Requires iron(II). The enzyme, characterized from yeast, is involved in phytosphingosine metabolism. The reaction is mediated by iron(IV) peroxide and results in the release of a water molecule and a carbon dioxide molecule, shortening the substrate by a single carbon atom and forming an odd-numbered fatty acid. Both oxygen atoms of the original carboxylate group are released - one as the leaving water molecule, the other as one of the oxygens of the carbon dioxide molecule. The two oxygen atoms in the newly-formed carboxylate originate from the 2-hydroxy group and from molecular oxygen, respectively. The other oxygen atom of the molecular oxygen is incorporated into the leaving CO2 molecule. The enzyme from the yeast Saccharomyces cerevisiae is active at least toward C14 to C26 2-hydroxyfatty acids, but not against C8 2-hydroxyfatty acid.