Bank of America Seeks Review of Eleventh Circuit Precedent on Second Mortgages

The Supreme Court plans to hear two cases brought by Bank of America concerning liens created by second mortgages where the value of the home is less than the amount of the lien from the first mortgage. In one federal appellate circuit, the Eleventh which takes appeals from certain southeastern states, the Court of Appeals has said that liens representing second mortgages are voidable.

Bank of America contends that this approach conflicts with the precedent set by all other federal appellate circuits and thereby the Supreme Court needs to resolve the split. Substantively, the Bank’s attorneys argue that secured creditors holding liens from second mortgages should not see those liens rendered worthless because it is possible that, after the conclusion of the bankruptcy case, the real estate which served as the collateral for the second mortgage could rise in value. Hence, the notion that the second mortgage is “underwater” may be merely a temporary problem subject to change when market conditions change.

“This case presents a critical issue of bankruptcy law affecting a large number of chapter 7 cases,” lawyers for Bank of America said in a court filing. The company urged the high court to clarify the rules “and restore uniformity to the administration of chapter 7 cases across the country.”  Bank of America claims hundreds — and possibly thousands — of homeowners in states covered by the 11th Circuit have moved to void underwater second mortgages since the appeals court endorsed the practice two years ago. Those states include Florida, Georgia, and Alabama.

A decision is expected by June of 2015. At stake is whether Chapter 7 debtors in at least those three states will have the chance to void or “strip” liens from second mortgages or whether banks holding such liens can hold them until after the bankruptcy to preserve their security interest in the future.  

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