In a decision handed down yesterday by the U.S. Supreme Court, wholly unsecured junior mortgages may not be stripped due to a lack of equity in Chapter 7 bankruptcy proceedings. The ruling came in the case of Bank of America vs. Caulkett.
The Court reasoned that, so long as a creditor's claim is both secured by a lien and is an allowed claim under 11 U.S.C. §502, a debtor may not void a junior mortgage lien even when the debt owed on a senior mortgage lien exceeds the value of the collateral. The debtors in Caulkett attempted to argue that the junior mortgage holder’s claim, while "allowed" under section 502, was not a secured claim under 11 U.S.C. §506 due to the lack of equity. The Caulkett Court revisited its prior ruling in Dewsup v. Timm, which dealt with partially unsecured mortgage liens in Chapter 7, and applied the same reasoning to wholly unsecured junior mortgage liens, holding that a "secured claim" under 11 U.S.C. 506(d) is a claim supported by a security interest in property, regardless of whether the property value is sufficient to cover the claim.
Junior mortgage lienholders should rejoice, as their claims now survive the Chapter 7 process and allow for avenues of recovery, post-bankruptcy.
