SCOTUS Rules in Bank of America v. Caulkett
June 3, 2015
Publication| Bankruptcy & Corporate Restructuring
In Bank of America v. Caulkett, the Supreme Court decided by unanimous decision on June 1 that a debtor in a Chapter 7 proceeding may not avoid a junior mortgage under section 506(d) of the Bankruptcy Code even where the debt owed on the senior mortgage exceeds the value of the debtor’s collateral.
Section 506(d) provides (in material part) that a lien that secures a claim that is not an allowed secured claim is void. See 11 U.S.C. §506(d). According to the debtors, section 506(a)(1) provides that an allowed claim only is secured to the extent of the value of the creditor’s collateral, and the creditor holds an unsecured claim for any amount in excess of the value of the collateral. Accordingly, a junior mortgagee who has no recourse to collateral because the value is completely subject to the senior mortgagor’s claim cannot be an “allowed secured creditor” so as to prevent the debtors from avoiding the junior mortgagor’s lien under Section 506(d).