On June 1, 2015, the Supreme Court of the United States decided Bank of America, N.A. v. Caulkett, 135 S. Ct. 1995 (2015) in a unanimous opinion—except for a footnote—authored by Justice Thomas, and determined that a chapter 7 debtor may not void a junior lien under § 506(d) of the Bankruptcy Code even when the debt owed on the senior lien exceeds the present value of the property.
On June 1, 2015, the United States Supreme Court decided Bank of America v. Caulkett, No. 13-1421, together with Bank of America v. Toledo-Cardona, No. 14-163, holding unanimously that a Chapter 7 bankruptcy debtor cannot “strip off” a junior lien.
In March 2015 in Bank of America NA v Caulkett the Supreme Court considered whether debtors in a Chapter 7 bankruptcy liquidation could invoke Section 506(d) of the Bankruptcy Code to void or 'strip off' the junior mortgage liens on their homes when the senior mortgage debt exceeded their homes' current value (for further details please see "Supreme Court considers junior liens on 'underwater' property").
Following up on our coverage in the recent U.S. Supreme Court ruling that a debtor in a Chapter 7 case cannot ‘strip off’ or void a wholly unsecured junior mortgage under section 506(d) of the Bankruptcy Code, I had the opportunity to discuss the ruling with Colin O’Keefe of LXBN TV.
The U.S. Supreme Court held that a secured creditor in a chapter 7 bankruptcy case is protected from having its lien “stripped off” even if the collateral securing its claim is worth less than the claims asserted by a senior secured creditor; i.e.the junior creditor’s secured claim is completely "out of the money.” The June 1, 2015 decision, Bank of America, N.A. v. Caulkett, reaffirmed the Court’s prior holding in Dewsnup v.
On June 1, 2015, the Supreme Court of the United States decided the case Bank of America v. David B. Caulkett, 2015 WL 2464049. Caulkett clarifies that a debtor in Chapter 7 bankruptcy may not be relieved of a second mortgage when their property is worth less than the payoff balance of their first mortgage. In reaching this conclusion, Court relies upon on the 1992 case,Dewsnup v. Timm.
On June 1, 2015, the United States Supreme Court in Bank of America, N.A. v. Caulkett, 575 U.S. ____ (2015), unanimously held that a Chapter 7 debtor cannot strip off wholly “underwater” liens secured by the debtor’s property. In Caulkett, the debtor’s property was subject to two liens when the bankruptcy case was commenced. Since the obligation owed on the first lien exceeded the value of the property, the second lien was underwater and therefore had no value.
The U.S. Supreme Court decided on Monday, June 1, 2015, that Chapter 7 debtors may not rid themselves of second-mortgage liens in cases where, at the time of the bankruptcy, the first mortgage is undersecured. The decision reverses two Eleventh Circuit rulings that would have made such liens disappear under Section 506(d) of the Bankruptcy Code.
While derivations of intercreditor agreements continue to enhance the rights of the senior secured party, whether the many provisions provided for are enforceable in bankruptcy remains a burning question. Recently, the Bankruptcy Court for the Northern District of Georgia in In re Aerosol Packaging, LLC, 2006 WL 4030176 (Bankr. N.D.Ga. 2006) helped bring clarity to one of the most important of these issues: is the right of a senior creditor to vote the claim of a junior creditor on whether to accept or reject a plan of reorganization enforceable in bankruptcy?
The Adelphia Creditors Committee filed an adversary proceeding against approximately 380 defendants, including bank lenders, investment banks and their agents, alleging wrongdoing in the defendants’ dealings with Adelphia’s former management who looted the company. The complaint asserted numerous claims for relief in connection with borrowing facilities under which Adelphia became liable to repay the banks for billions of dollars that went to the insiders.