Second Mortgage in Chapter 7: Bank of America, N.A. v. Caulkett

After the Eleventh Circuit determined it to be OK to strip off totally unsecured mortgages, the Supreme Court sent a message that they decided this one incorrectly.

The U.S. Supreme Court, on June 1, 2015, unanimously held in Bank of America, N.A. v. Caulkett, a chapter 7 debtor cannot "strip off" a mortgage, even if it is totally underwater, under § 506(d); the Court reversed the Eleventh Circuit decision.  The Court based its decision on Dewsnup v. Timm, 502 U.S. 410 (1992), in which the Court had held that a chapter 7 debtor cannot "strip down" a partially underwater mortgage under § 506(d).

Writing for the Court, Justice Thomas concluded that "Dewsnup's construction of "secured claim" resolves the question presented here." The Court's decision in Caulkett now indicates that mortgage liens are sacrosanct in chapter 7, without regard to whether they are partially or totally underwater.

It is yet to be seen how this will effect mortgages in Chapter 13 cases, but mortgagees have a plausible argument to extend Caulkett there as well.