Junior liens held by mortgage lenders can’t be voided by a bankruptcy judge just because the borrower is in a negative-equity position, according to a decision from the nation’s high court.
The case involves
two second liens held by Bank of America, N.A., that were voided in Chapter 7 bankruptcy cases.
In both cases, the value of the properties were less than the corresponding first mortgages — leaving the second liens completely underwater.
“The debtors sought to void their junior mortgage liens under §506 of the Bankruptcy Code, which provides, ‘To the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void.'” case documents state.
BofA unsuccessfully challenged the decision and lost. It then appealed the decision, but the appellate court affirmed the lower court’s decision.
So the Charlotte, N.C.-based company asked the Supreme Court to consider the cases.
In November 2014, the Supreme Court granted BofA’s petitions for writs of certiorari, agreeing to hear the cases, and consolidated the two cases.
On Monday, the court ruled in favor of BofA.
“A debtor in a Chapter 7 bankruptcy proceeding may not void a junior mortgage lien under §506(d) when the debt owed on a senior mortgage lien exceeds the current value of the collateral if the creditor’s claim is both secured by a lien and allowed under §502 of the Bankruptcy Code,” the decision stated.
The debtors had unsuccessfully argued that BofA’s claims were unsecured since its equity position was less than zero.
But in today’s decision, the court disagreed — citing
Dewsnup v. Timm in which a partially underwater lien was upheld.
“Thus, under Dewsnup, a ‘secured claim’ is a claim supported by a security interest in property, regardless of whether the value of that property would be sufficient to cover the claim,” the justices wrote.
The court took Dewsnup v. Timm a step further by
determining that the decision applies to all secured liens — not just those that are partially underwater.
