Block on Trump's Asylum Ban Upheld by Supreme Court
In a unanimous decision released Monday, the Supreme Court held that debtors in bankruptcy cannot void a second mortgage lien on a wholly underwater property. The case was Bank of America v. Caulkett, which involved two debtors who each owned houses with a senior and junior mortgage lien. Both mortgages were underwater meaning that the amount owed on the senior mortgage was higher than the value of the home.
If the houses were sold in bankruptcy, the junior mortgage holder would receive nothing. The families sought to void the junior mortgage liens under section 506 of the Bankruptcy Code, which voids liens that are "not an allowed secured claim."
Dewsnup Decides It
The question before the court was whether or not the junior liens were "allowed secured claims." The families argued that they were not secured claims, since the value of the banks' interest was nil.
The oral arguments saw the Justices torn between two unsavory options, relying on a fairly unpersuasive opinion or allow the second mortgage to be voided through some questionable line drawing, according to Amy Howe for SCOTUSblog. In that case, Dewsnup v. Timm, the Court ruled that when a mortgage lien is worth more than the value of the property, the value of the lien cannot be reduced to the property's market value through bankruptcy.
Unanimously, the Court went with Dewsnup, though it noted that "a straight forward reading of the statute" would lead to the opposite conclusion. Beyond that, the uncertainty expressed at oral arguments seems to have disappeared from Justice Thomas's opinion for the Court. Dewsnup foreclosed that straight forward reading, holding that if a lien had ever been allowed and secured, it does not come under the scope of sec. 506(d). The secured claim was defined by any security interest in the property, regardless of value.
For Now At Least
That's bad news for homeowners stuck with underwater mortgages. However, plenty of advisors recommend strategic defaults on mortgages that are fully underwater, though any default can have lasting consequences.
The debtors might have been in a better position had they took a stronger stand regarding Dewsnup. As Thomas points out, neither debtor argued that the case should be overruled. At three different points, the opinion indicates that Dewsnup might have been wrongly decided. Thomas even includes a lengthy footnote listing criticism of the decision by himself, Scalia and academics -- though the fairly straightforward footnote wasn't joined by Kennedy, Breyer or Sotomayor.
So next time debtors, ask for the overrule. The Court may be ready for it.