As of June 1, 2015, the good news is the long wait is over. The bad news is the U.S. Supreme Court (“the Supremes”) ruled against the lien-stripping of junior security deeds in Chapter 7 cases. Bank of America, N.A. v. Caulkett (June 1, 2015). In so ruling, the Court relied on the same “term-by-term” reading of the phrase “allowed secured claim” in Section 506(d) employed by earlier Supremes in Dewsnup v. Timm, 502 U.S. 410 (1992). Since Dewsnup, legal scholars uniformly criticized the term-by-term reading of Section 506(d) since such a reading appeared to ignore the “sea change” in Section 506 contained in the amendments enacted in 1978 which shifted the analysis of a secured claim from whether a debt was a secured debt (for example, a debt secured by a junior security deed given to a lender under GA law) to whether a claim was a secured claim determined under the provisions of the Bankruptcy Code.
In Caulkett, the Court decided that under Section 506(d),the claim was first “allowed” and second “secured” because even though the claim was wholly “underwater” and was not secured by any collateral value, “the claim was secured by a lien with recourse to collateral”. In other words, it was an allowed secured debt. At times like this, it’s worth remembering a great quote of Justice Jackson: “the Supreme Court is not final because it is infallible, but is only infallible because it is final!”.
Bottom line: The opportunity to strip junior security deeds remains available in a Chapter 13 case. Please feel free to participate in a free consultation with a JF&A attorney who can review your specific situation with you.
C. Wingate Mims, Attorney at Law
Jeff Field and Associates
342 North Clarendon Avenue
Scottdale, Georgia 30079
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