WASHINGTON — The Supreme Court issued a ruling Monday that said second mortgage liens cannot be voided in bankruptcy, even when the first lien is underwater.
In handing down their decision in favor of Bank of America, the justices reversed prior rulings by the 11th Circuit Court of Appeals, a U.S. district court and a bankruptcy court.
The Atlanta appeals court ruled that a bankruptcy court can strip away or void a second lien when the first lien is underwater and the home is worth less than what a debtor owes on the senior mortgage.
But the Supreme Court justices unanimously rejected that conclusion, ruling that the second lien cannot be voided just because the first lien is underwater. They based their decision on a 1992 Supreme Court ruling in Dewsnup v. Timm that held that a first mortgage cannot be stripped down to the current value of the property.
"The reasoning of Dewsnup dictates that a debtor in a Chapter 7 bankruptcy proceeding may not void a junior mortgage lien when the debt owed on a senior lien exceeds the current value of the collateral," wrote Justice Clarence Thomas in the decision.
Industry representatives welcomed the decision, saying that if the court had sided with earlier court decisions, second liens would have become more expensive.
"The public policy benefit is that second trust loans will be more affordable," said Bob Davis, an executive vice president at the American Bankers Association.