Holding a second MortgageHold a second mortgage
This ruling reversed an interpretative provision of Florida Insolvency Courts' Insolvency Law - an interpretative provision also confirmed by the Eleventh Circuit - which enabled a Kapitel 7 borrower to wipe off and revoke a fully submerged mortgage charge. At Caulkett the borrower went bankrupt under Section 7 and the borrower possessed a home burdened by a first and second mortgage.
Since the amount due on the first mortgage was higher than the actual value of the house, the second mortgage holding institution would get nothing if the house was actually resold at that point. Thus the second mortgage was completely under water. Insofar as a pledge protects a debt against the obligor which is not a permissible protected debt, this pledge is cancelled.
"11 U.S.C. § 506(d). Florida Middle District Bankruptcy Court in the United States permitted the borrower to "withdraw" (or cancel) the second mortgage. United States Supreme Court overturned Eleventh Constituency and ruled that the borrower may not annul the second mortgage under insolvency law. Lower tribunals based themselves on an interpretative version of the Code which indicated that the second mortgage creditor was not secure.
In particular, 506(a)(1) provides that'[a]n admissible claims of a mortgagee who is protected by a security right over real property is .... a protected claims in the amount of the value of the creditor's share in .... this object' and'an uncovered claims where the value of the creditor's share is ... lower than the amount of this admissible claim'.
" In this case, the value of the interest of the second mortgage owner was zero, which allegedly made the whole pledge insecure. The Supreme Court, however, had previously construed the concept of "secured claim" according to § 506(d) of the Code in Dewsnup v. Timm, 502 U.S. 410 (1992). At Dewsnup, a Kapitel 7 borrower attempted to "reduce" a partial subsea pledge under 506(d) to the value of the securities.
In particular, the borrower wanted to cut its debts from approximately $120,000 to the value of the land that secures the debts, which was $39,000. In Dewsnup, the court interpreted the concept of "secured claim" in 506(d) as any claims based on a right of priority over real estate, irrespective of whether the value of that real estate is adequate to meet the claims.
The court therefore did not allow the defendant to revoke the pledge. This means that a right of pledge can only be revoked in accordance with § 506(d) if the right of pledge is not permissible. Dewsnup banned the withdrawal of a mortgage partly submerged in water, while the Caulkett ruling extended this ban to stop borrowers from withdrawing a mortgage completely submerged.
Although this is not a surprising move, it will certainly have an impact on the filing for insolvency. In particular, borrowers can still resort to Section 13 of the insolvency procedure to shed a second mortgage. It is likely that this will distract many borrowers from Section 7 and may lead to an increase in submissions in Section 13.
Section 13 Borrower must draw up an organised settlement schedule before the pledge can be cancelled. Caulkett's ruling is a big gain for creditors by moving the negotiating powers of needy house owners away and assigning them to second mortgage owners in credit training. The second mortgage creditors will now have more influence in bear market sales talks.
In addition, junior lien holders can take a waiting and see stance in the hope that residential value will rise and the value of once worthless mortgage loans will be restored. Any such proposal may consider a second enforcement of a mortgage. Naturally, creditors should be willing to object to the debtors' continuing efforts to shed a second mortgage in Section 7, as this new ruling makes it impracticable to shed a second mortgage.
Overall, Caulkett offers a creditor many other choices that he should consider when evaluating and asserting his second mortgage.