Source: http://www.mrgdocs.com/federal-judicial-update/
Timestamp: 2019-04-26 13:08:26+00:00

Document:
The United States Supreme Court recently ruled that the Bankruptcy Code does not allow Chapter 7 debtors to rid themselves of junior liens on home loans that are underwater.
Section 506(d) of the Bankruptcy Code allows a borrower to void a lien on his property “to the extent that the lien secures a claim against the borrower that is not an allowed secured claim.” In the case at hand, the question before the Court was whether a borrower in a Chapter 7 bankruptcy proceeding may void a junior mortgage under §506(d) when the debt owed on a senior mortgage exceeds the present value of the property. The Court held that the borrower may not.
The borrowers in this case had two mortgage liens, of which Petitioner Bank of America (“Bank”) holds the junior mortgage lien. The amount owed on the borrower’s senior mortgage lien is greater than the home’s current market value. The borrowers filed for Chapter 7 bankruptcy and moved to “strip off,” or void, the junior mortgage liens under §506(d) of the Bankruptcy Code.
Section 506(d) provides to the extent that the lien secures a claim against the borrower that is not an allowed secured claim, such lien is void. Accordingly, the borrowers in this case may only strip off the Bank’s junior mortgages if the Bank’s “claim,” generally its right to repayment from the borrower, is “not an allowed secured claim.” Subject to some exceptions not relevant to this case, a claim filed by a lender is deemed “allowed” if no interested party objects or if, in the case of an objection, the Bankruptcy Court determines that the claim should be allowed under §502 of the Bankruptcy Code. The parties agree that the Bank’s claims meet this requirement but disagree on whether the claims are “secured” within the meaning of §506(d).
The Bankruptcy Code suggests that the Bank’s claims are not secured. Section 506(a)(1) provides that “an allowed claim of a creditor secured by a lien on property…is a secured claimto 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.” In other words, if the value of a lender’s interest is zero – as is the case here – their claim cannot be a “secured claim” within the meaning of §506(a).
However, the Court in Dewsnup v. Timm (502 U.S. 410) has previously adopted a construction of the term “secured claim” 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. Under this definition, §506(d)’s function is reduced to “voiding a lien whenever a claim secured by the lien itself has not been allowed” under §502. Dewsnup construed the term “secured claim” in §506(d) to include any claim “secured by a lien and…fully allowed pursuant to §502.” Because the Bank’s claims here are both secured by liens and allowed under §502, they cannot be voided under the definition given to the term “allowed secured claim” byDewsnup.
The borrowers further argued that the term “secured claim” could be defined as any claim that is backed by collateral with some value. This reading of §506(d), however, would give the term “allowed secured claim” in §506(d) a different meaning than its statutory definition in §506(a) and therefore is not acceptable.
For the reasons stated above, the Court held that a borrower in a Chapter 7 bankruptcy proceeding may not void a junior mortgage lien under §506(d) when the debt owed on a senior mortgage lien exceeds the current value of the collateral if the lender’s claim is both secured by a lien and allowed under §502 of the Bankruptcy Code.

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