Pub. 5 2015 Issue 4

COUNSELOR’S CORNER John Nasr is an associate of Gust Rosenfeld. His practice encompasses bankruptcy, restructuring, creditors’ rights and related litigation and appeals. He primarily represents lenders, including publicly and privately held banks, credit unions and other institutional clients. John handles commercial loan workouts, nonjudicial foreclosures, deeds in lieu of foreclosure, deficiency litigation and lender li- ability litigation and regularly counsels clients on regulatory compliance. O N JUNE 1, 2015, THE UNITED STATES SUPREME COURT RULED THAT A CHAPTER 7 DEBTOR MAY NOT VOID AN UNDER-SECURED junior lien under section 506(d) of the Bankruptcy Code. See, Bank of America, N.A. v. Caulkett, 135 S.Ct. 1995 (2015). The Supreme Court was asked to construe section 506(a) of the Code and the language that “an allowed claim of a creditor secured by a lien on property… is a secured claim to the extent of the value of such creditor’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.” Section 506(d) of the Code provides that “to the extent that a lien secures a claim against the Debtor that is not an allowed secured claim, such lien is void.” In Caulkett , Bank of America held a junior lien against residences owned by the debtors. The fair market value of the residences was less than the debt owed to the senior lienholder. As a result, there was no equity for Bank of Ameri- ca’s junior lien on either residence; Bank of America’s junior lien was wholly “out of the money.” The Supreme Court ultimately held that Bank of America had valid claims that were properly secured against the debtors’ residences, and therefore section 506(d) of the Code prohibits the avoidance, stripping, or removal of Bank of America’s lien, ir- respective of the underlying value of the collateral (the residence). The Supreme Court admitted that under a plain reading of the Bankruptcy Code that the debtors would have been able to strip or avoid the liens in favor of Bank of America. The Su- preme Court went through an analysis of section 506(a) and noted that the Bankruptcy Code permits an allowed claim of a creditor secured by a lien on real property to the extent of the value of the debtor’s interest in such property. The Court, however, was bound by its prior opinion in Dewsnup v. Timm, 112 S.Ct. 773 (1992) . In Dewsnup , the Court defined “secured claim”—within section 506(d)—as a claim that was “supported by a security interest in property, regardless of whether the val- ue of that property would be sufficient to cover the claim.” In other words, the underlying value of the collateral was ir- relevant to the analysis; the only inquiry was whether the secured creditor had created a valid and enforceable security interest in the property. It should be noted that the Caulkett decision is limited to cases filed under Chapter 7, and the result may not be the same in a Chapter 13. There is, how- ever, authority from the Ninth Circuit Court of Appeals (and Arizona is within the jurisdiction of the Ninth Circuit) that a “Chapter 20” debtor (a Chapter 7 followed by an immediate Chapter 13) may permanently void certain liens. See, In re Blendheim, 803 F.3d 477 (9th Cir. 2015). As far as Chapter 11 cases are con- cerned, courts that permit lien-stripping in the Chapter 11 context (which is permitted in Arizona and within the Ninth Circuit) do so under specific provisions under Chapter 11, and not under anything in section 506 of the Code. For example, the cramdown provision of section 1129(b) of the Code permits a debtor to modify the rights of holders of secured claims in certain instances, even if the secured creditors do not consent to such treatment. Of course, the secured creditor must retain its security interest to the extent of the collateral’s fair market value (unless the 1111(b) election is made, in which case the entire amount of the secured credi- tor’s claim will be treated as secured), and the secured creditor is entitled to receive deferred payments over time equal to the present value of its interest in the collateral that secures its claim. Additionally, section 1123(b) of the Code permits certain modifications to secured creditors so long as those claims do not arise from an interest in a debtor’s principal residence. Therefore, it is very unlikely that the Caulkett deci- sion will alter the way secured creditors are treated in a Chapter 11 context. w Recent Supreme Court Update for Secured Lenders 8 www.azbankers.org