Underwater-Lien Case Win for Bank of America

     WASHINGTON (CN) – Bank of America won a U.S. Supreme Court reversal Monday for cases in which its “underwater” liens on bankrupt individuals were voided.
     Both cases at issue stem from decisions by the Middle District of Florida.
     In one, Bank of America had a junior lien on property owned by Edelmiro Toledo-Cardona.
     This individual had two mortgage liens at the time he filed for Chapter 7 bankruptcy, and the debt owed on the first mortgage exceeded the fair-market value of the property.
     Bank of America held the second mortgage, worth more $100,000, but the bankruptcy court considered this junior lien wholly “underwater” because the debt secured by the first lien exceeded the value of the property.
     As such the bankruptcy court agreed to “strip off” or “void” Bank of America’s lien, and the U.S. District Court affirmed.
     The District Court also affirmed the void of another unsecured second-priority lien that Bank of America had on a different Chapter 7 debtor, David Caulkett.
     After the 11th Circuit affirmed for Toledo-Cardona on May 15, 2014, it cited that case in affirming for Caulkett on May 21.
     The Supreme Court accepted both cases for a consolidated hearing the following November.
     With the exception of three justices not taking part in a footnote, the court unanimously reversed for the bank Monday.
     Fatal to the debtors’ case here is the 1992 holding Dewsnup v. Timm.
     “Dewsnup’s construction of ‘secured claim’ resolves the question presented here,” Justice Clarence Thomas wrote for the court. “Dewsnup construed the term ‘secured claim’ in §506(d) to include any claim ‘secured by a lien and … fully allowed pursuant to §502.’ Because the bank’s claims here are both secured by liens and allowed under §502, they cannot be voided under the definition given to the term ‘allowed secured claim’ by Dewsnup.”
     The footnote appears in the next section of the opinion, which explains that the debtors in this case have asked the justices to limit, rather than overrule, Dewsnup to partially underwater liens.
     In the footnote, the judges highlight criticism Dewsnup has faced criticism since its inception.
     Justices Anthony Kennedy, Stephen Breyer and Sonia Sotomayor did not sign on to the footnote, but the court was otherwise unanimous.

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