Bank of America, N. A. v. Caulkett

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Debtors filed for Chapter 7 bankruptcy; each owned a house encumbered by a senior mortgage lien and by a junior mortgage lien held by Bank of America. Because the amount owed on each senior mortgage is greater than each house’s current market value, the bank would receive nothing if the properties were sold today. The debtors sought to void their junior mortgage liens under 18 U.S.C. 506, which provides, “To the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void.” In each case, the Bankruptcy Court granted the motion; the district court and the Eleventh Circuit affirmed. The Supreme Court reversed and remanded. A debtor in a Chapter 7 bankruptcy may not void a junior mortgage lien under section 506(d) when the debt owed on a senior mortgage lien exceeds the current value of the collateral if the creditor’s claim is both secured by a lien and allowed under Bankruptcy Code section 502. The bank’s claims are “allowed” under the Code. Acknowledging the statutory reference to “an unsecured claim to the extent that the value of such creditor’s interest . . . is less than the amount of such allowed claim,” the Court stated that a “secured claim” is supported by a security interest in property, regardless of whether the value of that property would be sufficient to cover the claim. The Court declined to distinguish between debts that are partially and those that are entirely “underwater.” View "Bank of America, N. A. v. Caulkett" on Justia Law