Mortgage modification has long been an angst-ridden topic for consumer creditors. The issue once again rose to the forefront in May of 2012, when the Eleventh Circuit issued the unpublished opinion of In re McNeal, wherein the court allowed a Chapter 7 debtor to “strip off,” or avoid, a wholly unsecured junior mortgage. As discussed in previous posts, this decision was particularly troublesome to creditors and their counsel, as the vast majority of courts throughout the country had held Chapter 7 “strip offs” to be prohibited by the Supreme Court’s decision of Dewsnup v. Timm.
On January 18, 2013, the Bankruptcy Court for the Southern District of Florida became only the second court within the Eleventh Circuit to issue an opinion directly addressing the impact of McNeal. In the case of In re Bertan, the debtor obtained a Home Equity Line of Credit in the amount of $200,000, secured by a junior mortgage on its homestead property. Relying on the value of the property, as determined by the Miami-Dade County Office of the Property Appraiser, the debtors asserted that the collateral was worth only $262,834.00. No creditor objected to this valuation. Because the property was encumbered by a senior mortgage in the amount of $291,557.00, the debtors argued that the junior mortgage was wholly unsecured.
Judge A. Jay Cristol of the Southern District of Florida acknowledged the Eleventh Circuit’s holding in McNeal, but noted correctly that lower courts within the Circuit are not bound to follow unpublished decisions. Nevertheless, Judge Cristol held that the court was bound by Folendore, a published Eleventh Circuit decision, which McNeal held to be controlling law within the Circuit.
Specifically, Judge Cristol stated that “[w]hile this Court believed the reasoning in Dewsnup was controlling under the circumstances presented in [Beltran], it has come to understand, through McNeal, that the Eleventh Circuit Court of Appeals does not believe [Dewsnup controls].” In dicta Judge Cristol noted that because the junior mortgage holder “has no interest in the [collateral] due to the senior mortgage, [it] is not therefore prejudiced as a result of this order.” Therefore, the court approved the debtor’s motion to “strip off” the wholly unsecured loan under § 506 of the Bankruptcy Code.
Creditors should take two important lessons away from Beltran. First, although McNeal is “non-precedential,” it is not without persuasive merit within the Eleventh Circuit. Second, it is critically important for creditors and their counsel to determine whether an independent appraisal might elevate the value of the collateral above that of the senior mortgage. Because McNeal and Folendore allow debtors to strip only wholly unsecured loans, an independent appraisal may have persuaded the Court that the value of the property was greater than that of the senior mortgage, thereby prohibiting modification altogether.