Holding: A debtor in a Chapter 7 bankruptcy proceeding may not void a junior mortgage lien under § 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 § 502 of the Bankruptcy Code.

In the recent U.S. Supreme Court decision of Bank of America, N.A. v. Caulkett, No. 13-421, Slip. op. June 1, 2015, Bank of America, N.A. (“BoA”) objected to the stripping of junior liens of a Chapter 7 debtor, arguing that they should not be treated as unsecured loans. BoA asserted that because the bankruptcy code only “strips off” claims from property that are disallowed, the Supreme Court’s ruling in Dewsnup v. Timm, 502 U.S. 410 (1992), which disallowed the “stripping down” of primary liens to the value of the underlying property, should extend to this case.  Respondent debtor argued that second liens should be treated as unsecured, and hence disallowed.

In 1991, the Supreme Court, in Dewsnup, put a stop to lien-stripping in Chapter 7 cases, finding that, so long as an allowed claim is secured by a lien – even one worth less than the full amount of the claim – a debtor could not strip down the lien. Instead, the lien would survive the bankruptcy, and the lender could foreclose it even after the Chapter 7 debtor received a discharge of his or her debts.

In yesterday’s opinion, the High Court declined to limit Dewsnup to partially underwater liens, and held in a unanimous decision that bankruptcy courts may not “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 — i.e, if the junior mortgage lien is “completely underwater.”  This decision is favorable to junior lienholders to collect on loans and the treatment of such debt in bankruptcy proceedings.

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  Carl is admitted in Delaware and regularly practices before the United States Bankruptcy Court for the District of Delaware. You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.