When is a Waiver Not a Waiver? The New Rules of Massachusetts Homesteads

     Last month, Judge William Hillman of the Boston Bankruptcy Court, in In re Maria A. D’Italia, Case No. 13-16051-WCH (March 18, 2014), confronted the following questions:  if a debtor signs a waiver of homestead rights in a guarantee, does that waiver then either: (a) release or subordinate the debtor's homestead vis-à-vis the creditor’s judgment and execution based on the debtor’s guarantee liability;  or (b) prohibit the debtor from avoiding the creditor’s execution on her home as a “judicial lien” under 11 U.S.C. §522(f)(1)?

     Judge Hillman answered both questions in the negative. To understand his answers, let’s review the homestead law in Massachusetts.

Massachusetts Homestead Basics

     In 2010, Massachusetts overhauled its homestead laws.  Under the revised laws:

•       A homestead is now automatic without the need to file a declaration of homestead, and protects equity in a residence up to $125,000.00 in value (M.G.L. c. 188, §§1 & 4).

•          If a homeowner records a homestead declaration in the appropriate registry of deeds signed by all owners of the residence, the homestead protects up to $500,000.00 in equity in the residence; however, the homestead declaration must be separate and not included in the deed to the property (M.G.L.. c. 188, §§1 & 3).

•            The homestead (whether automatic or declared, and except as noted below for elderly and disabled individuals) remains “whole and unallocated” for joint tenants or tenants by the entirety (i.e., co-owning spouses) when the tenants are asserting their interests separately against one of their creditors, but the tenants cannot exceed the applicable homestead limit (i.e., "stack" the homestead amounts) when they assert the homestead together (M.G.L. c. 188, §1). Tenants in common and holders of beneficial interests get protection equal to their ownership percentage multiplied by the homestead amount (i.e., a 30% tenant in common would have homestead protection of $150,000.00 based on a $500,000.00 total homestead in the entire property).

•          An “elderly” person’s homestead– over 62 years of age – and a disabled person ‘s homestead applies to their entire ownership interest asserted separately. In other words, a home owned in a tenancy by the entirety by two elderly spouses gets up to $1 million of equity in protection for a declared homestead ($500,000 x 2), because each person can claim up to $500,000.00 in their separate property interest, and "stack" the homesteads to claim an aggregate exemption of $1 million together (M.G.L.. c. 188, §§1 & 2).

•           Homesteads apply to “homes” owned by sole owners, joint tenants, tenants by the entirety, tenant in common, life estate holders, and the holders of beneficial interests in a real estate trust holding title to a residence. A homestead benefits the spouses and minor children (under 21) of any of those owners who live in the home, whether or not those family members have an ownership interest in the home.  A “home” can be a single family dwelling, a 2-4 family home, a manufactured home, a condo unit,  or a residential coop unit. The homestead protection also extends to the home’s sale proceeds and to insurance proceeds from a fire or casualty loss on the home (M.G.L. c. 188, §1).

•           The instances in which homesteads are waived, released or trumped by a debt are more limited than before. Specifically:

o     Homesteads are subject to (and ineffective against): (a) liens for federal, state and local taxes and assessments; (b) a lien recorded prior to the creation of the homestead; (c) prior recorded mortgages and certain mortgages recorded after the creation of the homestead (see below); (d) child support and alimony orders; and (e) an execution to enforce a judgment based on the owner’s fraud, mistake, duress, undue influence or lack of capacity (M.G.L. c. 188, §3)[1].

o      A homestead is subject to a mortgage signed by all the owners of the property; however, if the mortgage is signed by fewer than all of the owners of the property, then the mortgage takes priority over only the homestead of the owner(s) who signed the mortgage. The homestead is subject to a mortgage on the property regardless of whether the mortgage addresses the subordination or waiver of the homestead. No release or recorded subordination of the homestead is necessary for the mortgage to prevail over the homestead (M.G.L. c. 188, §9).

o     Otherwise, there is no subordination of a homestead to any other lien unless the owner records a release of the homestead (M.G.L. c. 188, §10(2)).

