Friday, September 07, 2012

Tenth Circuit Tries to Sort out the Unsortable

This week the Tenth Circuit issued its opinion in Woolsey vs. Citibank and attempted to sort out part of its history in the process.  Not that it is responsible for that history.  That honor goes to the US Supreme Court, courtesy its decision in Dewsnup vs. Timm.

Dewsnup, like Woolsey, started here in Utah.  In 1988 the Dewsnups were seeking Chapter 7 bankruptcy protection.  One of their problems was that they  had a piece of land that had more debt than it was worth (I won't say "underwater" because back then we still had land that was physically underwater.), and they wanted to strip down the lien and bifurcate it pursuant to Section 506 (As an aside, the Dewsnups were represented by William T. Thurman, now chief bankruptcy judge here and chief judge of the Tenth Circuit BAP.).  Judge Clark said "No" (87 B.R. 676).  506 applies only to determining the secured status of allowed claims, and in a Chapter 7, unlike a Chapter 13, only the trustee can play around with claims.  Further, once the trustee abandons property, the property is no longer before the bankruptcy court.  The debtor has no say in any of it.

This was relatively straight-forward stuff.  The District Court affirmed on appeal, and the Tenth Circuit did likewise.

Then the Supremes got their hands on it, and the whole thing went down the rabbit hole.  They could have simply affirmed the Tenth Circuit, but no, they had to come up with their own theory.  The Supremes held that 506(d) was unavailable for any lien valid under state law, reading the 506(a) valuation procedure out of the 506(d) lien validation procedure.  In other words, the Supremes divorced the process of determining whether a debt was actually secured from the process of making record title actually reflect that reality.  For the last 20 years, the professional response to that decision has been, "Huh?"

In Woolsey, the Tenth Circuit summarizes that "Huh?" and addresses an important ramification.  Had the Supremes simply smiled and nodded and accepted the Tenth Circuit's reasoning in Dewsnup, the 506 limitations would apply only to Chapter 7 cases, and the Woolsey trip would not have been necessary, as it is a Chapter 13.  But by creating a sandbox for the clerks in Dewsnup, the Supremes smeared their peculiar bifurcation of 506 across all chapters.

Fortunately, in Chapter 13 cases we have Section 1322(b)(2) to fall back on once we do the 506(a) valuation.  The odd thing in Woolsey was that, in spite of an express invitation by the Court, debtors refused to raise the point (Speaking of "Huh?"  Practice Pointer: Be careful which Code provision you're using.), and the Court wasn't going to do it for them.  But it still amounts to a work-around that would be wholly unnecessary if the Supremes had not gotten an urge to go all Rube Goldberg.

I've also posted a link to the Woolsey opinion on my website.

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At September 27, 2012 at 9:46 AM, Blogger Summit Real Estate said...

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