In March 2015 in Bank of America NA v Caulkett the Supreme Court considered whether debtors in a Chapter 7 bankruptcy liquidation could invoke Section 506(d) of the Bankruptcy Code to void or 'strip off' the junior mortgage liens on their homes when the senior mortgage debt exceeded their homes' current value (for further details please see "Supreme Court considers junior liens on 'underwater' property"). In a unanimous opinion on June 1 2015 the court reversed the US Court of Appeals for the Eleventh Circuit and held that the debtors could not strip off the junior mortgage liens.(1)
The Chapter 7 debtors in Caulkett had argued that the bank's junior mortgage liens on their homes were not secured because the amount owed on each senior mortgage debt was greater than the homes' values. Section 506(d) of the code provides that "[t]o the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void".(2) A simple textual analysis of Section 506(a) of the code (which defines 'secured' claims) would have supported this view – that is, a claim is secured only to the extent of the creditor's interest in the collateral and in Caulkett the value of the junior lienholder's interest in the "underwater" property was zero.(3)
However, the court rejected this straightforward reading and instead followed the construction of the term 'allowed secured claim' in Section 506(d) which it had adopted in Dewsnup v Timm,(4) which held that term to mean any claim notionally secured by a lien otherwise satisfying the requirements for allowance under the code.(5)
In its opinion the court noted three times that the debtors had not asked it to overrule Dewsnup, perhaps suggesting that it would consider doing so if it were asked. Indeed, not only did some of the justices indicate an inclination to overrule Dewsnup at oral argument;(6) but this signal reappeared in the single footnote to the opinion – a notation that Dewsnup has been repeatedly criticised.(7)
For further information on this topic please contact Andrew J Sackett at Caplin & Drysdale, Chartered by telephone (+1 202 862 5071) or email (firstname.lastname@example.org). The Caplin & Drysdale, Chartered website can be accessed at www.caplindrysdale.com.
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