•          A homestead is terminated or released only if:

o     The owners sell the property to a non-family member (M.G.L. c. 188, §10(1)); however, there is no release or termination(unless there is an express release) if the deed: (a) is between spouses or former spouse, or co-owners who jointly hold the homestead; (b) a trustee of a trust holding the property and a trust beneficiary; or (c) between a life tenant and a remainderman (M.G.L. c. 188, §10(5)(b)).

o     There is a recorded release of the homestead signed by the owner and any non-owner spouse or former spouse living in the home (M.G.L. c. 188, §10(2)).

o     The owner abandons the home; however, the homestead termination applies only to those owners and family members who actually abandon the home, and not to any family member who do not abandon the home. Also, the owner’s absence from his or her home due to military service cannot constitute “abandonment” (M.G.L. c. 188, §10(3)).

o     The trustee of a realty trust or a beneficiary of the trust records a release of the homestead on the property held in trust, or the beneficiary abandons the homesteaded property (M.G.L. c. 188, §10(4)).

o     The owner records a new declaration of homestead on other property; however, that new declaration does not affect the homestead rights of the owner’s spouse, former spouse or minor children still residing in the old property.

Application of Massachusetts Homestead Law to the Claimed Homestead Waiver

     Judge Hillman focused on three statutes: (a) the Massachusetts homestead law, specifically the release and termination provisions in c. 188, §10; (b) 11 U.S.C. §522(f)(1), which permits a debtor to avoid a “judicial lien” (such as an execution) if it impairs a debtor’s claim of exemption; and (c) 11 U.S.C. §522(e), which states that any exemption waiver signed by a debtor in favor of an unsecured claimholder is unenforceable in the debtor’s bankruptcy case, as is any waiver of the debtor’s right to avoid a judicial lien under §522(f).

     The facts of the case were that the debtor had signed a guarantee of a commercial lease and a loan, in connection with the build-out of a Dunkin’ Donut franchise. The guarantee stated that the debtor/guarantor “irrevocably waives, to the fullest extent permitted by law, all defenses which at any time may be available in respect of the Guarantor’s Obligations hereunder by virtue of any homestead exemption, statute of limitations, valuation, stay, moratorium law or other similar law now or hereafter in effect.” The creditor did not record either the guarantee or any other document reflecting this waiver.

     The business deal fell apart, and the creditor holding the guarantee sued, obtained a $539,000.00 judgment and execution, and recorded the execution against the residence in Buzzard’s Bay, Massachusetts, owned by the debtor and her spouse. The debtor's spouse had recorded a homestead declaration on their residence in 2009, and the debtor asserted a $500,000.00 exemption in the residence in her Chapter 7 bankruptcy case. The creditor filed a timely objection to the homestead, asserting that the homestead was invalid as to the creditor because of the waiver in the guarantee. The debtor responded to the objection, and also filed a motion to avoid the creditor’s judicial lien under 11 U.S.C. §522(f).

     The stakes: if the homestead exemption was good despite the waiver, the debtor could avoid the creditor’s judicial lien on her residence in full.[2] 

     Judge Hillman did validate the debtor’s homestead exemption despite the creditor’s objection, based on the lack of a recorded release reflecting the guarantee waiver. He relied on M.G.L. c. 188, §10, which requires such a document to be recorded.  He also relied on 11 U.S.C. §522(e), which automatically invalidates any waiver of exemption in favor of an unsecured claim.  He considered §522(e) along with §522(f)(1), and held that a judicial lienholder whose lien is avoidable is in essence an “unsecured creditor”. As such, the creditor holding an avoidable judicial lien is subject to§522(e)’s invalidation of any waiver of exemptions (he also noted that if the judicial lien was NOT avoidable, it did not matter whether the debtor had waived his or her exemption on the property).

