Correcting a Defect in Chapter 7: New Effort to Overturn Dewsnup v. Timm

By: Donald L. Swanson

You know how bankruptcy debtors can strip-away out-of-money liens in Chapters 11, 12 and 13, using 11 U.S.C. § 506?

Well . . . they can’t do it in Chapter 7. That’s because of a screw-up by the U.S. Supreme Court in an early opinion under the Bankruptcy Code—the opinion is Dewsnup v. Timm, 502 U.S. 410 (1992).

Effort to Overturn Dewsnup

So . . . two retired judges and four law professors [Fn. 1] are urging the U.S. Supreme Court to overturn Dewsnup v. Timm in the case of Ritter v. Brady (Supreme Court Case No. 18-747—Petition for certiorari is pending).

Here is the essence of their argument to the Supreme Court in Ritter v. Brady:

The question presented is whether Dewsnup v. Timm “should be overruled”;

The issue is whether individual debtors in Chapter 7 bankruptcy cases may “avoid” (e.g., “strip off ” or “strip down”) a mortgage lien on their home when a “second mortgage” exists and the value of the home is less than the amount owed on the first mortgage;

Such lien avoidance is a critical aspect of the fresh-start policy in bankruptcy, and Dewsnup impedes the fresh start; and

Authorizing lien avoidance is the correct interpretation of § 506 and is settled law under Chapters 11 and 13—and should control in Chapter 7 as well.

A Focus on Bank of America v. Caulkett

The two judges and four professors focus on a 2015 opinion from the U.S. Supreme Court, where the Supreme Court had an opportunity to overturn Dewsnup—but did not take that opportunity.

The opinion is Bank of America v. Caulkett, 135 S.Ct. 1995 (2015), in which the Chapter 7 debtor asked the Supreme Court to avoid a wholly-unsecured, junior lien on his house. The Supreme Court rejected the debtor’s position, but it did so on surprising grounds:

Under a “straightforward reading of the statute,” the Supreme Court said, the Chapter 7 debtor “would be able to void the Bank’s” lien; but

Dewsnup prevents such a “normal rule of statutory construction”; and

Since the debtor merely asked the Supreme Court to distinguish Dewsnup—not overrule it—the Supreme Court had no choice but to reject the debtor’s position.

The two judges and four professors, therefore, believe that Ritter v. Brady provides an opportunity to overturn Dewsnup because the Chapter 7 debtor is making that request.

Sufficient Votes to Overturn?

It appears that sufficient votes may exist on the U.S. Supreme Court to overturn Dewsnup. Here’s why:

The Caulkett opinion contains this footnote (citations omitted):

“From its inception, Dewsnup v. Timm . . . has been the target of criticism. . . . see also . . . (collecting cases and observing that ‘[t]he methodological confusion created by Dewsnup has enshrouded both the Courts of Appeals and Bankruptcy Courts’). Despite this criticism, the debtors have repeatedly insisted that they are not asking us to overrule Dewsnup”;

The Caulkett Syllabus says the above-quoted footnote is adopted by six Justices: Thomas, Roberts, Scalia, Ginsburg, Alito and Kagan. Justice Scalia is no longer on the Court, but the remaining five Justices could be a majority on the issue; and

One of the new Justices (Neil Gorsuch, Justice Scalia’s replacement) expressed concern about Dewsnup, while sitting on the Tenth Circuit, stating that “every federal court of appeals to consider the question has already refused to extend Dewsnup’s definition of the term ‘secured claim’ to other statutory provisions using that term in Chapter 13.” [Fn. 2]

Conclusion

Here’s a big “Thank you” to the two retired bankruptcy judges and four law professors for taking on this overturning-Dewsnup effort.

And here’s hoping their efforts are successful!

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Footnote 1: On Decvember 21, 2018, these six professionals filed a Motion for Leave to File Brief as Amici Curiae in the Ritter v. Brady case — David R. Kuney is their legal counsel.  The six professionals are (full bios are in the linked Motion):

Hon. Eugene Wedoff (ret.) served as United States Bankruptcy Judge in the Northern District of Illinois in Chicago from 1987 to 2015;

Hon. Leif M. Clark (ret.) served as United States Bankruptcy Judge for the Western District of Texas from 1987 to 2012;

Prof. Kenneth N. Klee is Professor of Law Emeritus at the UCLA School of Law;

Prof. Bruce A. Markell is Professor of Bankruptcy Law and Practice at Northwestern Pritzker School of Law, part of Northwestern University, and is a former Bankruptcy Judge and former member of the Ninth Circuit’s Bankruptcy Appellate Panel;

Prof. Michael D. Sousa is Associate Professor of Law at the University of Denver Sturm College of Law; and

Prof. Jack F. Williams is Professor of Law at Georgia State University and the Center for Middle East Studies Institute.

Footnote 2: Id., at 15.

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