On Monday, June 1, 2015, the Supreme Court of the United States issued its opinion in Bank of America v. Caulkett, a closely watched matter concerning whether Section 506(d) of the Bankruptcy Code permits junior lien stripping in the context of Chapter 7 bankruptcy.  Addressing two consolidated cases, Justice Clarence Thomas—writing for a virtually unanimous Supreme Court—held that Section 506(d) forbids debtors from voiding junior liens, even when such liens are wholly underwater.

In Caulkett, the individual debtors owned homes worth less than the amount each owed on a senior mortgage. The debtors had junior mortgage liens, for which the junior mortgagor—Bank of America—would receive nothing if the homes were sold today as a result of (1) subordination to a senior mortgage, and (2) a decline in each home’s market value. To strip those junior liens in bankruptcy, the debtors relied on Section 506(d) 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.”

The debtors prevailed in the lower courts on their argument that wholly underwater junior mortgage liens were no longer “secured” because the collateral had no value relative to the claim. The Supreme Court reversed those decisions.

In doing so, the Supreme Court credited the debtors’ argument that a straightforward reading of Section 506(a)(1)—which provides that “an allowable claim . . . is a secured claim to the extent of the value of such creditor’s interest in . . . such property”—would void an underwater junior mortgage lien.

But the Supreme Court also found that it had already adopted a construction of “secured claim” in its Dewsnup v. Timm opinion. In that case, the Supreme Court rejected an argument that a claim was “secured only to the extent of the judicially determined worth of the real property,” and instead defined the term “secured claim” to mean “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 debtors’ in Caulkett sought to distinguish Dewsnup because those secured liens in question were only partially underwater, as opposed to wholly underwater. The Supreme Court declined to draw that distinction because of the odd framework it would enact. In essence, had the Supreme Court accepted the Caulkett debtors’ distinction, a debtor could not strip down a junior lien if the collateral was valued at one dollar more than a senior lien, but a debtor could strip a junior lien if the collateral was valued at one dollar less. Such a framework would lead to arbitrary results, particularly given constant fluctuations in property values.

It is unclear from the Supreme Court’s decision why the debtors chose not to attack Dewsnup head on.  After all, they had a spirited dissent in Dewsnup from Justice Scalia behind them.  And the Supreme Court appears to go out of its way, repeatedly, to highlight that the debtors have not asked the Court to overrule Dewsnup.  Future litigants should take note.

By Andrew Pieper (andrew.pieper@stoel.com) and Jamila Toussaint.  Ms. Toussaint is a Summer Associate with Stoel Rives LLP and is not currently licensed to practice law.