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U.S. Supreme Court Overrules Debtors’ Ability to Void Underwater Junior Mortgages

In Bank of America, N.A. v. Caulkett, 575 U.S. __ (2015), the United States Supreme Court overruled the longstanding ability of a debtor to void a junior mortgage under 11 U.S.C. 506(d) when the debt owed on a senior mortgage exceeds the value of the secured property. Section 506(d) allows a debtor to void a lien on property "[t]o the extent that [the] lien secures a claim against the debtor that is not an allowed secured claim." Typically, and as was the case in Caulkett, debtors use 506(d) to void, or "strip," wholly-underwater junior mortgages, or ones in which the junior mortgagor will receive nothing in the event of a sale of the collateral. Because the amount of the senior debt exceeds the value of the property, only a senior mortgagor is entitled to payment from any sale proceeds, rendering the junior mortgagor essentially unsecured. The Supreme Court, however, overruled this practice. While other Code provisions might suggest otherwise, the Court followed Dewsnup v. Timm, 502 U.S. 410 (1992) in construing 506(d) to prohibit lien stripping. In Dewsnup, the Court held that a "secured claim" for purposes of 506(d) means "a claim supported by a security interest in property, regardless of whether the value of that property would be sufficient to cover the claim." The Dewsnup definition, the Court held, therefore mandated the result that 506(d) can be used to void a lien only to the extent the claim is not a secured allowed claim. Accordingly, "[t]he reasoning of Dewsnup dictates that a debtor 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."

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