Supreme Court Decides Bank of America v. Caulkett and Bank of America v. Toledo-Cardona

On June 1, 2015, the United States Supreme Court decided Bank of America v. Caulkett, No. 13-1421, together with Bank of America v. Toledo-Cardona, No. 14-163, holding that a debtor in a Chapter 7 bankruptcy proceeding may not void a junior mortgage under 11 U.S.C. § 506(d) when the debt owed on a senior mortgage lien exceeds the current value of the collateral if the junior creditor’s claim is both secured by a lien and allowed under § 502 of the Bankruptcy Code.

In each of the two cases, a debtor has two mortgage liens on his house. Bank of America holds the junior mortgage in each case. In both cases, the amount owed on each debtor’s senior mortgage lien is greater than the each home’s current market value. Thus, in both cases Bank of America’s junior mortgage liens are wholly under water, meaning that the Bank would receive nothing if the properties were sold today.

Each debtor filed bankruptcy under Chapter 7 of the Bankruptcy Code, and moved to “strip off” (i.e., void) Bank of America’s junior mortgage lien under § 506(d) of the Bankruptcy Code, which provides that a lien is void “[t]o the extent that [the] lien secures a claim against the debtor that is not an allowed secured claim.” 11 U.S.C. § 506(d). The debtors argued that Bank of America’s liens are not “secure[d]” under § 506(d) because § 506(a)(1) provides that an allowed claim secured by a lien on property is secured only “to the extent of the value of [the] creditor’s interest in” the property securing the claim, and is unsecured “to the extent that the value of such creditor’s interest…is less than the amount of such allowed claim.” The Bankruptcy Court in each case allowed the debtor to strip Bank of America’s junior lien. The district courts and the Eleventh Circuit affirmed.

The Supreme Court reversed. The Court began by noting that under a straightforward reading of § 506(d), the debtors would prevail because Bank of America’s claims are not “secured” under § 506(a)(1), and therefore cannot be “allowed secured claims,” so they are void under § 506(d). But in Dewsnup v. Timm, 502 U.S. 410 (1992), the Court had held that a claim was “secured” as long as it was supported by any security interest in the property, regardless of whether the value of that property would be sufficient to cover the claim.” Thus, under Dewsnup, § 506(d) voids a lien only when the claim supporting the lien was not allowed under § 502. The Court held that Dewsnup resolved the issue presented in these cases, because both of Bank of America’s claims are secured by liens under Dewsnup and were allowed under § 502.

The debtors did not ask the Court to overrule Dewsnup; instead, they asked the Court to adopt a distinction between wholly underwater liens (like Bank of America’s liens in this case) and partially underwater liens (like the liens in Dewnsup). The Court declined that invitation. The Court observed that Dewsnup’s definition of “secured claim” did not depend on whether a lien is partially or wholly underwater, and that the debtors’ proposal would result in the term “secured claim” having a different meaning under § 506(d) than it does under § 506(a) — a statutory construction that the Court typically avoids. The debtor’s reading would also lead to the odd situation where a debtor could not strip a junior lien if a court valued the collateral at one dollar more than the senior lien, but could strip the junior lien if the collateral were valued at one dollar less. 

Justice Thomas delivered the opinion of the Court, in which Chief Justice Roberts and Justices Scalia, Ginsburg, Alito, and Kagan joined, and in which Justices Kennedy, Breyer, and Sotomayor joined except as to the footnote in the Court’s opinion.

Download Opinion of the Court