripoffs of valueless junior mortgagesin chapter 7 cases. Their attempt to protect on-going investment opportunities for private equityfirms by means of high-yield second mortgagesdoes not support the dire consequences theypredict will result from allowing such stripoffs.However, no such concern has been expressed inthis case by the United States. The United Statesdid express a concern for the strip down of firstmortgages in its amicus brief filed in Dewsnup. Itchose not to file an amicus brief in this case,suggesting that it is not concerned that suchconsequences will result from allowing stripoffs ofvalueless second mortgages. The concern ofpetitioner’s amici is unwarranted, and should bedirected to the Congress, not this Court.

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CONCLUSION

Based on the foregoing and on respondents’brief, the order appealed from should be affirmed.

Respectfully submitted,

RICHARD LIEB

Counsel of Record

RESEARCH PROFESSOR

ST. JOHN’S UNIVERSITY

SCHOOL OF LAW

8000 Utopia Parkway

Jamaica, New York 11439

(212) 479-6020

(718) 990-1923

[email protected]

Attorney for

Amici Curiae Professors

Of Counsel:

STEVEN W. GOLDEN

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