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Bank of America, N. A. v. Caulkett

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Bank of America, N.A. v. Caulkett
Supreme Court of the United States
Argued March 24, 2015
Decided June 1, 2015
Full case nameBank of America, N.A., Petitioner v. David B. Caulkett
Docket no.13-1421
Citations575 U.S. ___ (more)
135 S. Ct. 1995
Related casesBank of America, N.A. v. Toledo-Cardona
ArgumentOral argument
Opinion announcementOpinion announcement
Holding
Section 506(d) of the Bankruptcy Code does not allow a Chapter 7 debtor to void a junior mortgage on the debtor's property when the debt owed in respect of a senior mortgage on the same property exceeds the property's current market value.
Court membership
Chief Justice
John Roberts
Associate Justices
Antonin Scalia · Anthony Kennedy
Clarence Thomas · Ruth Bader Ginsburg
Stephen Breyer · Samuel Alito
Sonia Sotomayor · Elena Kagan
Case opinion
MajorityThomas, joined by unanimous (except as to the "dagger" footnote, in which Kennedy, Breyer, and Sotomayor did not join)
Laws applied
11 U.S.C. § 506

Bank of America, N.A. v. Caulkett, 135 S. Ct. 1995 (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[i] when the debt owed in respect of a senior mortgage on the same property exceeds the property's current market value.[1]

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."[2] 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."[3] 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.[4] 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."[5] As a functional matter, the value of a creditor-lienor's interest[ii] in the estate's interest in the collateral property depends on four factors:

  1. the fair market value of the estate's interest in the collateral property, i.e.—the fair market value of the property on which the creditor's lien is fixed
  2. the priority of the creditor's lien in relation to other interests the collateral property[iii]
  3. the face amount of the creditor's allowed claim
  4. the "purpose of the valuation and ... the proposed disposition or use of [the collateral] property."[6][iv]

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). 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.[7][v] 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.[8][vi] 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.[9]

The Dewsnup Court held that § 506(d) does not permit a Chapter 7 debtor to "strip down" an undersecured creditor's lien on the debtor's realty to the fair market value of the collateral realty.[10] The Court concluded that the phrase "allowed secured claim" in § 506(d) meant an "allowed claim" of a creditor secured by a lien; that is, the phrase "allowed secured claim" did not have the same meaning in § 506(d) as in § 506(a)(1).[10][vii] In so concluding, the Court acknowledged the apparent logical infirmity in its construction, but observed that it was not "writing on a clean slate."[10] As support for this proposition, the Court pointed to "the pre-Code rule that liens pass through bankruptcy unaffected."[10] Because the Court found "ambiguity" in the text of § 506(d), the Court was "not convinced that Congress intended to depart" from that rule.[10] Thus, the Court's conclusion: the phrase "allowed secured claim" in § 506(d) means an "allowed claim" of a creditor secured by a lien.

The Court's decision in Dewsnup was poorly received and has been subject to extensive criticism "from its inception."[11] For example, Justice Scalia's dissent in Dewsnup castigated the majority for "disregarding well-established and oft-repeated principles of statutory construction." And in Bank of America National Trust and Savings Association v. 203 North LaSalle Street Partnership, 526 U.S. 434 (1999), Justice Thomas criticized Dewsnup for "enshroud[ing] both the Courts of Appeals...and Bankruptcy Courts" in "methodological confusion."[12] However, "[r]ight or wrong, the Dewsnuppian departure from the statute's plain language is the law."[13]

Caulkett: Facts; Proceedings Below; Question Presented

Facts

The debtor in Caulkett, David B. Caulkett, had two mortgage liens on his house; Bank of America held the junior mortgage lien.[1] In 2013, Caulkett filed a bankruptcy petition under Chapter 7 in the U.S. Bankruptcy Court for the Middle District of Florida; at that time, the amount of the senior mortgage debt was greater than the fair market value of Caulkett's house.[14]

Proceedings Below

After filing in Chapter 7, Caulkett moved to void Bank of America's junior mortgage lien under § 506(d).[1] The Bankruptcy Court granted Caulkett's motion, and Bank of America appealed. Both the District Court and the Eleventh Circuit affirmed the Bankruptcy Court's order.[1] Thereafter, Bank of America filed a petition for a writ of certiorari in the Supreme Court, which the Court granted on November 17, 2014.[15]

Question Presented

Caulkett presented the question whether a Chapter 7 debtor may void a junior mortgage on the debtor's property under § 506(d) when the debt owed in respect of a senior mortgage on the same property exceeds the property's current value.[16]

Opinion of the Court

In Caulkett, the Court unanimously held that § 506(d) does not allow a Chapter 7 debtor to void a junior mortgage on the debtor's property when the debt owed in respect of a senior mortgage on the same property exceeds the property's current market value.[1] The Court based this holding on its prior decision in Dewsnup, reasoning as follows:

  • Dewsnup held that the phrase "allowed secured claim" in § 506(d) means an "allowed claim" of a creditor secured by a lien on property in which the bankruptcy estate has an interest.
  • Bank of America's claim against Caulkett was "allowed" under § 502.
  • Bank of America's allowed claim was secured by a lien on property in which Caulkett's bankruptcy estate had an interest; Bank of America held the junior mortgage on Caulkett's house.
  • Thus, Bank of America's junior mortgage lien on Caulkett's house could not be voided under § 506(d).[17]

Although the Court expressly acknowledged the logical infirmity in Dewsnup's reasoning, it declined to overrule Dewsnup; noting that Caulkett had not asked the Court to do so.[18] Having declined to overrule Dewsnup, the Court concluded that Dewsnup dictated only one result: Section 506(d) does not allow a Chapter 7 debtor to void a junior mortgage on the debtor's property when the debt owed in respect of a senior mortgage on the same property exceeds the property's current market value.[19]

