Bank of America v. Caulkett: Chapter 7 Debtors May Not Void A Creditor's Secured Lien In Real Property

Case AnalysisNicole Holland

Bank of America v. Caulkett, 135 S.Ct. 1995 (2015).  

Opinion issued: Jun. 1, 2015. Supreme Court Document Link.

Written by: Nicole Holland, Organizational Development Chair

Both debtors had houses with value less than the amount owed on the senior mortgage liens, making the junior mortgage liens wholly underwater.[1] The debtors filed for Chapter 7 Bankruptcy and petitioned the court to strip off the junior mortgage liens.[2] While both sides agreed that the Bank’s claim on the debtors’ houses were allowed, the debtors argued that the Bank’s claims were not secured under 11 U.S.C. § 506(d).[3]

The Court found the claims were secured and could not be voided under § 506(d).[4] The decision came down to the definition of secured claim.[5] Section 506(a)(1) states a creditor’s claim cannot be secured if the value of the claim is less than the amount of the claim.[6] The Court agreed that under normal statutory construction rules identical words within separate parts of the same act should have similar meaning.[7] However, the Court applied its previous meaning of the phrase from Dewsnup, where it held a creditor’s claim is secured when it is “supported by a security interest in property, regardless of whether the value of that property would be sufficient to cover the claim.”[8] Consequently, the junior mortgage liens on the properties could not be voided.[9] The Court reasoned that real estate values fluctuate greatly, and the status of a secured lien should not be contingent on the current market.[10] Under this ruling, § 506(d)'s function is reduced to “voiding a lien whenever a claim secured by the lien itself has not been allowed.”[11]

When the Supreme Court went back to its decision in Dewsnup, it was not to clarify a previously identified ambiguity in the Bankruptcy Code.[12] Instead, the Court reaffirmed its decision and rejected “normal rule[s] of statutory construction.”[13] Even while standing by its decision in Dewsnup, the Court admitted to its numerous weaknesses.[14] The Caulkett Court emphasized that the debtors did not ask that Dewsnup be overturned three times.[15] Although the Court’s ultimate decision does not favor bankruptcy debtors, perhaps the door is not entirely closed for future litigants to, once again, challenge the Dewsnup decision. 

[1] Bank of Am., N.A. v. Caulkett, 135 S. Ct. 1995, 1997 (2015).

[2] Id. In Dewsnup, the Court refers to the debtor’s argument as a strip down because the lien was only partially underwater. Because the junior mortgage was wholly underwater in Caulkett, the Court refers to the debtor’s request as a strip off. Caulkett, 135 S. Ct. at 1997; see Dewsnup v. Timm, 502 U.S. 410, 411-12 (1992). (meaning “the Bank would receive nothing if the properties were sold today”).

[3] See 11 U.S.C. § 502(a)–(b) (2014); Caulkett, 135 S. Ct. at 1997.

[4] Id. at 1999.

[5] Id. at 1998–99.

[6] 11 U.S.C. § 506(a)(1) (“An 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 the estate's interest in such property . . . and is an unsecured claim to the extent that the value of such creditor's interest . . .  is less than the amount of such allowed claim.”).

[7] Caulkett, 135 S. Ct. at 1999.

[8] Id. In Dewsnup, the Court ruled that a bankruptcy debtor may not strip down a creditor’s claim on the debtor’s real property when the claim is secured by a lien and allowed under 11 U.S.C.     § 502.

[9] Id. at 2001.

[10] Id. at 2001.

[11] Id. at 135 S. Ct. at 1999.

[12] Id. at 1999.

[13] Id.

[14] Id. at 1995. The Court also refers to the “hedging language” of the Dewsnup decision. Id. at2000, 2001. (“Even if Dewsnup were deemed not to reflect the correct meaning of § 506(d), the debtors' solution would not either.”) (emphasis added).

[15] Id. at 1995, 1999, 2001.