Source: https://www.beiramee.com/blg-blog-post/tag/Lien+Stripping
Timestamp: 2019-04-25 09:43:47+00:00

Document:
In Bank of America, N.A. v. Caulkett, the U.S. Supreme Court reversed an Eleventh Circuit decision that permitted a junior lien to be “stripped down” or voided under Section 506(d) of the Bankruptcy Code because it was wholly underwater. In doing, so, the Court reaffirmed its holding in Dewsnup v. Timm, 502 U.S. 410 (1992), which defined the term ‘secured claim’ in §506(d) to mean “a claim supported by a security interest in property, regardless of whether the value of that property would be sufficient to cover the claim.” Slip Op at 4.
Consequently, the Court held that, so long as a claim is supported by a security interest in property, then it is not subject to being “stripped down” or voided under Section 506(d) of the Bankruptcy Code “regardless of whether the value of that property would be sufficient to cover the claim.” Slip Op at 4.
In Caulkett, the Court considered two consolidated cases on appeal, each of which involved debtors (“Debtors”) who had a primary and secondary mortgage lien on their respective homes. The Bank held the junior mortgage lien on each house. The Debtors each filed for Chapter 7 bankruptcy. By that time, however, the amount owed under the senior mortgage was greater than each home’s current market value, meaning that the Bank would receive nothing under the junior mortgage lien if the respective property were sold at foreclosure.
The Debtors each moved to “strip off” or void the junior mortgage lien under Section 506(d) of the Bankruptcy Code. That statute provides that a lien is void “[t]o the extent that a lien secures a claim against the debtor that is not an allowed secured claim.” Slip Op. at 2 (citing 11 U. S. C. § 506(d)). The bankruptcy court granted the Debtors respective motions, and both the District Court and the Court of Appeals for the Eleventh Circuit agreed. Granting certiorari, the U.S. Supreme Court reversed.
The Court noted that, although the parties agreed that BANA’s claim is “allowed” as defined under 11 U. S. C. § 502(a)-(b), at issue was whether BANA’s allowed claims were “secured.” See Op. at 3. The Court acknowledged that a strict reading of the applicable statutes “suggests” that BANA’s lien is not “secured.” Notably, under Section 506(a)(1), “[a]n 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 . . . such property,” and “an unsecured claim to the extent that the value of such creditor’s interest . . . is less than the amount of such allowed claim.” Op. at 3 (citing 11 U. S. C. § 506(a)(1)).
However, the Court determined that its interpretation of the term “secured claim” in Dewsnup v. Timm, 502 U.S. 410 (1992), was controlling, which would include BANA’s junior mortgage liens. In Dewsnup, the Court defined the term ‘secured claim’ in §506(d) to mean “a claim supported by a security interest in property, regardless of whether the value of that property would be sufficient to cover the claim.” Slip Op at 4.
Thus, in Dewsnup, the Court had rejected a Chapter 7 debtor’s argument seeking to “strip down” (or reduce) a partially underwater lien to the value of the collateral under Section 506(d). Notably, in Dewsnup, the debtor asserted that the creditor’s claim was “secured only to the extent of the judicially determined value of the real property on which the lien [wa]s fixed.” Op. at 3-4 (citing Dewsnup, 502 U.S. at 414). In rejecting such argument, the Dewsnup Court determined that if a claim “has been ‘allowed’ pursuant to § 502 of the Code and is secured by a lien with recourse to the underlying collateral, it does not come within the scope of § 506(d).” Op. at 4 (citing Dewsnup, 502 U.S. at 415). Consequently, under Dewsnup’s interpretation of an “allowed secured claim,” the Court concluded that BANA’s liens could not be voided.
Although Debtors sought to limit the Dewsnup interpretation to apply only to partially underwater liens, rather than wholly underwater liens, the Supreme Court refused to adopt such a distinction. See Op. at 5. The Court explained that such proposition would leave an “odd statutory framework . . . [where] if a court valued the collateral at one dollar more than the amount of a senior lien, the debtor could not strip down a junior lien under Dewsnup, but if it valued the property at one dollar less, the debtor could strip off the entire junior lien.” Slip Op. at 6-7.
Accordingly, the U.S. Supreme Court reversed the judgment of the Eleventh Circuit, and remanded the cases for further proceedings.

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