David Caulkett had borrowed $ 183,000 from the bank of American against the first mortgage and $ 47,885 against the second which was only $ 98,000 in value at the time of foreclosure. The first of them had a market value that was less than the amount owed to the bank at the time and thus the other mortgage was held under water.
In the year 2013, David Caulkett sued through the 11th U.S. Circuit Court of Appeals, a court that oversaw Florida. He requested that the court proclaims him bankrupt and thus forfeit the lien of the bank over the junior mortgage he had used as collateral. According to section 506(d) of the bankruptcy code, a debtor was allowed to forfeit the lien he had allowed his creditor on the junior mortgage if the debt owed by him/her exceeded the current market value of the senior mortgage. This rule was applied, and thus, it was held that the lien of the bank over the junior mortgage was void. This was also affirmed by the district court of appeal where the case was appealed for the first time by the bank of America. In addition, the case was compared to a similar case, Bank of America v. Toledo-Cardona, another case that shared the facts of Bank of America v. David Caulkett, U.S (2015) and which had been given the same ruling.
The bank petitioned for a writ of certiorari from the United States court of appeals on August 13th, 2014 saying that the decision would risk the miss-ruling of many other cases pending in courts. On November 17th, 2014, the petition for a writ of certiorari was granted and identified as number 13-1421.
The real issue in this case was: Does Section 506(d) allow a debtor filing for bankruptcy to void the lien of his lender on the junior mortgage when the amount owed by him exceeds the market price of the senior mortgage? The high court held that a debtor in chapter 7 of the bankruptcy code "may not void a junior mortgage lien when the debt owed on a senior mortgage exceeds the current market value of the collateral if the creditors claim is both secured by a lien and allowed under section 502 of the bankruptcy code." This ruling won by a (9-0) vote thus favoring the bank.
Justice Clarence Thomas of the high court issued the explanation of an identified court, that section 506(d) of the bankruptcy code allowed a debtor to forfeit a lien of his creditor on a mortgage to the extent that the lien covered a claim against the debtor that is not an allowed secured claim. This on its literal meaning may favor the debtors but instead, the court, rather than apply the statutory definition of the secured claim in 506 (d) which it reasoned was insufficient because of the self-interested parties before it disagreed over the meaning of the term secured claim. The court held that secured claim is one supported by a security interest in the property, regardless of whether that claim was sufficient to cover the claim or not. Thus, even if the second mortgage was underwater, the debtor would not void the lenders lien over that property in bankruptcy cases. All previous decisions regarding the case were reversed and the case was remanded.
The Legal Conflict on the Case
Stripping-off the lien
A lien is a case to your property so as to fulfill an obligation. Stripping off a lien would therefore mean that a debtor would avoid paying his debts and for this to be arrived at, several procedures must be followed under the courts of law. Stripping off a lien will only occur if the banks claim is not an allowed secured claim for repayment of debt.
Was the District Court and the Eleventh Circuit decision wrong enough to be reversed by the Supreme Court? Caulkett filed for chapter 7 bankruptcy in an aim to strip off his second lien and he succeeded. David Caulkett has a senior and a junior mortgage lien on his home. The Bank of America holds the junior mortgage lien. The amount owed on senior mortgage lien is greater than the value of the house meaning that the junior mortgage lien is underwater i.e. Caulkett owes the bank more than the value of the junior lien. This means that the bank will not recover its money if the property was to be sold. The Supreme Court had applied the phrase Secured claim according to section 506(d) in Dewsnup which means a claim that was supported by a collateral interest in property, under such circumstances as to whether the value of the property would be good enough for the claim.
The case is still pending where by the Supreme Court reversed the judgment by the Court of Appeals and remanded the case for more proceedings in the lower courts. In my opinion, the possible outcome in this case would be in favor of the respondent David Caulkett in voiding his junior mortgage lien. Since the debtor owes the Bank of America a senior mortgage which is more than the market value of the house, this is a clear indication that the junior mortgage as well owes more than its worth. This is a reason good enough to declare Caulkett Bankrupt. Considering the Bankruptcy Code "under section 506(d), which provides that to the extent that a lien secures a claim which is not an allowed secured claim, the lien in the moonlight will be considered void." By overruling the rule in Dewsnup who defined secured claim as a claim supported by a security interest in property considering the value of that property as compared to the value of the claim would put Caulkett in a better position to have the lien stripped off. This would be so because there is no clear definition regarding the phrase Secured claim in chapter 7 nor chapter 11 as both give contradicting information and also section 506(a) and 506(d) cannot have similar statements under the bankruptcy code regarding the same. The District Court and the Eleventh Circuit should be left to decide on the case since they have the power of jurisdiction on the same ensuring they follow the constitution mandate.
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Kirkpatrick, M. and Levitin, A. (n.d.). Amicus Curiae Brief to the Supreme Court of the United States Regarding Underwater Second-Lien Mortgages (Bank of America v. Caulkett & Bank of America v. Toledo-Cardona). SSRN Electronic Journal.
MacIntyre, E. (2008). Business law. Harlow, England: Pearson Longman.
Makdisi, M. and Makdisi, J. (2009). Introduction to the study of law. Newark, NJ: LexisNexis Matthew Bender.
Marinc, M. and Vlahu, R. (2012). The economics of bank bankruptcy law. Berlin: Springer.
Redmond, P. and McCallum, I. (1981). Bankruptcy law. Plymouth: Macdonald and Evans.
SCOTUSblog, (2016). Bank of America, N.A. v. Toledo-Cardona. [online] Available at: http://www.scotusblog.com/case-files/cases/bank-of-america-n-a-v-toledo-cardona/ [Accessed 2 Feb. 2016].
The case involving the Bank of America v. Toledo Cardona
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