On June 1, 2015, the U.S. Supreme Court decided the case of Bank of America v. Caulkett and held unanimously that a debtor in a Chapter 7 bankruptcy can not “strip” a junior lien. “Lien stripping,” a topic we have address previously, is this: When there is more than one lien on a piece of property, and the amount owned on the senior lien is greater than the value of that property, there is no equity present to secure the junior lien. Therefore, in a Chapter 13 case, the property owner can “strip” the junior lien, causing it to be treated as unsecured debt.
Prior to today’s decision, all of the Circuit Courts to have addressed this issue (besides the Eleventh Circuit) had held that the Bankruptcy Code does not permit such lien stripping in Chapter 7 cases. They relied (as did the decision today) on the Supreme Court’s holding in 1992’s Dewsnup v. Timm; Section 506(d) of the Code allows a lien to be voided when it secures a claim that is not an allowed, secured claim. And while no equity was present here to secure the claim, Dewsnup says that the existence of the lien categorizes it a secured. Case closed.
Interesting thing though: While the decision was unanimous, a single footnote in the middle of the opinion acknowledges that Dewsnup has been harshly criticized, but points out that the Debtors insisted that they were not asking it to be overruled. Kennedy, Breyer, & Sotomayor did not join in this footnote, which raises an interesting question: what would happen if a debtor did expressly ask Dewsnup be overruled?