Supreme Court: No Lien Stripping in Chapter 7

In the long-awaited case of Bank of America v. Caulkett, the U.S. Supreme Court reversed the 11th Circuit, and held that Chapter 7 debtors cannot "strip off" 2nd mortgages, where the value of the 1st mortgage exceeds the value of the property.  In so holding, the Court held that it was bound by the definition of "secured claim" espoused in the previous case of Dewsnup v. Timm (which held that a 2nd mortgage could not be "crammed down" on a "partially underwater" home).  In Dewsnup, the term "secured claim" was defined as a claim supported by a lien on real property, regardless of the value of the property.  Since section 506(d) allows a debtor to void a lien, except a lien that is an allowed secured claim, even a 2nd mortgage lien that is wholly underwater cannot be voided (since it is still defined as "secured").

However, the story does not end here.  Justice Thomas, who delivered the opinion of the Court, continually criticized the Dewsnup opinion, and even pointed out that the debtors should be allowed to void a wholly unsecured 2nd mortgage based upon the plain language of the Code.  He points out clearly, more than once, that the debtors in Caulkett "do not ask us to overrule Dewsnup," but only modify its holding. 

So, Justice Thomas points out that the Court is thus still bound by Dewsnup's poorly-arrived-at definition of "secured claim":  "Rather than apply the statutory definition of 'secured claim' in 506(a), the Court reasoned that the term 'secured' in 506(d) contained an ambiguity because the self-interested parties before it disagreed over the term's meaning."  Justice Thomas even adds a footnote, joined in by most of the Justices, that Dewsnup's reasoning is the subject of much criticism.

So, because the debtors did not ask the Supreme Court to overrule Dewsnup, the present decision was the result.  If there is a debtor who is willing to follow the appeal process up to the Court again, and this time ask it to overrule Dewsnup, it appears that we would get a different result.