     The link to Judge Hillman’s decision is here: https://ecf.mab.uscourts.gov/cgi-bin/show_case_doc?46,441971,,89110135. Judge Hillman is always a pleasure to read, because he is a writer who says a lot with a few words. To put it simply (as he would): if the release or waiver of a Massachusetts homestead is not recorded, there is no release of the homestead. Period.

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         [1] But see In re Weinstein, 164 F.3d  677 (1^st Cir. 1999) and Owen v. Owen, 500 U.S. 305(1991), in which state limitations on homesteads were federally pre-empted under 11 U.S.C. §522(f)(1), to the extent that the judicial lien to be avoided would have prevailed over the homestead under state law.

         [2] The Court did not address debtor’s first attempt to avoid the creditor’s judicial lien in this decision, because it denied the debtor’s motion (without prejudice) because the debtor had omitted necessary allegations under 11 U.S.C. §522(f)(1). The debtor refiled the motion with the proper allegations, and the motion is pending (with opposition from the creditor, focused on the debtor’s lack of an appraisal to support her alleged value of her residence). 

©Kevin C. McGee

CHAPTER 13 FOR BUSINESS DEBTORS IN MASSACHUSETTS

      Chapter 13 is not just for consumers. An individual in a sole proprietorship (or who is engaged in some business activity, such as renting properties as a landlord) has Chapter 13 available to him or her, provided that he or she meets the debt limits in 11 U.S.C. §109(e) and has regular income (either via the business activities or from other sources, such as separate employment). Chapter 13 is not available to partnerships (although individual partners may file), corporations or LLCs that operate businesses.

     Chapter 13 has much to recommend it over Chapter 11 if the debtor’s goal is reorganization and preservation of his or her business. For one, a Chapter 13 plan is easier to propose and confirm than a Chapter 11 plan (fewer confirmation standards, no absolute priority rule, and no disclosure statement requirement). The debtor also has the ability to stretch out and pay administrative claims and priority debt over years, rather than meeting the Chapter 11 requirement to pay such claims in full on confirmation. Other benefits include the (much) cheaper filing fee; the right to cure mortgage defaults over the life of the plan; no quarterly U.S. Trustee fee; no monthly operating reports; and no requirement that the debtor’s attorney be approved under 11 U.S.C. §327. The enhanced discharge in 11 U.S.C. §1328(a) also applies in business debtor Chapter 13 cases. 

     One possible disadvantage is the 5 year limit on plan payments; if the debtor needs to "cram down" a secured creditor's claim, the debtor has to do so within the 60 month limit on plans. See Bullard v. Hyde Park Savings Bank (In re Bullard), 494 B.R. 92 (BAP 1st Cir. 2013)(11 U.S.C. §1325 requires that the payments on a cram-down of a secured claim equal the present dollar value of the property as of the confirmation date, and that distribution on account of the claim must occur within five years).

     The “business” Chapter 13, however, has several statutes and rules that apply to it and which may be unfamiliar or “traps for the unwary” for attorneys who ordinarily file consumer Chapter 13 cases, and for individuals in business considering the Chapter 13 option. Here are the more significant issues, with the applicable statutes and rules:

·         Debtor Engaged In Business – 11 U.S.C. §1304: 

           §1304(a) states that “[a] debtor that [sic] is self-employed and incurs trade credit in the production of income from such employment is engaged in business”. §1304(b) allows the debtor, unless the court orders otherwise, to operate his or her business, and references the debtor’s right to use property in that business, subject to the limitations on a trustee under §363(c) (cash collateral use requirements) and §364 (limitations on incurring credit).

