Fun & Games with Mortgage Bankruptcy

Dewsnup v. Timm

In 1992, the United States Supreme Court decided a mortgage bankruptcy case entitled, Dewsnup v. Timm, 502 U.S. 410 (1992).  This held that a debtor in a bankruptcy could not use a Chapter 7 liquidation proceeding to “strip down” a mortgage lien to the value of the collateral.

In Dewsnup, the mortgage was for a greater amount than the value of the property.  The debtor attempted to use bankruptcy to reduce the value of the mortgage to the value of the property, and to discharge the “undersecured” remainder of the mortgage debt.  The Supreme Court refused to allow that, thus leaving the debtor in the position of either walking away from the property (that is, abandoning it in the bankruptcy), or agreeing to pay the mortgage bank the full amount of the mortgage.

Applying the Dewsnup Ruling

Despite frequent criticism of Dewsnup’s reasoning, the Supreme Court has just reaffirmed it.  In last week’s case of Bank of America v. Caulkett, the debtors both had second mortgages which were completely “under water.”  That is, the values of the two properties were each less than the first mortgages, leaving the second mortgages fully unsecured.  The Supreme Court, being consistent, followed Dewsnup, and declared that not even completely unsecured mortgages could be “stripped down” in bankruptcy.

The interesting point, however, was that the opinion, a unanimous ruling authored by Justice Thomas, admitted in a footnote that Dewsnup “has been the target of criticism.”  Indeed, Justice Thomas cited to Justice Scalia’s dissent in Dewsnup.  One might therefore have expected the Supreme Court to consider overruling Dewsnup.  Thomas chose not to do this, relying repeatedly on the fact that counsel in Caulkett never asked that Dewsnup be reconsidered.  One will note, charitably, for the record, that this omission has not stopped the High Court in the past from targeting issues.  Perhaps they are simply laying the ground work for an all-out assault on Dewsnup.

If you have any questions or would like to discuss this matter in more detail, please contact Joel Glucksman, Partner, Chair, Bankruptcy & Creditors Rights Group.

Are you a creditor in a bankruptcy?  Have you been sued by a bankrupt?  If you have any questions about your rights, please contact me, Joel Glucksman, at 201-806-3364.