At the beginning of this term, there was hope that the United States Supreme Court would issue an opinion in Bank of America v. Caulkett that would provide homeowners with the opportunity for lien stripping second mortgages during bankruptcy. Earlier this month, the Court issued its ruling and opinion and those hopes were crushed.
Lien Stripping Background
The Court’s decision addressed two consolidated bankruptcy cases with substantially the same facts. In each case, the bankruptcy debtor filed for Chapter 7 bankruptcy, the liquidation form of bankruptcy that most individuals utilize. Each had two mortgages on their home with the second mortgage held by Bank of America.
A second mortgage is subordinate to the first mortgage (or in the case of multiple mortgages, more senior). That means that if the home is sold during foreclosure, or otherwise, the second mortgage holder won’t receive any proceeds until the first mortgage is paid off. In each of the consolidated cases, the home value was less than the remaining balance on the first mortgage. That meant that if the home was sold during foreclosure or otherwise, the first mortgage holder would not recoup the entire amount owed from the sale and Bank of America would receive nothing.
The 11th Circuit’s Decision on Lien Stripping
The cases made their way to the 11th Circuit, the federal appellate court that hears cases from federal trial courts in Florida, Georgia, and Alabama. The 11th Circuit found that § 506(d) of the Bankruptcy Code allows for wholly underwater lien stripping.
§ 506(d) reads “[t]o the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void.” Whether a second mortgage lien is voidable thus depends on whether it is a “allowed secured claim.” The 11th Circuit found that while the second mortgages were clearly allowed claims, they weren’t secured because they had no value. (Remember: the market value of the homes was less than the respective first mortgages meaning the second mortgage holder, Bank of America, would not receive any money from the sale of the properties.) Put differently, there was no real security remaining.
The Supreme Court’s Reversal
The Supreme Court’s opinion acknowledged that “a straightforward reading of the statute would seem to favor lien stripping for the debtors,” but it none-the-less reversed the 11th Circuit’s decision based on its own prior precedent, Dewsnup v. Timm.
In Dewsnup the court addressed the meaning of “secured” in an analogous context. The homeowner in Dewsnup sought to have the amount owed on her mortgage stripped down to the value of the home that secured it. The home’s value was approximately $80k less than what she owed. The Court rejected her request based on its definition of secured claim as one that has a security interest in property, even where the interest wouldn’t be enough to pay off the amount owed.
The Court in Caulkett explained that it was bound by the definition it had set forth in Dewsnup and was not persuaded by the homeowners attempt to distinguish their cases on the grounds that Dewsnup involved a mortgage that was only partially underwater, meaning the lien continued to have some value even if that value wasn’t equivalent to the entire amount owed.
Jacksonville Florida Foreclosure & Bankruptcy Help
Though Caulkett wasn’t the homeowner, lien stripping friendly decision some had hoped for, there remain other approaches that can be taken to obtain the most favorable outcome possible in bankruptcy and foreclosure proceedings. You can contact Jacksonville bankruptcy lawyers, Adam Law Group for legal assistance with either, or both.