           §1304(c) requires the debtor in business to perform the same duties that a Chapter 7 trustee performs in §704(a)(8); those duties require the debtor to file with bankruptcy court, the United States trustee, and any governmental unit that collects or determines tax arising out of the debtor’s operation, “periodic reports and summaries of the operation of [the debtor’s] business, including a statement of receipts and disbursements, and such other information as the United States trustee or the court requires.” Fed. R. Bankr. P. 2015(c)(1) is more specific; that rule requires that the debtor;

o   Keep a record of receipts and the disposition of money and property received;

o   Comply with §704(a)(8) and include a statement, if payments are made to employees, of the amounts of deductions for all taxes required to be withheld or paid for and in behalf of employees and the place where such amounts are deposited; and

o   Give notice of the case, ASAP after the petition date, to every entity known to be holding money or property subject to withdrawal or order of the debtor, including any bank, public utility company, landlord with whom the debtor has a deposit, and every insurance company which has issued a policy to the debtor having a cash surrender value payable to the debtor.

     MLBR Appx. 1, Rule 13-2(a)(2) also requires that Massachusetts Chapter 13 debtors in business submit the following to the Chapter 13 trustee:

o   Within 7 days after the petition is filed, both evidence of current and sufficient business insurance, and evidence that the debtor opened “appropriate debtor-in-possession checking accounts”.

o   Within 14 days after the petition, a profit and loss statement for debtor’s fiscal or calendar year preceding the year the case is filed, and a profit and loss statement for the period beginning at the end of the prior year and ending on the petition date.

o   Within 30 days of the close of each quarter, a statement of quarterly income and expenses incurred.

     The United States Trustee’s Handbook for Standing Chapter 13 Trustees (10/1/12) states that the Chapter 13 must monitor the debtor and his or her business to “verify that the ongoing business, while in bankruptcy, does not fall in deeper financial difficulty than at the time of the filing of the case.” According to the handbook (Section G(3)), monitoring, depending on the nature of the business, might include “the debtor meeting with the standing trustee’s business case analyst, if applicable, to review the budget, an evaluation of the debtor’s accounting systems, an on-site tour of the business premises, the requirement that periodic operating reports be filed along with bank statements, tax deposits and payment forms, and monitoring of insurance coverage.”

·         Cash Collateral Use: 

     

           Cash collateral does not often come up in a Chapter 13, but if: (a) your debtor is selling goods and generating accounts receivable subject to a secured claim; or (b) your debtor is collecting real estate rents from property subject to a mortgage, and the mortgage contains an assignment of leases and rents, you must – right after you file the petition -- either get the secured creditor’s/mortgagee’s permission to use the cash collateral post-petition in a stipulation, or get an order (after motion and hearing) from the bankruptcy court allowing you to use the cash collateral. 

               To accomplish either task in Massachusetts, you need to be familiar with §§363(c) & (e) (as well as the definition of “cash collateral” in §363(a) and what does and does not constitute “adequate protection” for cash collateral use); §552; Fed. R. Bankr. P. 4001(b) & (d); and MLBR 4001-2.

·         Limited Powers as Debtor-In-Possession: 

           Unlike Chapter 11, there is always a trustee in a Chapter 13 case. Consequently, the debtor’s powers over his or her property and in operating his or her business have limits.

o   As stated above, the debtor can seek to use cash collateral; the debtor also has the right to incur credit under the terms of 11 U.S.C. §364. This means that the debtor can “obtain unsecured credit and incur unsecured debt in the ordinary course of business” without prior court authorization, and that (post-petition) debt will have administrative claim status. 11 U.S.C. §§364(a), 1304(a). If the debtor is unable to obtain unsecured trade credit on these terms, the debtor can file a motion with the bankruptcy court to allow him or her to grant a lien on property; however, if there is already a lien on the property being offered, the debtor has to offer the existing lienholder “adequate protection” of that lien.

o   A business Chapter 13 debtor retains the right under 11 U.S.C. §363(b) to use or sell his or her assets in the ordinary course of business without prior court authorization, and to sell those assets outside the ordinary course with court authorization.

o   The debtor remains in possession of all property in the estate, except as otherwise provided in a confirmed plan. 11 U.S.C. §1306(b).

o   If the debtor’s estate has preference, fraudulent transfer or other avoidance actions, Chapter 13 is silent regarding who brings those actions. The debtor, however, can provide that he or she will pursue the avoidance actions in the confirmed plan, as permitted in 11 U.S.C. §§1322(b)(9) & (11).

