The Eleventh Circuit’s opinions in In re McNeal1, Bank of America v. Caulkett2 and Bank of America v. Toledo-Cardona3 put second mortgages in greater jeopardy for lenders when the Eleventh Circuit held that second-priority mortgage liens could be eliminated completely (i.e. “stripped off”) in chapter 7 bankruptcy cases where collateral is worth less than the amount of the first mortgage. On appeal of the Caulkett and Toledo-Cardona cases, the amici argued that affirmance of those decisions (http://business-finance-restructuring.weil.com/wp-content/uploads/2015/02/LSTA-Brief.pdf) could “ripple through the commercial loan market, impact the holders of junior liens, and dampen their appetite to lend on a junior basis.”

However, the Supreme Court’s ruling on June 1, 2015 in Bank of America, N.A. v. Caulkett, 135 S.Ct. 1995 (2015) (http://www.supremecourt.gov/opinions/14pdf/13-1421_p8k0.pdf), which will benefit lenders, declined to allow the two chapter 7 debtors, Caulkett and Toledo-Cardona, to rid themselves of second mortgages on their homes despite the fact that the first mortgages exceeded their home’s current value.  Specifically, the Supreme Court held that debtor in a Chapter 7 bankruptcy proceeding may not void a junior mortgage lien under 11 U.S.C. § 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 11 U.S.C. § 502.  For now, this decision provides a measure of relief for real estate lenders, avoiding the disorder and chaos real estate markets might have suffered if the Eleventh Circuit decisions had been affirmed and second-lien holders had little, if any, recourse on loans with severely diminished equity positions. For now the message is clear, Stop Stripping!…junior liens in chapter 7.


1477 Fed.Appx. 562, 2012 WL 1649853, at *1 (11th Cir. May 11, 2012)

2566 Fed.Appx. 897, (11th Cir. 2014)

3556 Fed.Appx. 911, (11th Cir. 2014)