In its 2015 decision in Wellness International Network Ltd. v. Sharif, the United States Supreme Court ruled that a trustee of a trust, who is a debtor in bankruptcy, may implicitly waive his right to a trial in federal District Court. The Supreme Court held that this implicit waiver may place jurisdiction with the bankruptcy court to decide whether the assets of the trust are assets of the debtor/trustee’s bankruptcy estate.
Bankruptcy courts have a mission to protect creditors by marshalling all available assets into the bankruptcy estate. Therefore, the bankruptcy court may not be the friendliest venue for a debtor arguing against the inclusion of trust assets in the bankruptcy estate. Because the waiver may be implied, drafters of trust documents may want to consider an express “non-waiver” of the jurisdiction of federal District Courts in the event the trustee becomes a debtor in a bankruptcy case.
In Bank of America v. Caulkett, the United States Supreme Court held unanimously that a Chapter 7 debtor may not void a junior mortgage lien, even when there was insufficient value in the real estate to fully secure the senior mortgage lien. Section 506(d) of the Bankruptcy Code allows debtors to void or “strip off” to the extent that a lien secures a claim that is not an “allowed secured claim.”
The issue in Caulkett was whether the junior mortgage was a secured claim, given that there was no equity in the real estate to cover any portion of the junior mortgage.
The Supreme Court held that a claim was “secured”, for purposes of Section 506(d), if it was secured by a lien in a purely legal sense. In this case the lien was a properly filed mortgage. Therefore, the junior mortgage was a secured claim, i.e., a claim secured by a valid mortgage lien, regardless of whether there was any equity in the property to actually pay the lien.
This decision strengthens the position of residential mortgage lenders in Chapter 7 bankruptcy cases because the junior liens, unsecured from a practical standpoint, will not be stripped off by a bankruptcy filing. These liens will continue to encumber the residential real estate after the bankruptcy. But this may be a pyric victory. Because the debtors will remain responsible for both senior and junior loans, it can be anticipated that more Chapter 7 debtors will throw in the towel and abandon their homes. This will result in more homes in foreclosure and fewer performing loans.
*written by Barry W. Sawtelle
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