·         Claims: 

           The business debtor has all the rights a consumer debtor has regarding the review of and objection to proofs of claim. The business debtor, however, needs to look out for administrative claims made under 11 U.S.C. §503(b)(9), which are claims for the value of goods received by the debtor within twenty (20) days before the petition date, when the goods were sold to the debtor in the ordinary course of business. Note that MLBR 3002-1 sets a deadline for such claims in Massachusetts: 60 days after the date of the §341 meeting. Business Chapter 13 debtors also need to be aware of the reclamation rights of sellers of goods to the debtor, spelled out in 11 U.S.C. §546(c).

·         Debtor in Business Subject to Chapter 13 Trustee Investigation – 11 U.S.C. §1302(c): 

           Per §1302(c), the Chapter 13 trustee must perform the duties specified in §§1106(a)(3) & (4) in a Chapter 13 business case. Specifically, those duties, unless the bankruptcy court orders otherwise, are to “investigate the acts, conduct, assets, liabilities, and financial condition of the debtor, the operation of the debtor’s business and the desirability of the continuance of the business, and any other matter relevant to the case or to the formulation of a plan.” Once that investigation is done, the Chapter 13 trustee must “as soon as practicable” file a statement of his or her investigation with the court (and provide a copy of such statement to any entity the court designates), “including any fact ascertained pertaining to fraud, dishonesty, incompetence, misconduct, mismanagement, or irregularity in the management of the affairs of the debtor, or to a cause of action available to the debtor.”

     Section G(2)(a) of the United States Trustee’s Handbook for Standing Chapter 13 Trustees (10/1/12) states that the Chapter 13 trustee, in filling this role, might ask for:

o   Copies of Federal and State tax returns, along with all supporting schedules, for at least the two years preceding the filing;

o   Copies of financial statements furnished to a third party, such as a trade creditor or a bank, within the two years preceding the filing of the petition, including but not limited to the balance sheet, income statement and cash flow statement;

o   Current books and records of the business, including checks and check registers;

o   Monthly profit and loss statements for at least the year preceding the filing;

o   Current schedule of accounts receivable and accounts payable;

o   Current insurance policies; and

o   Lease agreements.

     The Handbook also outlines what the investigative report might address, such as: the nature and location of the business; number of employees; status of federal, state, and local tax returns and tax delinquencies; insurance; business licenses; condition of books and records; prior balance sheets and profit/loss statements; aging of accounts receivable and accounts payable; debts; work in progress; and turnover actions, if applicable.

·         Additional Work – Schedules and Statement of Financial Affairs: 

           Note that there are many types of business property you have to list in Schedule B, including inventory; accounts receivable; machinery and equipment; office furniture and fixtures; patents; licenses; copyrights; trade names; customer lists; and supplies. The new Schedule I, in ¶8a, requires the debtor to state his or her net income from business operations or rentals, and “attach a statement for each property and business showing gross receipts, ordinary and necessary business expenses, and the total monthly net income” (note that the new Schedule J presumes you identify all of the debtor’s business-related expenses in this statement and not in Schedule J).  The statement of financial affairs has business-related questions that must be answered by an individual debtor, located in questions 18-20. Those questions relate to inventories taken, accountants used, where books and records are kept and by whom, and who received financial statements from the debtor in the last 2 years.

·         Common Chapter 13 Provisions for Consumers and Business Debtors: 

           A debtor’s status as a debtor in business does not change the major aspects of Chapter 13. The debtor still has to take the pre-petition credit counseling course in order to file the case, and must take the post-petition financial management course in order to receive a discharge. The plan must be filed and confirmed pursuant to the standards in §1325, the plan cannot exceed five years in term, and the concept of “disposable income” still applies – with one twist. The debtor in business is allowed to deduct from his or her current monthly income all “amounts reasonably necessary to be expended … for the payment of expenditures necessary for the continuation, preservation, and operation of [the debtor’s] business.” 11 U.S.C. §1325(b)(2)(B).

