Message From A Bankruptcy Attorney in Clearwater, Florida



Jay Weller is a Bankruptcy Attorney with Offices in Clearwater, Port Richey, and Lakeland, Florida.

In Caulkett, the Debtor filed Chapter 7 Bankruptcy. The Debtor in Bankruptcy owned a Home with a First and Second Mortgage. The Fair Market Value of the Home was less than the Balance of the First Mortgage. The Second Mortgage, in terms of Bankruptcy, is Wholly Unsecured.
Section 506(d) of the Bankruptcy Code provides, “to the extent that a lien secures a claim against the Debtor that is not an allowed secured claim, such lien is void”.
The Debtor in the Chapter 7 Bankruptcy sought to avoid and have declared void, the lien by the Second Mortgage on his Home.
The Bankruptcy Code granted the Motion to Avoid Lien and the District Court and the Eleventh Circuit Court Affirmed, or agreed with the Lower Court Decisions.
The Supreme Court held that a Debtor in a Chapter 7 Bankruptcy may not void a junior mortgage lien under Section 506(d) of the Bankruptcy Code, when the Debt owed on a senior mortgage lien exceeds the current value of the collateral if the creditors claim is both secured by a lien and allowed under Section 502 of the Bankruptcy Code.
The Court’s reasoning appears sound at the beginning of the Decision,” …a straightforward reasoning of the statute (Bankruptcy Code), seems to favors the Debtors”. However, the Court follows that their Decision in a prior case, Dewsnup, does not permit the Court to make a decision based upon the plain reading of the statute.
The Court continues that Section 506(d) of the Bankruptcy Code provides, that to the extent that a lien secures a claim against the debtor that is not an ALLOWED SECURED CLAIM, such lien is void. Therefore, Section 506(d) of the Bankruptcy Code permits the debtor to strip of a junior or Second Mortgage only if the Claim is NOT AN ALLOWED SECURED CLAIM.
Under Section 502 of the Bankruptcy Code, a Claim filed by a Creditor in a Bankruptcy, is deemed ALLOWED if:
2. When there is an Objection, the Bankruptcy Court determines the Claim should be ALLOWED.
The Court continues, that the Bankruptcy Code,

“Suggests that the Bank’s Claim are not Secured. Section 506(a)(1) of the Bankruptcy Code provides that an allowed claim of a creditor secured by a lien on property…is a secured claim to the extent of the value of such creditor’s interest in such property, and an Unsecured Claim to the extent that the value of such creditor’s interest…is less than the amount of such allowed claim”.

“Give that these identical words are later used in the same section of the same Act-Bankruptcy Code Section 505(d)-one would think this presents a classic case for application of the normal rule of statutory construction that identical words used in different parts of the same act are intended to have the same meaning”, continues the Supreme Court.
The Court however, does not apply the clear meaning of the Bankruptcy Statute, because it did not apply the clear meaning in its prior Decision, Dewsnup. If I was a law professor, and a first year law student attempted to make such an argument pursuant to a memorandum writing requirement, he or she would be deserving of a failing grade.
Furthermore,the facts in the Cases of Caulkett and Dewsnup are starkly different. In Dewsnup, the Debtor in Bankruptcy owned a home with a Fair Market Value of about $39,000 and a single mortgage of about $100,000. The Debtor sought to pay the Bank only the value of the home, namely $39,000, and treat the remainder as an Unsecured Debt, presumably to be Discharged in the Bankruptcy.
The Bank in Dewsnup was at least partially, a Secured Creditor, in the amount of the $39,000, and had a valid Secured Claim, in the Bankruptcy. The Bank in Caulkett was a wholly Unsecured Creditor. If the First Mortgage Holder was to Foreclose on the property, the Second Mortgage Holder, Bank of America, would receive no proceeds from the Foreclosure.
The Court then attempts to bolster its illogical argument by introducing, failingly, a public policy argument. The Court continues,
“Under the debtor’s approach, if a court value the collateral at one dollar more than the amount of a senior lien, the debtor could not strip down a junior lien under Dewsnup, but if it valued the property at one dollar less, the debtor could strip off the entire lien. Given the constantly shifting value of real property, this reading could lead to arbitrary results”.
The Bankruptcy Code is full of examples where “Line Drawing” occurs, and where the difference of one dollar can have enormous impacts on the debtor in Bankruptcy. The Court acknowledges this by stating,
“To be sure, the Code engages in line-drawing elsewhere and sometimes a dollar’s difference will have a significant impact on bankruptcy proceedings. But these lines were set by Congress, not this Court. There is scant support for the view that 506(d) applies differently depending on whether a lien was partially or wholly underwater”.
Does this even make sense? You do not have to be a trained or experienced Bankruptcy Attorney to understand what the Supreme Court is writing is complete nonsense.
Part Two of this Series will discuss why the Supreme Court’s Lawless Decision in Bank of America v Caulkett is important.