Chapter 7 bankruptcy consumers dealt serious blow by SCOTUS

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2nd Jun 2015

The Supreme Court dealt a blow to Chapter 7 bankruptcy consumers on Monday in Bank of America v. Caulkett, 575 U.S. ____ (2015). The facts in the case, and companion case Bank of America v. Toledo- Cardona, were almost identical, each had a senior mortgage whereon the amount owed was greater than the value of their home, they also each had a junior mortgage, which consequently, was completely unsecured. Under Eleventh Circuit precedence, the debtors were allowed to void the unsecured junior mortgage; however, the Supreme Court’s holding has now changed this.

The Court ironically points out that the definition in the statute provides that “[a]n allowed claim of a creditor secured by a lien on property … is a secured claim to the extent of the value of such creditor’s interest in … such property,” and “an unsecured claim to the extent that he value of such creditor’s interest … is less than the amount of such allowed claim.” If the Court were to rely on this statutory definition of an allowed secured claim, then it is clear the debtors would be entitled to void the junior liens. However, the Court claimed that it has superseded the statutory definition and replaced it with a definition contained in Dewsnup v. Timm 502 U.S. 410 (1992). This new definition “forecloses the textual analysis” of the statutory term. The new definition is simply any claim supported by a security interest in property, regardless of whether the value of that property would be sufficient to cover this claim.

In an attempt to justify the distorted new definition, the Court states that it is “generally reluctant to give the same words a different meaning when construing statutes”; notwithstanding the changed definition created in Dewsnup. While reviewing the possible interpretations and proposed solutions offered by the debtors, the Court explains that it would be unjust to adjust the definition based on policy arguments.

Later, the Court again justifies the discombobulating decision by reminding readers that property values are shifting and that it is potentially unfair to creditors if valuations of the property could differ by as little as a dollar; consequently, the Court does not support the potentially “arbitrary results” that could happen if the debtor were allowed their rights as specified in the statute. Ironically, the Court then concedes that a single dollar can have a “significant impact on bankruptcy proceedings” in many other areas, but, in a Pontius Pilate hand-washing act, blames Congress for these other challenges.

Finally, the Court acknowledges that the opinion is obfuscated and may not be entirely correct or settled by conceding that the definition of “allowed secured claim” in Dewsnup may not correctly reflect the meaning of the statute. Even so, the damage has been done to future debtors. Relief that was offered in the statute has been rescinded. It will require an act of Congress to correct the consequences of the Caulkett Court.