The U.S. Supreme Court issued its decision today in the
consolidated cases of Bank of
America, N.A., Petitioner v. David B. Caulkett,
and Bank of America, N.A., Petitioner v. Edelmiro Toledo-Cardona,
declining 9-0 to void the junior mortgage liens on the respondents’ homes when
the senior lienholder’s debt exceeds the property’s value. This decision
reverses the judgments of the Eleventh Circuit.
The facts in each of these cases are essentially the same.
The debtors, respondents David Caulkett and Edelmiro Toledo-Cardona, each had 2
mortgages on their respective homes. The petitioner, Bank of America, holds the
junior mortgage lien on each of the homes. The junior mortgage liens are
completely underwater as the amount outstanding on the senior mortgage liens
exceeds the current value of the homes. The debtors moved to have the junior
mortgage liens voided, i.e., ‘stripped off”, under §506(d) of the
Bankruptcy Code.
Section
506(d) states 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.” Therefore, the
secured claim can be stripped off only if its right to repayment from the
debtors is not an allowed secured claim. With minor exceptions that do not
apply in these cases, a claim filed by a creditor is deemed “allowed” under Section 502 of the
Bankruptcy Code if no interested party objects or, if an interested party
objects, the bankruptcy court makes the determination that secured claim should
be allowed. The parties in these cases had agreed that Bank of America’s claims
were “allowed” claims. Their disagreement was over whether Bank of America’s
claims were “secured” claims as defined under §506(d) of the
Bankruptcy Code.
A straight reading of §506(d) of the
Bankruptcy Code would tend to support the debtors’ construction of a secured
claim. However, back in 1992, in Dewsnup v. Timm
(502 U.S. 410), the Court came to a different interpretation that defined the
term “secured claim” under §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. This
interpretation essentially limited §506(d)’s application
to voiding only those liens where the claim it secures has not been allowed.
To remain consistent with its prior decision, the Court
reversed the lower court decisions and refused to void Bank of America’s junior
mortgage liens. The Court noted that it was not being asked to overrule its
decision in Dewsnup and noted to decide as requested by
the debtors, it would in the same term having more than one definition and
would leave an “odd statutory framework in its place.” One has to wonder what
the Court’s decision would have been if it was in fact asked to overrule Dewsnup.
The end result is Bank of America’s junior liens remain in
place on the homes. Bank of America won
the battle in protecting its future interest as a junior lien holder. However,
if the bankruptcy courts were to grant a motion for the senior lenders to
proceed with foreclosure actions, Bank of America’s junior liens could still be
stripped if the winning bids at sheriff’s auction are not high enough to cover both
the senior and junior liens.
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