On June 1, 2015, the U.S. Supreme Court decided Bank of America N.A., v. Caulkett,[1] unanimously holding that debtors could not strip off a second lien in a chapter 7 proceeding. In Caulkett, the debtors were attempting to void a junior lien where the debt owed by the senior lien exceeded the value of the collateral. Each borrower filed motions to “strip off” the subordinate lien using § 506(d) of the Bankruptcy Code.[2] The bankruptcy court granted the motions, and the U.S. Court of Appeals for the Eleventh Circuit affirmed, noting that it is required to follow circuit court precedent, which held that junior liens may be voided. The Supreme Court granted certiorari and reversed the appeals court, relying heavily on the Court’s earlier opinion in Dewsnup.[3]
In Dewsnup, the borrower attempted to “strip down” a second mortgage lien, or reduce the amount of the secured claim to the value of the property. The Supreme Court denied this attempt, reasoning that the term “secured” is ambiguous within the statute and, using pre-Code practice, opined that if a claim is secured with recourse to the underlying collateral, it did not come within the text of § 506(d).
The Court further noted that Dewsnup foreclosed the argument that the borrowers were making in these consolidated cases.[4] The Court indicated that Dewsnup’s definition of “secured claim,” or any claim secured by a lien and fully allowed pursuant to § 502, did not allow the borrowers to void the liens at issue in these cases. The Court recognized that the liens in these cases were “secured” and “fully allowed,” and because of this distinction, the debtors could not void the liens at issue. Consequently, it should logically follow that the Court cleared the circuit split on the question of whether a debtor could void a lien off a property in chapter 7.
However, the Court shifted gears and seemed to indicate that it wanted to overrule Dewsnup. The debtors in these cases, the Court stressed, had not specifically asked the Court to overrule Dewsnup, but instead attempted to have the Court limit that decision to the facts within it, namely only the strip-down of liens and not the strip-off of liens. The Court rejected this argument, holding that the reading that the debtors were attempting to have the Court adopt would lead to very odd results. The Court further noted that the case of Nobelman,[5] cited by the debtors, did not support the debtors’ contentions either. Nobelman, the Court believed, addressed the interplay of §§ 506(d) and 1322(d), not §§ 506(d) and 506(a).
The Court reasoned that Dewsnup foreclosed the debtors’ arguments because using the debtors’ definition would not give § 506(d) its original meaning. Finding that the reading that the debtors would have preferred the Court to adopt would have allowed the debtors to remove an entirely underwater lien without cramming down the same lien if there was even a dollar value securing the mortgage.
The Court throughout the opinion continually referenced that the debtors did not ask the Court to overrule Dewsnup, even going as far as providing a footnote regarding the confusion that some courts have dealt with since the opinion was handed down, and noting that the debtors had repeatedly insisted that the Court not overrule Dewsnup. The Court was seemingly suggesting that the debtors bring the next round of appeals to the Court, which would then allow the Court to explicitly overrule Dewsnup.
One cannot help but think, when reading the opinion, that the Justices were hinting at having other debtors bring an appeal to the Court, which would then allow the Court to revisit Dewsnup. On more than three occasions in the opinion, the Court reminded the reader that the debtors in these cases did not ask the Court to overrule Dewsnup, but rather limit its holding to that of strip-down mortgages.
In conclusion, while the Court held that chapter 7 debtors may not strip off a second mortgage in a chapter 7 proceeding, it left the door wide open for the next round of appeals, which will presumably ask the Court to overrule Dewsnup and allow the voiding of liens in a chapter 7 proceeding. Inevitably, those cases are being brought in bankruptcy courts around the nation right now. The general consensus among bankruptcy practitioners is that the Court would have to put an end to voiding liens in chapter 7 bankruptcies, but in so saying, it will likely renew debtors’ pursuit of voiding liens in chapter 7.
[1] 575 U.S. __ (2015).
[2] All references to Code sections hereinafter refer to Title 11 found at 11 U.S.C. § 101 et seq.
[3] Dewsnup v. Timm, 502 U.S. 410 (1992).
[4] The petition In re Toledo-Cardona, 556 Fed. Appx. 911 (2014), was consolidated with Caulkett.
[5] Nobelman v. American Savings Bank, 508 U.S. 324 (1993).