11th Circuit - Two Days - Two 506 Decisions

Two days, two chapter 7 section 506 decisions by the the 11th Circuit Court of Appeals.  On September 29, 2014, the Court issued its decision in In re Phillip, 2014 WL 4802758 (11th Cir. Sept. 29, 2014)(not selected for publication). On September 30, 2014, the Court issued its decision in In re Vaner Iest, 2014 WL  4825253 (11th Cir. Sept. 30, 2014)(not selected for publication).  The mortgage lender in both cases was Bank of America, N.A.

In both cases, the second mortgage on the chapter 7 debtor's home was underwater. In both cases, the Court noted its prior decision in McNeal v. GMAC Mortgage, LLC, 735 F.3d 1263 (11th Cir. 2012) in which the Court held that it was bound by the "prior panel precedent" rule to apply its prior decision in Folendore v. Small Business Administration, 862 F.2d 1537, 1540 (11th Cir. 1989). The Court in Folendore held that section 506 (d) of the Bankruptcy Code permits a chapter 7 debtor to avoid ("strip off") a wholly "underwater" second mortgage.

Dewsnup Ironically, the Court in  Phillips stated that the Supreme Court in Dewsnup v. Timm, 502 U.S. 410 (1992) "rejected the reasoning of Folendore."  In Dewsnup, the Supreme Court held that lien partially underwater could not be stripped down to value of its equity. 
Prior Panel Precedent Rule - "Clear Contrary Opinion" Required

In McNeal, the Court held that it was bound by the Court's "prior panel precedent" rule to apply Folendore and allow the strip down of wholly underwater liens in a chapter 7 case despite the Supreme Court's decision in Dewsnup.  The 11th Circuit previously explained in the case of United States v. Steele, 147 F. 3d 1316 (11th Cir. 1998)(en banc) that under its prior precedent rule, "a panel  cannot overrule a prior one's holding even though convinced it was wrong."

The Court's ruling in Phillips appears to reflect frustration in being required to follow its prior decision in Folendore and that that if Bank of America sought   "to petition this Court for en banc consideration of the issue it raises here, this Court should seriously consider the petition."

This article explains that the 11th Circuit in the case of Main Drug, Inc. v. Aetna U.S. Healthcare, Inc., 475 F.3d 1228 (11th Cir. 207), held that “‘[w]ithout a clearly contrary opinion of the Supreme Court or of this court sitting en banc, we cannot overrule a decision of a prior panel of  this court.’”

Next 

Folendore's days may be numbered. It would make sense that Bank of America will move for an en banc hearing.

Jordan E. Bublick is a Miami Bankruptcy Lawyer