The U.S. Supreme Court recently heard oral arguments in Bank of America, N.A., v. Caulkett which explores whether, under Section 506(d) of the Bankruptcy Code, a Chapter 7 debtor may “strip-off” a junior mortgage lien in its entirety when the outstanding debt owed to a senior lienholder exceeds the current value of the collateral. Section 506(d) of the Bankruptcy Code provides that “to the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void.” David Caulkett’s property was subject to two “underwater” mortgage liens when he filed for bankruptcy. The bankruptcy court granted a motion to void the second mortgage due to the fact that the debt owed on the first mortgage exceeded the value of the collateral property. Both the District Court and the 11th Circuit Court of Appeals affirmed. The Supreme Court’s decision is expected to be handed down sometime this spring and will surely have lasting implications on second mortgage lending practices.
You can read a summary of the case and oral arguments here.