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CBAI Files Amicus Curiae Brief to Protect Lender Interests

The Community Bankers Association of Illinois (CBAI) filed an Amicus Curiae brief with the United States Supreme Court urging a reversal of an Eleventh Circuit Court of Appeals’ decision to permit wholly underwater junior liens to be stripped-off or voided in bankruptcy. This matter was brought to our attention by CBAI’s Associate Member SmithAmundsen LLC. Attorney John Collen of that firm drafted and submitted the brief on behalf of CBAI. CBAI’s Board of Directors unanimously approved the filing of this brief to protect the lender interests of Illinois community banks.

In this case, the Appeals Court allowed junior mortgages to be voided or stripped-off based on the judicial determination the liens had no monetary value at the time the debtors were discharged in bankruptcy because the real estate was valued at an amount less than the indebtedness that is subject to the first mortgage. The debtors, however, retained their respective properties to which the liens had been previously attached. Accordingly, the secured party lost the ability to recover any of its indebtedness from possible future appreciation of the value of the properties. Had the secured party’s liens been allowed to pass through bankruptcy unaffected, in accordance with century-old practice, the secured party would have had a chance to recover something in the future rather than being judicially sentenced to recover nothing. The secured party was therefore deprived of a valuable right, even though, at a particular moment in time, its liens supposedly would have recovered no value from the liquidation sales.

It is fundamentally wrong to confuse a lien’s liquidation value at a particular moment in time with the value of the property right which the lien represents. This line of reasoning ignores the fact that even a wholly underwater junior lien is a valuable proper right and that a junior lien which is wholly underwater today may acquire value as underwater property values fluctuate (increases) in the future. This line of reasoning also ignores the fact that valuations/appraisals are subjective and can fluctuate widely; so that it is fundamentally unfair to void a junior lien because, for example, at a point in time a judge decides there is a $1,000 underwater value based on one appraisal when another appraisal could state there is $5,000 more in value and that no underwater situation exists. The brief concluded by respectfully urging the Appeals Court decision be reversed.

CBAI appreciates SmithAmundsen bringing this matter to the attention of CBAI and for their valuable efforts in what will hopefully be a reversal of the Appeals Court decision. Read Amicus Brief.