Thursday, July 5, 2012

In re McNeal: The Eleventh Circuit Lets
Debtors Strip Off Second Mortgages

In a recent opinion, the Eleventh Circuit Court of Appeal held that second-priority mortgage liens may be eliminated completely (“stripped off”) in chapter 7 bankruptcy proceedings when the underlying collateral is worth less than the amount of the first-priority mortgage. In re McNeal, Case No. 11-11352, 2012 WL 1649853 (11th Cir. 2012). This ruling represents a significant change in Eleventh Circuit precedent and is in conflict with three other federal circuit court decisions. See, e.g., id. at *2; Ryan v. Homecomings Financial Network, 253 F.3d 778 (4th Cir. 2001); Talbert v. City Mortgage Services, 344 F.3d 555 (6th Cir. 2003); Laskin v. First National Bank of Keystone, 222 B.R. 872 (9th Cir. 1998). 

The significance of this ruling can hardly be understated, as practitioners are well aware that numerous properties subject to multiple mortgage liens are worth less than the amount of the first-priority mortgage. Given this state of affairs, debtors in chapter 7 proceedings are likely to vigorously contest collateral valuation in order to potentially eliminate second-priority mortgage liens altogether. Creditors must plan accordingly to protect second-priority liens in valuation proceedings in the Eleventh Circuit.