The United States Supreme Court issued its decision in Bank of America v. Caulkett, which is a solid guidepost in the bankruptcy journey for both creditors and debtors alike. The issue confronted by the Supreme Court was whether a wholly unsecured junior mortgage lien may be stripped off pursuant to §506(d) in a Chapter 7 bankruptcy.
This case was a “consolidated case where both debtors had two mortgage liens on their respective homes with the junior lien on each being held by Bank of America. In each instance, the amount owed on debtor’s senior mortgage was greater than each home’s current market value and therefore Bank of America’s junior liens were wholly ‘underwater’ or unsecured. In each case, the Debtors moved to “strip off” the junior liens under section 506(d) of the Bankruptcy Code, claiming that the Bank’s claims were not “secured” within the meaning of §506(d).
The Debtors urged the Court to adopt a straightforward reading of the term “secured claim” from section 506(a)(1) in conjunction with 506(d) to void the Bank’s claims. However, a straightforward reading would directly conflict with the Supreme Court’s 1992 ruling in Dewsnup v. Timm where the Court refused to allow a debtor to “strip down” her debt of $120,000 to the value of the collateral securing the claim, $39,000. Dewsnup v. Timm 502 U.S. 410, 413 (1992). The Dewsnup Court concluded that the term “secured claim” means a claim supported by a security interest in property, regardless of whether the value of that property would be sufficient to cover the claim.
“Section 506(a)(1) provides that ‘[a]n 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 ‘an unsecured claim to the extent that the value of such creditor’s interest…is less than the amount of such allowed claim.”
“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)(emphasis added by the Court). “Subject to some exceptions not relevant here, a claim filed by a creditor is deemed ‘allowed’ under §502 if no interested party objects, or if, in the case of an objection, the Bankruptcy Court determines that the claim should be allowed under the Code.” §§502(a)-(b)
Here, the Bank’s claims were secured by liens and allowed under §502 so they cannot be voided under the definition given to the term “allowed secured claim” in Dewsnup. The Court’s ruling is Dewsnup was not dependent on whether a lien is partially or wholly underwater. So long as a claim in a Chapter 7 bankruptcy is secured by a lien and allowed under §502, it may not be “stripped off” even if the lien is wholly underwater.
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