Lien stripping in Chapter 7 eliminated by Supreme Court

An important decision was announced on June 1, 2015 by the United States Supreme Court.   In a unanimous decision arising from two cases in Florida, the Court ruled in Bank of America v. Caulkett that a person who files a Petition for Bankruptcy under Chapter 7 may not cancel a junior lien when the amount owed on the senior lien exceeds the value of the property.  The only condition is that the senior lien must be a secured and allowed claim under the bankruptcy Code.  A first mortgage, properly recorded, is a typical secured and allowed claim.  This reverses the 11th Circuit Court of Appeals that hears cases on appeal from the federal courts in South Florida, including the U.S. Bankruptcy Court in the Southern District of Florida.  The lower courts had ruled that an individual in a Chapter 7 bankruptcy case could “strip off” a condominium/HOA lien when the property was completely “underwater”.  In other words, before this ruling, if there was a first mortgage on the property and the fair market value of the property at the time of filing the Petition was less than the amount owed on the mortgage, the association’s lien (a “second” lien in priority) could be “stripped off” the property and no longer have any force or effect.    The Court’s ruling rejected the use of Chapter 7 for that relief and property owners who file bankruptcy under Chapter 7 can no longer cancel the lien filed by their condominium and homeowner associations, even if the property’s value is less than the balance on the first mortgage.  The ruling does not bar such actions under a Chapter 13 Plan  for reorganization of individual debts.

As always, if this issue presents itself to you, you are encouraged to consult with an experienced attorney.

Michael E. Rehr, Esq.

September 2, 2016