Bank of America, NA v. Caulkett; Bank of America, NA v. Toledo-Cardona
Issues
Does 11 U.S.C. § 506(d) permit a bankruptcy court to “strip off” a junior lien on a home that is completely underwater?
The Supreme Court will determine whether 11 U.S.C. § 506(d) permits bankruptcy courts to “strip off” junior liens on property if the value of the property used as collateral is less than the amount the debtor owes to the senior lienholder—in other words, the junior mortgage lien is “completely underwater.” Bank of America asserts that junior liens should not be “stripped off,” or treated as unsecured loans, because § 506 only “strips off” claims from property that are disallowed and because the Supreme Court’s ruling in Dewsnup v. Timm, disallowing “stripping down” of primary liens to the value of the underlying property, should extend to this case. Caulkett and Toledo-Cardona argue that second liens should be treated as unsecured, and hence disallowed, loans when the value of the collateral exceeds the amount owed on the first mortgage and that the Supreme Court’s ruling in Dewsnup is limited to “stripping down” and should not extend to these circumstances. The Court’s ruling impacts the right of junior lienholders to collect on loans in the event of a debtor’s declaration of bankruptcy and the treatment of previously secured, but subordinate, debt in bankruptcy proceedings.
Questions as Framed for the Court by the Parties
Section 506(d) of the Bankruptcy Code provides in relevant part that "[t]o the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void." In Dewsnup v. Timm, 502 U.S. 410 (1992), this Court held that section 506(d) does not permit a chapter 7 debtor to "strip down" a mortgage lien to the current value of the collateral. The question presented in this case, on which the courts of appeals are divided, is does section 506(d) permits a chapter 7 debtor to “strip off” a junior mortgage lien in its entirety when the outstanding debt owed to a senior lienholder exceeds the current value of the collateral?
In 2013, Respondents David Caulkett and Edelmiro Toledo-Cardona (collectively, “the borrowers” or “Caulkett and Toledo-Cardona”) each filed a petition for chapter 7 bankruptcy in the United States Bankruptcy Court for the Middle District of Florida (“bankruptcy court”).
Edited by
Additional Resources
- Yvanna Custodio: Supreme Court to Consider Eleventh Circuit Decisions Upholding "Strip Off" of Junior Mortgage Liens, Bankruptcy Blog (Feb. 11, 2015).
- Lawrence Hurley: U.S. Top Court to Hear Bank of America Cases on Second Mortgages, Reuters (Nov. 17, 2014).