Yesterday the United States Supreme Court, in Bank of America v. Caulkett, ruled in favor of commercial lenders, holding that a Chapter 7 debtor cannot avoid mortgage debt by filing a Chapter 7 bankruptcy proceeding. In a unanimous ruling overturning the Eleventh Circuit, the Court held that the Bankruptcy Code does not allow debtors to void junior mortgage liens even when the senior mortgage exceeds the value of the property. The Eleventh Circuit had held that second mortgages could be voided in cases where at the time the bankruptcy petition was filed the senior mortgage was under-secured, relying on Section 506(d) of the Bankruptcy Code. 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.” 11 U. S. C. §506(d).
Three other Circuits that addressed this issued held that the junior mortgage was not voided. The Supreme Court ruling clarifies the law in this area, and the differing rulings from the Circuit Courts.
This ruling is a major victory for mortgage holders, and a set back for homeowners who are unable to pay their mortgages. It may also be a set back for first lien holders as well, which will continue to have to deal with the impact of a junior lien against the property. In fact, counsel for the debtors advanced this argument to the Supreme Court–i.e., that it would hurt first lien holders if second liens were allowed to exist against the property. The Supreme Court rejected this argument.