In the latest chapter of “lien stripping,” the Honorable Judge Erik P. Kimball of the Southern District of Florida, Bankruptcy Court, recently grappled with the issue of whether a debtor can strip a completely unsecured junior mortgage on abandoned property. In Bodensiek , a creditor held two mortgages on the debtor’s homestead property. However, the minimal value of the homestead property rendered the creditor’s second mortgage completely under water. Prior to the debtor filing a motion to strip creditor’s second mortgage, the Chapter 7 Trustee issued a Notice of Abandonment related to the homestead property.
The creditor argued that because the homestead was abandoned, it was no longer property of the estate. Consequently, the creditor asserted that the debtor could no longer strip the second mortgage pursuant to 11 U.S.C. 506. The Court disagreed with creditor’s analysis and found that when construing 11 U.S.C. 506, property should be classified at the time of filing the bankruptcy petition . Relying on Justice Scalia’s dissent in Dewsnup v. Timm , the Court held that a debtor can strip a completely unsecured lien without regard to whether the property is, or will be, abandoned. The Court noted the similarities between abandoned and exempt property, and determined that a contrary result could lead to complicated issues arising if, for example, a debtor amended its schedule of exempt assets prior to the case being closed.
Creditors and their counsel within the Eleventh Circuit should take notice of Bodensiek and anticipate motions to strip being filed by debtors regardless of whether the subject property is claimed exempt or abandoned.