Bank of America, N.A. v. Caulkett, 575 U.S. 790 (2015), is a bankruptcy law case decided by the Supreme Court of the United States on June 1, 2015. In Caulkett, the Court held that 11 U.S.C. § 506(d) does not permit a Chapter 7 debtor to void a junior mortgage on the debtor's property when the amount of the debt secured by the senior mortgage on that property exceeds the property's current market value.Bank of America, N.A. v. Caulkett, 135 S. Ct. 1995, 1998 (2015).See also Raff Ferraioli, Bank of America, N.A. v. Caulkett: Dewsnup Lives, (Dec. 2015) ("Dewsnup Lives"); Bruce A. Markell, Loser's Lament: Caulkett and ASARCO, (Aug. 2015) ("Loser's Lament").
Background Allowed secured claims in bankruptcy Statutory provisions Section 506(d) of the Bankruptcy Code provides, as a general rule, "[t]o the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void." (emphasis added). Although § 506(d) provides two exceptions to this general rule, the facts of Caulkett did not implicate either of these exceptions. As used in the Bankruptcy Code, the term "claim" includes any "right to payment," and the term "lien" means a "charge against or interest in property to secure payment of a debt or performance of an obligation." (definition of "claim") and (definition of "lien"). The full text of § 101(5) reads as follows: "The term 'claim' means— (A) right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured; or (B) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured." By corollary, defines the term "debt" to mean "liability on a claim." A claim is "allowed" if proof of the claim is filed under 11 U.S.C. § 501, and the claim is not objected to by a party in interest. ("A claim or interest, proof of which is filed under section 501 of this title, is deemed allowed, unless a party in interest, including a creditor of a general partner in a partnership that is a debtor in a case under chapter 7 of this title, objects.")
As to what constitutes a "secured" claim, § 506(a) provides the following: Where a creditor's allowed claim is "secured by a lien on property in which the [bankruptcy] estate has an interest," that allowed claim "is a secured claim to the extent of the value of such creditor's interest in the estate's interest in such property ... and is an unsecured claim to the extent that the value of such creditor's interest ... is less than the amount of such allowed claim." (emphasis added). The filing of a petition in bankruptcy "creates an estate[.]" . With certain exceptions not relevant here, that estate includes "all legal or equitable interests of the debtor in property as of the commencement of the case." § 541(a)(1). This, then, is the "estate" to which § 506(a)(1) refers. In § 506(a), a creditor-lienor's "interest" in the estate's interest in certain collateral property means that creditor's lien on that property. ("In subsection (a) of [§ 506] the creditor's "interest in property" obviously means his security interest without taking account of his right to immediate possession of the collateral on default."). As a functional matter, the value of a creditor-lienor's lien generally depends on four factors: the "purpose of the valuation and ... the proposed disposition or use of [the collateral] property.". the value of the collateral property (and the estate's interest therein) the amount of the creditor-lienor's allowed claim the priority of the creditor-lienor's lien in relation to other interests in the collateral property.See generally 4 Collier on Bankruptcy ¶ 506.03 (16th ed. 2015) (discussing § 506(a)(1) and how courts determine "the estate's interest in the collateral, and ... the creditor's interest in that interest.")For example, consider the following situation: Debtor Mr. X owes $200,000 to First National Bank (FNB). Mr. X's debt to FNB is secured by a first-priority mortgage lien on Mr. X's house, which has a fair market value of $150,000. Mr. X duly files a bankruptcy petition in Chapter 7. FNB duly files a proof of claim under 11 U.S.C. § 501; no objections are made to FNB's claim. Here, under § 506(a)(1), FNB would have an allowed secured claim of $150,000 and an allowed unsecured claim of $50,000. In common bankruptcy parlance, FNB's mortgage lien would be said to be "partially underwater," and FNB itself would be said to be "undersecured." To the extent that the amount of a creditor-lienor's claim exceeds the fair market value of the collateral property, that creditor's lien is said to be "underwater." Insofar as an "underwater" lien is supported by some value in the collateral property, that lien is only partially underwater. A creditor-lienor with a partially underwater lien is said to be "undersecured." See 4 Collier on Bankruptcy ¶ 506.03 (16th ed. 2015). Section 506(a) thus distinguishes between "secured claims" and "unsecured" claims based on the numeric relation between (A) the value of a creditor-lienor's interest in the estate's interest in the collateral property; and (B) the amount of that creditor-lienor's allowed claim.See 4 Collier on Bankruptcy ¶ 506.03 In common bankruptcy parlance, this same numeric relation is used to denominate a creditor-lienor's allowed claim as "oversecured," "fully secured," or "undersecured."See, e.g., 4 Collier on Bankruptcy ¶ 506.03. Denomination of creditor-lienors' allowed claims as oversecured, fully secured, or undersecured is often extended to denominate creditor-lienors themselves as such, e.g.—a creditor-lienor with an undersecured claim is an "undersecured creditor," and so forth. E.g., Prof. John D. Ayer et al., What Every Secured Creditor (and Its Lawyer) Should Know About Chapter 11, in 31 (H. Slayton Dabney, Jr. & John W. Kibler eds., 2007) ("[A creditor-lienor] may be oversecured, fully secured, or undersecured."). In a given case, the particular denomination used depends on the particular nature of that numeric relation.See, e.g., 4 Collier on Bankruptcy ¶ 506.03[b]; Prof. John D. Ayer et al., What Every Secured Creditor (and Its Lawyer) Should Know About Chapter 11, in 32-35.
