Bank of America, N. A. v. Caulkett
192 L. Ed. 2d 52, 135 S. Ct. 1995, 2015 U.S. LEXIS 3579 (2015)
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Rule of Law:
A debtor in a Chapter 7 bankruptcy proceeding cannot void a junior mortgage lien under § 506(d) of the Bankruptcy Code, even when the debt owed on the senior mortgage lien exceeds the property's current market value, rendering the junior lien wholly underwater.
Facts:
- David Caulkett and Edelmiro Toledo-Cardona each owned a house.
- Each house was subject to two mortgage liens.
- Bank of America held the junior mortgage lien on each of the debtors' homes.
- For each property, the amount owed on the senior mortgage lien was greater than the home's current market value.
- Consequently, Bank of America's junior mortgage liens were wholly underwater, meaning there was no equity in the properties to secure the junior liens.
Procedural Posture:
- Debtors David Caulkett and Edelmiro Toledo-Cardona each filed for Chapter 7 bankruptcy.
- In their respective bankruptcy proceedings, each debtor filed a motion to void Bank of America's junior mortgage lien under § 506(d).
- The Bankruptcy Court granted the motions in both cases.
- The U.S. District Court affirmed the decisions of the Bankruptcy Court.
- Bank of America, as petitioner, appealed to the U.S. Court of Appeals for the Eleventh Circuit.
- The Eleventh Circuit affirmed the lower courts' rulings, noting it was bound by existing circuit precedent.
- The Supreme Court of the United States granted certiorari.
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Issue:
Does § 506(d) of the Bankruptcy Code allow a debtor in a Chapter 7 bankruptcy to void a junior mortgage lien when the total amount of the senior mortgage debt exceeds the current market value of the property?
Opinions:
Majority - Justice Thomas
No. 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 exceeds the current value of the collateral. The Court is bound by its precedent in Dewsnup v. Timm, which defined a 'secured claim' under § 506(d) as any claim that is secured by a lien and has been allowed under § 502, regardless of the actual value of the collateral. The Bank's claims are allowed under § 502 and are secured by liens on the properties, so they fit the Dewsnup definition and cannot be voided. The Court rejected the debtors' argument to limit Dewsnup to only partially underwater liens, finding no basis for such an 'artificial distinction' and noting that it would lead to arbitrary results based on minor fluctuations in property value.
Analysis:
This decision reaffirms and extends the controversial precedent of Dewsnup v. Timm, solidifying its application to wholly underwater junior liens in Chapter 7 bankruptcies. It prevents Chapter 7 debtors from 'stripping off' valueless liens, meaning those liens survive the bankruptcy and can attach to any future equity the debtor gains in the property. The ruling highlights the Court's commitment to stare decisis, even for a widely criticized precedent, and clarifies a significant circuit split on the issue. This creates a stark contrast between Chapter 7, where such liens cannot be stripped, and other bankruptcy chapters like 13, where they often can be, influencing debtors' strategic choices when filing for bankruptcy.
