Supreme Court, Advocates Struggle with Dewsnup at Oral Argument on Lien Stripping
On Tuesday, March 24, 2015, the Supreme Court heard oral argument in the consolidated cases of Bank of America, N.A. v. Caulkett and Bank of America, N.A. v. Toledo-Cardona. The Supreme Court granted certiorari in Caulkett and Toledo-Cardona to decide whether a chapter 7 debtor may “strip off” a junior mortgage lien, pursuant to Sect. 506(d), when the debt owed to the senior lienholder exceeds the current value of the collateral. In its 1992 decision in Dewsnup v. Timm, the Supreme Court held that Sect. 506(d) did not permit the chapter 7 debtors to “strip down” a lien to the current value of the collateral. Finding the Code’s text ambiguous, the Dewsnup Court explained that Congress did not intend to depart from the pre-Code rule that liens pass through bankruptcy unaffected. Because the creditors’ claim in Dewsnup was allowed and secured by a lien, even though the claim amount exceeded the collateral’s value, the Court concluded that the chapter 7 debtors could not “void” the lien, pursuant to Sect. 506(d). The issue in Caulkett and Toledo-Cardona is whether Dewsnup‘s holding in the context of a partially underwater mortgage applies to cases with totally underwater second mortgages.
This case discussion is from 4/1/15 ABA e-newsletter, written by an ABI resident Scholar, Prof. Anne Lawton.