Supreme Court Hears Oral Argument in Mortgage Lien-Stripping Cases
The Supreme Court heard oral argument today in the cases of Bank of America v. Caulkett and Bank of America v. Toledo-Cardona, and its decision later this year could have big implications for the U.S. housing market, the Financial Times reported today. The cases present the Supreme Court with the issue of whether, under Sect. 506(d) of the Bankruptcy Code (which provides that “[t]o the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void”), 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. The debate in the Supreme Court today centered on the 1992 case of Dewsnup in which the court ruled that a borrower could not reduce a primary mortgage to the value of the property. Bank of America argued that the same logic should apply whether a loan is a primary mortgage or a junior debt. While it was unclear from the judges’ questions today how they would rule, several of the nine members, including Justice Antonin Scalia, who dissented in the original Dewsnup decision, hinted that the Court might need to limit or reconsider the Dewsnup ruling itself. At one point, Justice Elena Kagan interrupted Stephanos Bibas, the lawyer representing the people who owned the homes, to say: “My sort of reaction to this case is that these distinctions that you are drawing between partially underwater and fully underwater are not terribly persuasive. But the only thing that may be less persuasive is Dewsnup itself.”