            Summary: 

           If you are individual debtor who runs even a small side business (like renting out floors in your three-decker residence), the attorney you choose should have at least some passing familiarity with the business issues and how to address them (including making a determination whether you are indeed "a debtor in business" under §1304 and if those business issues do apply to your case). You should also expect to pay the attorney more for a Chapter 13 business case than you would pay for a Chapter 13 consumer case, given the additional reporting and issues involved. [1]

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[1] Based on a presentation made to the Worcester County Bar Association Bankruptcy Section, on April 3, 2014. ©Kevin C. McGee. 

Now in Play: §506(d) "Strip-Offs" in Chapter 7

     On March 31, 2014, the Supreme Court of the United States denied certiorari in Bank of America, N.A. v. Sinkfield, Petition No. 13-700. To put it in terms appropriate to Major League Baseball’s opening day, this was the equivalent of Casey’s mighty whiff at strike three in the ninth inning, with the bases loaded, a full count, and the chance for a walk-off win.

     The elements were all in place; a “rogue” circuit makes a holding that three other circuits would not dare to make, on an issue that many debtor lawyers fantasize about revisiting and that many banks dread like a recurring nightmare. The 11^th Circuit (albeit summarily, in an order) held that a fully unsecured second mortgage lien could be “stripped off” a Chapter 7 debtor’s residence in Georgia, when the value of that residence is only enough to (partially) secure the first mortgage lien. The 11^th Circuit based the order on its previous (unpublished) decision in In re McNeal, No. 11-11352 (11th Cir. 5/11/12), in which the circuit limited the Supreme Court’s decision in Dewsnup v. Timm, 502 U.S. 410 (1992) to prohibiting the strip-down of partially secured first mortgages in Chapter 7.  The McNeal court held that fully unsecured second mortgages are fair game to be stripped off under 11 U.S.C. §506(d), and relied on its own, pre-Dewsnup 1989 decision, Folendore v. United States Small Bus. Admin., 862 F.2d 1537 (11th Cir. 1989), as precedent for doing so. The 4^th Circuit, 6^th Circuit, and 7^th Circuit (as well as many lower courts) all reached opposite results in holding that Dewsnup v. Timm did apply and prohibited any lien stripping in Chapter 7. Throughout most of the country, the old adage that liens float unaffected through a (Chapter 7) bankruptcy is alive and well.

Bankruptcy 101 on Lien-Stripping (in Chapter 7):

     11 U.S.C. §506(d) seems clear on its face. It states that:

  To the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void, unless --  

(1)   such claim is disallowed only under section 502(b)(5)[as an unmatured debt for a domestic support obligation] or 502(e) [as a contingent claim for reimbursement or contribution] of this title; or

(2)  such claim is not an allowed secured claim due only to the failure of any entity to file a proof of claim under section 501 of this title.

      Add to this §506(a)(1), which states that “An allowed claim of a creditor secured by a lien on property in which the estate has an interest … is a secured claim to the extent of the value of such creditor’s interest in the estate’s interest in such property … and is an unsecured claim to the extent that the value of such creditor’s interest … is less than the amount of such allowed claim.”  

      Thus, under recent Supreme Court precedent, it seems like a “no-brainer” to hold that the statutes say what they say:  you determine secured claims according the value of the debtor’s property (and we can fight about what that “value” is); there is no secured claim or lien beyond the value of the property;  the only exceptions to the lien-voiding rule in §506(d) are certain unmatured  and contingent secured claims; and a creditor does not have to file a proof of claim to have its lien determined as an “allowed secured claim”.  After all, look at the unanimous decision last month in Law v. Seigel, in which the justices solemnly proclaimed that “’whatever equitable powers remain in the bankruptcy courts must and can only be exercised within the confines of ‘the Bankruptcy Code” and “We have recognized  … that in crafting the provisions of§522, ‘Congress balanced the difficult choices that exemption limits impose on debtors with the economic harm that exemptions visit on creditors.’  … The same can be said of the limits imposed on recovery of administrative expenses by trustees. For the reasons we have explained, it is not for courts to alter the balance struck by the statute.” [1]

