Bank of Am., N.A. v. Caulkett - 575 U.S. 790, 135 S. Ct. 1995 (2015)

Rule:

The reasoning of judicial precedent dictates that a debtor in a Chapter 7 bankruptcy proceeding may not void a junior mortgage lien under 11 U.S.C.S. § 506(d) when the debt owed on a senior mortgage lien exceeds the current value of the collateral.

Facts:

Respondent debtors each filed for Chapter 7 bankruptcy, and each owned a house encumbered with a senior mortgage lien and a junior mortgage lien, the latter held by petitioner bank. Because the amount owed on each senior mortgage was greater than each house's current market value, the bank would receive nothing if the properties were sold today. The junior mortgage liens were thus wholly underwater. The debtors sought to void their junior mortgage liens under §506 of the Bankruptcy Code, which provided that to the extent that a lien secured a claim against the debtor that was not an allowed secured claim, such lien was void. In each case, the Bankruptcy Court granted the motion, and both the District Court and the Eleventh Circuit affirmed. According to the Eleventh Circuit, it was bound by the Circuit precedent holding that §506(d) allowed debtors to void a wholly underwater mortgage lien. Certiorari was granted. 

Issue:

May a debtor in a Chapter 7 bankruptcy proceeding void a junior mortgage under §506(d) when the debt owed on a senior mortgage exceeded the present value of the property? 

Answer:

No.

Conclusion:

The court held that a debtor in a Chapter 7 bankruptcy proceeding may not void a junior mortgage lien under §506(d) when the debt owed on a senior mortgage lien exceeded the current value of the collateral if the creditor's claim is both secured by a lien and allowed under §502 of the Bankruptcy Code. In Dewsnup v. Timm, 502 U.S. 410, 112 S. Ct. 773, 116 L. Ed. 2d 903, the Court held that a Chapter 7 debtor was not permitted to strip down a partially underwater lien under §506(d) to the value of the collateral. In the aforementioned case, the Court concluded that an allowed claim secured by a lien with recourse to the underlying collateral did not come within the scope of §506(d). Thus, under Dewsnup, a secured claim was a claim supported by a security interest in property, regardless of whether the value of that property would be sufficient to cover the claim.