Notes

  1. ^ Here, "the debtor's property" is a non-technical usage; to be technically precise, "the debtor's property" should be replaced with "the bankruptcy estate's property." See 11 U.S.C. § 541(a)(1). In this article, insofar as "the debtor's property" conveys the same practical import as "the bankruptcy estate's property," the former is used in the interest of general readability.
  2. ^ In § 506(a)(1), a creditor-lienor's "interest in the estate's interest" in the collateral property is the creditor's lien. United Sav. Ass'n of Texas v. Timbers of Inwood Forest Assocs., Ltd., 484 U.S. 365, 372 (1988).
  3. ^ In debtor-creditor law generally, "priority" means “a creditor's right to have a claim paid before other creditors of the same debtor receive payment.” PRIORITY, Black's Law Dictionary (10th ed. 2014).
  4. ^ 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." To the extent that 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[4] (16th ed. 2015).
  5. ^ Put differently, the question presented by Dewsnup was whether § 506(d) allows a Chapter 7 debtor to "strip down" a creditor's "partially underwater" lien on the debtor's realty to the fair market value of that realty.
  6. ^ Thus, the creditor's lien was "underwater" by $81,000.
  7. ^ The Dewsnup Court's interpretation of § 506(d) in this manner has provoked extensive, often scathing criticism. See, e.g., Dewsnup, 502 U.S. at 435 (Scalia, J., dissenting) (castigating the Dewsnup majority for "disregarding well-established and oft-repeated principles of statutory construction."); Lawrence Ponoroff & F. Stephen Knippenberg, The Immovable Object Versus the Irresistible Force: Rethinking the Relationship Between Secured Credit and Bankruptcy Policy, 95 Mich. L.Rev. 2234 (1997) ("Ponoroff & Knippenberg"); Barry E. Adler, Creditor Rights After Johnson and Dewsnup, 10 Bankr.Dev. J. 1, 10-12 (1993) ("Adler"); Mary Josephine Newborn, Undersecured Creditors in Bankruptcy: Dewsnup, Nobelman, and the Decline of Priority, 25 Ariz. St. L.J. 547 (1993) ("Newborn"); Margaret Howard, Dewsnupping the Bankruptcy Code, 1 J. Bankr.L. & Prac. 513 (1992) ("Howard").

References

The citations herein are written in Bluebook style.

  1. ^ a b c d e Caulkett, 135 S. Ct. at 1998.
  2. ^ 11 U.S.C. § 506(d) (emphasis added). Although § 506(d) provides two exceptions to this general rule, the facts of Caulkett did not implicate either of these exceptions.
  3. ^ 11 U.S.C. § 101(5) (definition of "claim") and § 101(37) (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, 11 U.S.C. § 101(12) defines the term "debt" to mean "liability on a claim."
  4. ^ 11 U.S.C. § 502(a) ("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.")
  5. ^ 11 U.S.C. § 506(a)(1) (emphasis added). With certain exceptions not relevant here, the filing of a petition in bankruptcy creates "an estate ... comprised of ... all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. § 541(a)(1). This is the "estate" to which § 506(a)(1) refers.
  6. ^ 11 U.S.C. § 506(a)(1). Cf. § 506(a)(2). See generally 4 Collier on Bankruptcy ¶ 506.03[5] (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.")
  7. ^ See Dewsnup, 502 U.S. at 411-12.
  8. ^ Dewsnup, 502 U.S. at at 412-13.
  9. ^ Dewsnup, 502 U.S. at 413.
  10. ^ a b c d e Dewsnup, 502 U.S. at 417.
  11. ^ Caulkett, 135 S. Ct. at 2000 n.1. See, e.g., Dewsnup, 502 U.S. at 435 (Scalia, J., dissenting); In re Woolsey, 696 F. 3d 1266, 1273-74 (10th Cir. 2012) (charging that Dewsnup "warped the bankruptcy code's seemingly straight path into a crooked one."); David G. Carlson, Bifurcation of Undersecured Claims in Bankruptcy, 70 Am. Bankr. L. J. 1, 12-20 (1996); Adler, at 10-12; Newborn, passim; Howard, passim.
  12. ^ Bank of America Nat. Trust and Sav. Assn. v. 203 North LaSalle Street P'ship, 526 U.S. 434, 461-63 (1999) (Thomas, J., concurring in the judgment).
  13. ^ In re Woolsey, 696 F. 3d at 1274.
  14. ^ See Caulkett, 135 S. Ct. at 1998; Bank of Am., N.A. v. Caulkett, No. 6:14-CV-78-ORL-31, 2014 WL 7175386, at *1 (M.D. Fla. Feb. 14, 2014).
  15. ^ Bank of Am., N.A. v. Caulkett, 135 S. Ct. 674 (2014).
  16. ^ Caulkett, 135 S. Ct. at 1998 (stating that "the question [is] whether a debtor in a Chapter 7 bankruptcy proceeding may void a junior mortgage under § 506(d) when the debt owed on a senior mortgage exceeds the present value of the property.")
  17. ^ Caulkett, 135 S. Ct. at 1999-2000.
  18. ^ Caulkett, 135 S. Ct. at 1999-2000 n.1 ("From its inception, [Dewsnup] has been the target of criticism....Despite this criticism, the debtors have repeatedly insisted that they are not asking us to overrule Dewsnup."). Justices Kennedy, Breyer, and Sotomayor did not join the footnote regarding the criticism of Dewsnup.
  19. ^ Caulkett, 135 S. Ct. at 1999-2001.
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