Bank of America is getting some more mileage out of its Supreme Court victory in June.
Four months after the high court ruled, in Bank of America v. Caulkett, N.A. and Bank of America, N.A. v. Toledo-Cardona, that a debtor in Chapter 7 bankruptcy could not void a junior mortgage that was underwater, it has sided with the lender again.
In this case, the debtor, Judith Hackbart, has two mortgages on her home, the second of which is held by BofA. During bankruptcy proceedings, a motion to void the junior lien under Section 506(d) of the bankruptcy code was granted and affirmed by the district court. The case reached the United States Court of Appeal for the Eleventh Circuit, which has jurisdiction over federal cases originating in the states of Alabama, Florida and Georgia. This court also affirmed the order.Bank of America was asking the Supreme Court to reconsider.
On Oct. 5, the Justices declined to do so. It did, however, legally void the previous decision made in the case, referencing its earlier ruling.
“The judgment is vacated, and the case is remanded to the United States Court of Appeals for the Eleventh Circuit for further consideration in light of Bank of America, N.A. v. Caulkett,” the Supreme Court said Monday.
That means the previous ruling, which stripped Hackbart’s second mortgage, has been overturned.
Don Hawthorne, a partner at New York-based law firm Axinn, Veltrop & Harkrider, specializing in financial industry litigation, said this is probably not BofA’s last victory when it comes to second liens.
“Decisions like those of the 11th Circuit will be reversed in light of Bank of America v Caulkett, which says that second mortgages are not extinguished in bankruptcy even if the collateral is insufficient to satisfy the first-lien,” he told Leveraged Finance News.
However, the bigger picture could be the Supreme Court’s ruling in the 1992 case Dewsnup v. Timm, which prohibited debtors in Chapter 7 bankruptcy proceeds from stripping a partially underwater second mortgage down to the current market value. While the precedent set in Dewsnup was not challenged in BofA v. Caulkett, a footnote in the Justice’s decision invited the opportunity to reverse the decision.
“Caulkett therefore may be a Pyrrhic victory,” Hawthorne said. “When an appropriate case comes its way, a majority of the Supreme Court appears prepared to re-examine the idea that underwater collateral cannot provide a basis for voiding, or proportionately reducing, junior liens. But in the meantime, cases like the one pending in the Eleventh Circuit have little chance in the face of clear and binding (if not particularly enthusiastically endorsed) Supreme Court precedent.”