Bank of America, N. A. v. Caulkett

Background

Two homeowners each had a first mortgage and a second, or junior, mortgage on their houses. A large bank held the junior liens. In both cases the debt on the senior mortgage exceeded the home’s current market value, so the junior lien was wholly underwater. The homeowners filed Chapter 7 bankruptcy in 2013 and asked courts to void, or “strip off,” the junior liens under Section 506(d). Bankruptcy courts granted the motions, and the District Court and the Eleventh Circuit affirmed, so the cases reached this Court.

Reasoning

The main question was whether a Chapter 7 filer may void a wholly underwater junior mortgage under Section 506(d). The Court relied on its earlier decision in Dewsnup, which treated any allowed claim secured by a lien as an “allowed secured claim” for Section 506(d) purposes, regardless of the collateral’s value. The Court rejected the homeowners’ text-based argument that the statute should treat a claim as unsecured when the collateral has zero value, and it declined to limit Dewsnup to partially underwater liens. The majority concluded the bank’s claims were allowed and secured, so Section 506(d) does not permit voiding those junior liens. The Court reversed the Eleventh Circuit and remanded for further proceedings consistent with this opinion.

Real world impact

People filing Chapter 7 cannot eliminate a second mortgage simply because the first mortgage exceeds the home’s value; junior lenders keep their lien status even with no equity. The decision preserves existing practice under Dewsnup unless Congress or this Court changes that precedent.