November 9, 2015
by Linda J. St. Pierre
USFN Member (Connecticut)
by Michael J. McCormick
McCalla Raymer, LLC
USFN Member (Georgia)
On Writs of Certiorari to the U.S. Court of Appeals for the Eleventh Circuit, the United States Supreme Court rendered a decision in the consolidated cases of Bank of America, N.A. v. Caulkett and Bank of America, N.A. v. Toledo-Cardona, 575 U.S. ___ (June 1, 2015). The Supreme Court held that a debtor in a chapter 7 case cannot “strip-off” or void a wholly unsecured junior mortgage under section 506(d) of the Bankruptcy Code.
This decision stems from the cases of In re Caulkett, 566 Fed. Appx. 879 (2014), and In re Toledo-Cardona, 556 Fed. Appx. 911 (2014), where the debtors moved to strip-off or void the junior mortgages of Bank of America in their chapter 7 cases. In each of these cases, the bankruptcy court granted the debtors’ motions, which were upheld by both the District Court and the Court of Appeals for the Eleventh Circuit. After granting Bank of America’s Writ of Certiorari, the U.S. Supreme Court reversed the judgments of the Court of Appeals.
In its analysis, the Supreme Court stated that a debtor may strip-off a junior mortgage only if the bank’s claim is “not an allowed secured claim,” and that a claim filed by a creditor is deemed “allowed” under § 502 if no interested party objects; or if, in the case of an objection, the bankruptcy court determines that the claim should be allowed under the Bankruptcy Code. In this case, the parties agreed that the claims were allowed claims but disagreed on whether the claims were secured.
In upholding its prior decision in Dewsnup v. Timm, 502 U.S. 410 (1992), the Supreme Court stated that Dewsnup 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. Under this definition, § 506(d)’s function is reduced to “voiding a lien whenever a claim secured by a lien itself has not been allowed.” The Supreme Court rejected the debtors’ argument that Dewsnup should be limited to partially unsecured liens.
The Supreme Court held that a “secured claim” does not depend on whether a lien is partially or wholly underwater. Additionally, the Supreme Court rejected the debtors’ argument that § 506(d) could be redefined as any claim that is backed by collateral with some value. The Supreme Court reasoned that embracing that reading would give a different meaning to “secured claim” under § 506(a) and § 506(d). Lastly, the Supreme Court rejected the debtors’ argument that Nobelman v. American Savings Bank, 508 U.S. 324 (1993), controlled.
The Supreme Court observed that Nobelman involved the interaction between § 506(a) and § 1322(b)(2), which was an entirely separate provision. Further, the Supreme Court determined that to limit Dewsnup to that case would effectively give the term “secured claim” different definitions depending on the value of the collateral, and that doing so would effectively leave an odd statutory framework in place. If a court valued the collateral at one dollar more than the amount of the senior lien, the debtor could not strip the lien; but if it valued the property at one dollar less, the debtor could strip the lien.
As of the effective date of the Caulkett decision, debtors in chapter 7 cases will no longer be able to strip-off or void a wholly unsecured junior mortgage under § 506(d) of the Bankruptcy Code. Unfortunately, for those creditors who have had orders entered stripping their junior liens in chapter 7 cases since the Eleventh Circuit first decided In re McNeal, 735 F.3d 1263 (11th Cir. 2012), there is likely little remedy.
For cases involving statutory interpretation, the Supreme Court has long recognized the importance of being able to rely on prior decisions and the “equitable consequences of retroactive application.” See Chevron Oil Co. v. Huson, 404 U.S. 97, 107 (S. Ct. 1971). Although the Supreme Court did not eliminate the possibility of retroactive application by specifically stating its decision only applied to future cases [a technique called “sunbursting;” see Great N. Ry. v. Sunburst Oil & Ref. Co., 287 U.S. 358, 364 (1932)], the Supreme Court’s decision in Caulkett did establish a new principle of law by overruling the Eleventh Circuit case law allowing lien-strips in chapter 7 cases. See Huson, 404 U.S. at 106-07 [quoting Linkletter v. Walker, 381 U.S. 618, 629 (S. Ct. 1965)].
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