But - Dewsnup v. Timm

      As many law school professors will gleefully tell you after you cite this straight-forward analysis – we have the 1992 precedent of Dewsnup v. Timm, in which the Supreme Court held that a partially unsecured first mortgage could not be “stripped down” in Chapter 7 using these two statutes. The pillars of that decision are as follows:

 (a)  Congress could not have meant to change long-standing bankruptcy law that “that liens pass through bankruptcy unaffected”, and courts do not look at a clean slate (with no history) when interpreting Bankruptcy Code provisions;

(b)  even though §506(a) and §506(d) both use the term “allowed secured claim”, it is an ambiguous, undefined term, and does not necessarily mean the same thing in each statute or elsewhere in the Bankruptcy Code;

(c)  the function of §506(a) is to determine the relative interests of secured creditors and debtors in property that is part of the debtor’s estate, while the function of §506(d) is to void “only liens corresponding to claims that have not been allowed and secured”; and

(d)  if the Court were to hold otherwise, it would ignore pre-Code bankruptcy practice and “freeze the creditor's secured interest at the judicially determined valuation.  By this approach, the creditor would lose the benefit of any increase in the value of the property by the time of the foreclosure sale. The increase would accrue to the benefit of the debtor, a result some of the parties describe as a ‘windfall.’”

      Dewsnup contains a dissent authored by Judge Scalia, who – unsurprisingly – disagrees with the majority’s decision because the plain language of both §506(a) and §506(d) compels the voiding of the unsecured portion of the lien, notwithstanding pre-Bankruptcy Code practice. Judge Scalia is still on the Supreme Court;  one of the justices joining the majority, Judge Kennedy, is also still on the Supreme Court. The rest of the participants in the majority opinion – Judge Blackmun (the author of the majority opinion), Judge O’Connor, Judge White, and Judge Stevens – have been replaced. So has Judge Souter, who joined in Judge Scalia’s dissent. But Judge Thomas, who did not participate in the decision and often joins with Judge Scalia, is still on the court.

     So, all the conditions seemed right for a revisiting of §§506(a) & 506(d): a split in the circuits; a (mostly) new cast of characters on the Supreme Court; and a different perspective in recent decisions of the Supreme Court on whether the plain language of the Bankruptcy Code or the historical precedent of bankruptcy practice is more important.  Yet, the petition for certiorari is denied, and mortgagees across the country breathe a sigh of relief -- except, of course, in Georgia, Alabama, and Florida, where motions and adversary proceedings for lien-strip offs in Chapter 7 continue unabated[2].  Casey was expecting a fast ball on a 3 and 2 count, and got a curve ball instead, leaving the home crowd unsatisfied.

     The practical effect is that a debtor’s attorney in the First, Second, Fifth, Eighth, Ninth, or Tenth Circuit will have to take the right case up for an appeal, and obtain a reasoned circuit decision on this issue. The 11^th Circuit has the outlier opinion already in In re McNeal – it’s just a matter of finding an appeal with the right ingredients.

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[1]  Note also that the justices threw an earlier Supreme Court case, Marrama v. Citizens Bank of Mass., 549 U. S. 365 (2007) under the bus, ignoring that the Marrama court had blessed an equitable exception to express statutory language, and then finessing the issue by saying that another statute disqualified the debtor from converting his case to Chapter 13.

[2]  The NACBA’s amicus brief opposing the certiorari petition likely gives the real reason for the order denying certiorari: Bank of America “fast-tracked” the petition by agreeing that the 11 Circuit’s order was final, and deprived the Supreme Court of a “deliberative” decision by a circuit court setting up a true conflict in the circuits on the issue.

©Kevin C. McGee