Bank of America, N. A. v. Caulkett
The Supreme Court ruled that homeowners in Chapter 7 bankruptcy cannot wipe out a second mortgage just because the home is worth less than what's owed on the first mortgage.
The decision keeps a 1992 precedent in place, meaning banks holding junior liens keep some legal claim on a property even when that claim would currently be worthless if the house were sold.
How it got here: Bankruptcy courts voided the junior liens; the district courts and the Eleventh Circuit affirmed; Bank of America asked the Supreme Court to review both cases together.
The Case in Depth
What happened
Two homeowners, David Caulkett and Edelmiro Toledo-Cardona, each had a house with two mortgages: a first (senior) mortgage and a second (junior) mortgage held by Bank of America. In both cases, the amount owed on the first mortgage alone exceeded the home's current market value, meaning the bank's second mortgage was worth nothing if the house sold today. The homeowners filed for Chapter 7 bankruptcy and asked the bankruptcy court to void the bank's second mortgage entirely.
The question before the Court
If a homeowner's second mortgage is completely underwater because the first mortgage already exceeds the home's value, can bankruptcy erase that second mortgage entirely?
The Court's answer
No — the Court ruled that a Chapter 7 debtor cannot void a completely underwater second mortgage under the bankruptcy code provision at issue, because its 1992 decision in Dewsnup v. Timm already defined a "secured claim" as any claim backed by a lien and formally allowed in the bankruptcy process, regardless of whether the collateral is actually worth anything.
The homeowners asked the Court to at least limit Dewsnup to liens that are only partially underwater, leaving wholly underwater liens voidable. The Court refused, finding no principled basis in Dewsnup's reasoning for treating partially and wholly underwater liens differently. So the second mortgages survive the bankruptcy, even though they were worth nothing at the time.
Curious how the Court got there? See the step-by-step legal reasoning →
Why it matters
Homeowners who filed for Chapter 7 bankruptcy while owing more on their first mortgage than their house is worth cannot use bankruptcy to erase a second mortgage entirely. Banks holding underwater junior liens keep an enforceable claim that could resurface if home values recover, affecting how much debt relief bankruptcy actually delivers to struggling homeowners.
What changes now
The cases are sent back to the lower courts, which must now recognize that the junior mortgages remain valid liens rather than voided ones. Bank of America's underwater second mortgages survive the homeowners' bankruptcies and could become collectible again if the properties later increase in value. The ruling leaves Dewsnup v. Timm's approach in place and applies it to wholly, not just partially, underwater liens.
What this does not decide
The Court did not decide whether Dewsnup v. Timm was correctly decided in the first place -- the homeowners explicitly did not ask the Court to overrule it. The ruling addresses only whether Dewsnup's rule extends to liens that are completely, rather than partially, underwater.
Concurrences and dissents
Concurrence in part — Justice Kennedy
Justices Kennedy, Breyer, and Sotomayor joined the Court's opinion in full except for one footnote, which recounted the extensive scholarly and judicial criticism directed at the Dewsnup precedent over the years. Their partial join suggests they did not want to endorse cataloguing that criticism, even though they agreed with the Court's ultimate reasoning and outcome.
How the Court got there
The legal reasoning, step by step
- The Court examined the bankruptcy code provision letting debtors void a lien that does not secure an 'allowed secured claim.' The parties agreed the bank's claims were 'allowed,' so the fight was over whether they were 'secured.'
- Read on its own, the code's definition of 'secured claim' would seem to favor the homeowners, since it ties 'secured' status to the actual current value of the collateral -- and that value here was zero.
- But the Court explained that its 1992 decision in Dewsnup v. Timm (a case where a debtor tried to reduce, rather than fully erase, an underwater lien) already defined 'secured claim' differently for this particular code provision: any claim backed by a lien and formally allowed in the bankruptcy process counts as secured, regardless of the collateral's actual value.
- Because Bank of America's claims were both backed by liens and formally allowed, they qualified as 'secured' under Dewsnup's definition, even though the liens were completely underwater.
- The Court declined to draw a line between partially underwater liens (covered by Dewsnup) and wholly underwater liens (the homeowners' proposed exception), reasoning that Dewsnup's definition did not turn on how much value, if any, remained in the collateral.
- The Court also rejected the homeowners' reliance on a separate case, Nobelman v. American Savings Bank, finding it addressed an unrelated code provision and did not speak to the definition at issue here.
Doctrinal impact
Cases affected by this decision
Reaffirms Dewsnup v. Timm (502 U. S. 410)
The Court relies on and extends Dewsnup's definition of 'secured claim' to wholly underwater liens rather than overruling it.
Distinguishes Nobelman v. American Savings Bank (508 U. S. 324)
The Court says this case addressed a different statutory provision and offers no guidance here.