By Michael L. Moskowitz

Supreme Court Hears Argument on Debtors’ Efforts to Strip-Off Underwater Mortgages in Chapter By Michael L. Moskowitz{2:25 minutes to read} On November 17, 2014, the Supreme Court agreed to review two appeals filed by Bank of America against homeowners who filed Chapter 7 bankruptcies and then sought to “strip off” the lender’s underwater mortgage liens. In Bank of America, N.A. v. Caulkett (No. 13-1421) and Bank of America, N.A. v. Toledo-Cardona (No. 14-163), the Court of Appeals for the Eleventh Circuit ruled in favor of the homeowners, leading to Bank of America’s appeals to the Supreme Court.

In Toledo-Cardona, the market value of the Chapter 7 debtor’s home was $77,689.00. The first mortgage had a balance of $135,703.00, and the second mortgage had a balance of $32,000.00. In Caulkett, the market value of the Chapter 7 debtor’s home was $98,000.00. The first mortgage balance was $183,264.00. The second mortgage had a balance of $47,855.00.

Each home was worth significantly less than the balances owed on the first mortgages and the second mortgages were, without question, wholly unsecured. In each case, the Eleventh Circuit avoided and stripped the second mortgage liens.

The Eleventh Circuit’s rulings to allow “strip offs” conflict with rulings by the Fourth, Sixth and Seventh circuits as well as courts in New York, New Jersey and Utah, which concluded that the Supreme Court’s ruling in Dewsnup v. Timm, 502 U.S. 410 (1992), controls the issue. Dewsnup held that section 506(d) does not permit a Chapter 7 debtor to strip off a mortgage lien to the property’s fair market value. It has also been construed as prohibiting the strip-off of underwater mortgages.

Locally, the United States District Court for Eastern District of New York, in Wachovia v. Smoot, held that a Chapter 7 debtor may not strip off an underwater junior mortgage under section 506(d) of the Bankruptcy Code. Wachovia v. Smoot, 478 B.R. 555 (E.D.N.Y. 2012). This decision will become moot should the Supreme Court affirm the Toledo-Cardona and Caulkett decisions.

Oral argument was held by the Supreme Court on March 24, 2015. Most of the time spent during oral argument revolved around whether, and to what extent, Dewsnup controlled and/or if it should be overruled. Click here for a copy of the hearing transcript.  A decision is expected within a few months. Weltman & Moskowitz will continue to monitor this matter for the Supreme Court’s decision and will keep our clients and colleagues informed.

Richard Weltman & Michael Moskowitz |

About Weltman & Moskowitz, LLP, A New York and New Jersey Business, Bankruptcy, and Creditors’ Rights Law Firm:

Founded in 1987, Weltman & Moskowitz, LLP is a highly regarded business law firm concentrating on creditors’ rights, bankruptcy, foreclosure, and business litigation. Michael L. Moskowitz, a partner with the firm, focuses his practice on business and bankruptcy litigation, as well as creditor’s rights, foreclosure, adversary proceeding litigation, corporate counseling, M&A, and transactional matters. Michael can be reached at (212) 684-7800, (201)794-7500 or