Unsecured junior lien cannot be stripped in chapter 7.
In an opinion written by Justice Thomas, the Court declined to limit its prior opinion in Dewsnup v. Timm, 502 U.S. 410 (1992), to partially underwater liens, reversing the Eleventh Circuit in two cases and holding that chapter 7 debtors cannot use § 506(d) to void wholly unsecured junior liens. The amounts owing on first mortgage liens exceeded the current market values of the debtors’ homes, leaving the junior liens with no supporting value. Section 506(d) permits voiding the liens only if the bank’s claims were not allowed secured claims, and the only dispute here was whether the claims were “secured” within § 506(d)’s meaning.
In Dewsnup, the Court adopted the construction of the term “secured claim” for purposes of § 506(d) as meaning that if the claim had been “allowed” pursuant to § 502 and was secured by a lien with recourse to the property collateral, that claim was secured regardless of whether there was value to support it.
The opinion noted that the debtors had not asked that Dewsnup be overruled, and the Court declined to make a distinction from that precedent for wholly unsecured junior liens. Moreover, the Court’s prior decision in Nobelman v. American Savings Bank, 508 U.S. 324 (1993), dealt with the interaction between § 506(a) and § 1322(b)(2), leaving no guidance for the chapter 7 issue presented here.