The U.S. Supreme Court has entered a unanimous decision to deny lien strip of second mortgages in Chapter 7 bankruptcy.
The bankruptcy attorneys for debtors in the two cases taken together BANK OF AMERICA, N. A. v. DAVID B. CAULKETT and BANK OF AMERICA, N. A. V. EDELMIRO TOLEDO-CARDONA attempted to strip the second mortgage liens from the houses of the debtors using section 506(d) of the bankruptcy code.
Under a lien strip, both the lien and the underlying debt are discharged. At the end of the bankruptcy, the lien would be removed and the mortgage company would have no recourse for non-payment as it could not foreclose or sue for payment.
Under Chapter 13, the bankruptcy lawyer for the debtor can use the bankruptcy code to strip off any wholly unsecured mortgages on debtor’s property. The bankruptcy code specifically allows for this form of lien strip and the Court’s decision has not changed this option under the law.
The bankruptcy attorney for the debtors in the cases before the bankruptcy court attempted to strip off junior mortgage liens using section 506(d) of the bankruptcy code.
Section 506(d) of the bankruptcy code states:
(d) To the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void, unless—
(1) such claim was disallowed only under section 502 (b)(5) or 502 (e) of this title; or
(2) such claim is not an allowed secured claim due only to the failure of any entity to file a proof of such claim under section 501 of this title.
The bankruptcy attorneys argued that the claims were not allowed secured claims as the claims were entirely unsecured – meaning that the balance of the first mortgage exceeded the value of the home so no value remained for the second mortgage to be secured by.
The bankruptcy attorneys argument has previously succeeded at the court of appeals and Bank of America’s bankruptcy lawyers were forced to bring an appeal to have the prior cases overturned.
After analyzing the legal issues presented, the court ruled that the construction offered by the debtors’ bankruptcy lawyers did not fulfill requirements needed to approve lien strip in Chapter 7 cases.
The court reasoned:
To start, the debtors rely on language in Dewsnup stating that the Court was not addressing “all possible fact situations,” but was instead “allow[ing] other facts to await their legal resolution on another day.” Id., at 416–417. But this disclaimer provides an insufficient foundation for the debtors’ proposed distinction. Dewsnup considered several possible definitions of the term “secured claim” in §506(d). See id., at 414–416. The definition it settled on—that a claim is “secured” if it is “secured by a lien” and “has been fully allowed pursuant to §502,” id., at 417—does not depend on whether a lien is partially or wholly underwater. Whatever the Court’s hedging language meant, it does not provide a reason to limit Dewsnup in the manner the debtors propose.
The debtors next contend that the term “secured claim” in §506(d) could be redefined as any claim that is backed by collateral with some value. Embracing 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). We refuse to adopt this artificial definition.
Ultimately, the court decided that they would be reading too much into particular words, taken out of context and normal reading throughout the code. They decided on the legal interpretation offered by Bank of America’s bankruptcy attorney.
Please see the United States Supreme Court’s decision for more http://www.supremecourt.gov/opinions/14pdf/13-1421_p8k0.pdf.