Oversecured claim A creditor-lienor's allowed claim is "oversecured" to the extent that the value of that creditor's interest in the estate's interest in the collateral property exceeds the amount of that creditor's allowed claim.E.g., 4 Collier on Bankruptcy ¶ 506.03. Fully secured claim A creditor-lienor's allowed claim is "fully secured" where the value of that creditor's interest in the estate's interest in the collateral property equals the amount of that creditor's allowed claim. Undersecured claim A creditor-lienor's allowed claim is "undersecured" to the extent that the value of that creditor's interest in the estate's interest in the collateral property is less than the amount of that creditor's allowed claim, but greater than zero.
Dewsnup v. Timm Dewsnup v. Timm, 502 U.S. 410 (1992), presented the Supreme Court with its first occasion to interpret 11 U.S.C. § 506(d).. See, e.g., A.W. Bailey III, Note, Dewsnup v. Timm: Judicial Sleight of Hand in Statutory Construction of the Bankruptcy Code, (1993) ("Judicial Sleight of Hand") ("The Court used [Dewsnup] to settle a debate over contradictory attempts among the circuits to interpret sections 506(a) and 506(d) of the Bankruptcy Code."). Specifically, Dewsnup presented the question whether § 506(d) allows a Chapter 7 debtor to avoid an undersecured creditor's lien on the debtor's realty to the extent that the amount of the claim secured by that lien exceeds the collateral realty's fair market value.See Dewsnup, 502 U.S. at 411-12. The avoidance of the unsecured portion of a partially underwater lien is frequently termed "strip down". See, e.g., Lawrence Ponoroff, Hey, The Sun Is Hot And The Water's Fine: Why Not Strip Off That Lien?, 13, 16 n.14 (2013) ("Why Not Strip Off That Lien?") ("'Strip down' occurs when an undersecured lien is bifurcated and the unsecured portion is avoided."). Thus, the Supreme Court's framing of the question presented in Dewsnup: 502 U.S. at 411-12. See also Bailey, Judicial Sleight of Hand, at 319 ("The Court used [Dewsnup] to settle a debate over contradictory attempts among the circuits to interpret sections 506(a) and 506(d) of the Bankruptcy Code. The interpretive attempts applied to a Chapter 7 debtor's ability to "strip down" a creditor's lien on real property to the current value of the property."); David G. Carlson, Bifurcation of Undersecured Claims in Bankruptcy, (1996) ("Bifurcation of Undersecured Claims") ("In Dewsnup v. Timm, the Supreme Court granted certiorari to unloose the Gordian knot of lien stripping."). In Dewsnup, the Chapter 7 debtor's $120,000 debt to a creditor was secured by lien on certain of the debtor's realty, the fair market value of which was $39,000.Dewsnup, 502 U.S. at 412-13; In re Dewsnup, 87 Bankr. 676, 677 (Bankr. D. Utah 1987). See also Margaret Howard, Dewsnupping the Bankruptcy Code, (1992) ("Dewsnupping"). The debtor, invoking § 506(d), sought to void that lien to the extent that the creditor-lienor's $120,000 claim exceeded the collateral realty's $39,000 fair market value, thereby "stripping down" the creditor's lien to the value of the collateral realty.Dewsnup, 502 U.S. at 413. See also Howard, Dewsnupping, at 513-14.