On June 1, 2015, the Supreme Court of the United States decided the case Bank of America v. David B. Caulkett, 2015 WL 2464049. Caulkett clarifies that a debtor in Chapter 7 bankruptcy may not be relieved of a second mortgage when their property is worth less than the payoff balance of their first mortgage. In reaching this conclusion, Court relies upon on the 1992 case,Dewsnup v. Timm. In Dewsnup, the Court held that a Chapter 7 debtor was not relieved of the remaining portion of a mortgage if the property that secured that mortgage was valued too low to cover the entire mortgage. Therefore, if a debtor has a mortgage of $100,000 but their house is only valued at $50,000, Dewsnup does not allow the remaining $50,000 to be “stripped off.”
The elephant in the room is the Court’s apparent dissatisfaction with the Dewsnup case. Despite relying heavily on the opinion, the Court makes a passing jibe at the Dewsnup rationale that § 506 is ambiguous “because the self-interested parties before it disagreed over the term’s meaning…” (emphasis added). The Court also points out twice that the debtor did NOT ask them to overrule Dewsnup. Finally, the Court inserts a footnote referring to widespread criticism ofDewsnup and the “methodological confusion” it has created (citing Justice Thomas’ concurrence in Bank of America Nat. Trust and Sav. Assn. v. 203 North LaSalle Street Partnership, 526 U.S. 434, 463, and n. 3, 119 S.Ct. 1411, 143 L.Ed.2d 607 (1999)). Though the opinion was unanimous, three Justices did not join in the footnote.
In short, the Caulkett outcome is favorable to mortgage creditors. Thus far, Dewsnup has protected second mortgage creditors from being stripped as unsecured or undersecured in Chapter 7 cases, at least in most districts. The Caulkett case will further support this rationale.
However, the dicta may forecast rough times for junior mortgage creditors. It appears possible that at least 6 members of the Court are willing to revisit Dewsnup if asked and if the debtor can present an interpretation of § 506 that suits the Court’s liking. Apparently, Caulkett offered the Court neither option, as the opinion’s penultimate paragraph opines that “[e]ven if Dewsnupwere deemed not to reflect the correct meaning of § 506(d), the debtors’ solution would not either.”