In its opinion in Dewsnup v. Timm, 502 U.S. 410 (1992) the Supreme Court held that a debtor may not under § 506(d) of the Bankruptcy Code, strip down a partially undersecured mortgage lien against his home to the value of the lender’s collateral. In its recent opinion in Bank of America, N.A. v. Caulkett, 135 S. Ct. 1995 (2015), the Court has extended that reasoning to prohibit a debtor from stripping off a fully undersecured mortgage lien under § 506(d). In Caulkett, the debtor argued that the Court’s reasoning in Dewsnup applied only to partially secured liens and did not apply to fully secured lines. The Court rejected that argument and held that its reasoning in Dewsnup applies equally to fully undersecured liens.
Interestingly, the Court noted early in its opinion in Caulkettthat a straightforward reading of § 506 supported the debtor’s contention. Section 506(a)(1) provides that “an allowed claim of a creditor secured by a lien on property . . . is a secured claim to the extent of the value of such creditor’s interest in . . . such property,” and further provides that such claim “is an unsecured claim to the extent that the value of such creditor’s interest . . . is less than the amount of such allowed claim.” Section 506(d) provides that “to the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void.” Although acknowledging that the debtor’s contention was reasonably in light of the statutory language, the Court held that its reasoning in Dewsnupprecluded a ruling in favor of the debtor.
The Court referred to its opinion in Dewsnup in the following words: “Relying on policy considerations and its understanding of pre-Code practice, the Court concluded that if a claim ‘has been allowed’ pursuant to § 502 of the Code and is secured by a lien with recourse to the underlying collateral, it does not come within the scope of § 506(d). . . In other words, Dewsnup defined the term ‘secured claim’ in § 506(d) to mean a claim supported by a security interest in property, regardless of whether the value of that property would be sufficient to cover the claim.” The court reiterated that § 506(d) comes into play to strip down or strip off a lien only if the claim itself has not been allowed. The debtor argued that Dewsnup should be limited to its facts and should not be extended to fully undersecured claims. However, the Court stated that such a holding would require it to read the same words in the statute differently depending on situational context, and would lead to arbitrary results in light of the shifting nature of real estate value. As a result, the Court extended its reasoning in Dewsnup to fully undersecured liens, and concluded that a claim that is fully allowed and secured by a lien cannot be stripped down or stripped off under § 506(d).