Supreme Court Cracks Down on Stripping! (Lien Stripping Junior Mortgages, that is!)
Published on June 1, 2014 by: Ian M. Falcone
In 2012, the Eleventh Circuit held that, contrary to common belief at the time, a junior mortgage that is wholly unsecured, was not considered a secured debt and therefore, could be stripped off or voided in a Chapter 7 case. (See McNeal v. GMAC Mortgage, 735 F. 3d 1263 (11th Cir. 2012). Learning of this opportunity, Debtors' lawyers filed motion after motion to strip off these junior mortgages. Earlier today, the party ended; the United States Supreme Court, in a unanimous decision, held that junior mortgages, even those that are wholly unsecured, can not be stripped off.
In 2012, the Eleventh Circuit held that, contrary to common belief at the time, a junior mortgage that is wholly unsecured, was not considered a secured debt and therefore, could be stripped off or voided in a Chapter 7 case. (See McNeal v. GMAC Mortgage, 735 F. 3d 1263 (11th Cir. 2012). Learning of this opportunity, Debtors' lawyers filed motion after motion to strip off these junior mortgages. Earlier today, the party ended; the United States Supreme Court, in a unanimous decision, held that junior mortgages, even those that are wholly unsecured, can not be stripped off.
The issue of lien stripping turns on the definition of whether or not a debt is secured. "Section 506(a)(1) of provides that "[a]n allowed claim of a credit secured by a lien on property . . is a secured claim to the extent of the value of such creditor's interest in . . such property," and "an unsecured claim to the extent that the value of such creditor's interest . . . is less than the amount of such allowed claim." Bank of America, N.A. v. Caulkett, 575 U.S. _____ (2015). The Court went on to explain that under 506(a), where a senior mortgage exceeds the fair market value of the real property, it would certainly seem that the junior mortgage, by definition is not secured.
Unfortunately, as the Supreme Court went on to explain, the "Court has already adopted a construction of the term 'secured claim; in 506(d) that forecloses this textual analysis.'" Bank of America, N.A. v. Caulkett, 575 U.S. _____ (2015) (referring to Dewsnup v. Timm, 502 U.S. 410 (1992)). In Dewsnup, the Court, rather than relying on the statutory meaning, concluded that a "secured" claim was one in which a security interest existed regardless of the value of the collateral.
The Debtors in Caulkett tried to convince the Court, as the McNeal court did, between partially secured liens and wholly unsecured mortgages. The Court refused to draw such distinction.
Thus, it appears that Chapter 7 debtors are now stuck with all mortgages on their homes, regardless of the fair market value of the real property. It was a nice party while it lasted.
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