Tag Archives: supreme court

Short Sellers Can’t Be Sued for Balance of Debt, Court Rules

Distressed homeowners who, with their lender’s approval, arrange a short sale of their property — for less than they owe — can’t be sued for the balance of their debt, the state Supreme Court ruled Thursday.

The unanimous decision protects borrowers who increasingly resorted to short sales as property values fell at the end of the last decade. The Legislature amended state law in 2012 to provide them explicit protection against deficiency judgments, but a lawyer for the borrower in Thursday’s case said that about 200,000 Californians had conducted short sales in the previous five years and were potentially affected by the ruling.

“The little guy won today,” said the attorney, Andrew Stilwell.

His client, Carol Coker, borrowed $452,000 in 2004 to buy a condominium in San Diego County. She fell behind on her payments, and in March 2010 JPMorgan Chase Bank, which then held the loan, sent her a default notice and began foreclosure proceedings.

The bank then agreed to allow Coker to sell the condo to another buyer for $400,000, collect the proceedings and release its lien on the property. But after the sale, the bank billed her for the $116,000 balance due on her loan.

The state law at the time, originally enacted in 1933 and amended in 1989, prohibited a bank from seeking a deficiency judgment, for the balance due on its loan, after the bank itself foreclosed on a home. But the law did not address short sales, which were rare until the late 2000s, and JPMorgan Chase argued that the anti-deficiency rule did not apply to those cases.

But the court said the rationale of the law applied equally to short sales.

“For more than half a century, this court has understood the statute to limit a lender’s recovery on a standard purchase-money loan to the value of the security,” Justice Goodwin Liu said in the 7-0 decision.

Liu said the law was intended to maintain economic stability and protect property buyers from severe losses during periods of economic decline.

Coker’s short sale of the condo — which she bought as a residence, rather than an investment — “did not change the standard purchase-money character of her loan,” Liu said. He said the short sale, “like a foreclosure sale, allowed Chase to realize and exhaust its security” in the property.

Stilwell said the ruling would also affect cases in federal Bankruptcy Courts in California, which rely on state laws affecting creditors and debtors.

“The Supreme Court shut the door on banks trying to go too far to take advantage of the poor, the middle class, people who couldn’t afford what they got into in this real estate debacle,” he said.

The bank’s lawyers referred inquiries to bank headquarters in New York, which could not be reached for comment late Thursday.

By | Source: National Mortgage News

Supreme Court Outlaws Chapter 7 ‘Stripping Off’ of Second Mortgages

by DS News

The U.S. Supreme Court ruled on Monday that an underwater second mortgage cannot be extinguished, or “stripped off,” as unsecured debt for a debtor in bankruptcy, according to the Supreme Court‘s website.

In the cases of Bank of America v. Caulket and Bank of America v. Toledo-Cardona, Florida homeowners David Caulkett and Edelmiro Toldeo-Cardona had filed for Chapter 7 bankruptcy and had second mortgages with Bank of America extinguished by a bankruptcy judge following the housing crisis of 2008 based on the fact that they were completely underwater. On Monday, just more than two months after hearing arguments for the case, the Supreme Court ruled in favor of the bank.

When the Supreme Court heard arguments for two cases on March 24, attorneys representing Bank of America contended that the high court should uphold a 1992 decision in the case of Dewsnup v. Timm, which barred debtors in Chapter 7 bankruptcy from “stripping off” an underwater second mortgage down to its market value, thus voiding the junior lien holder’s claim against the debtor. Attorneys for the debtors argued that the Dewsnup decision was irrelevant for the two cases.

Bank of America appealed the bankruptcy judge’s ruling for the two cases, but the 11th Circuit U.S. Court of Appeals upheld the bankruptcy court’s decision in May 2014, going against the Dewsnup ruling by saying that decision did not apply when the collateral on a junior lien (second mortgage) did not have sufficient enough value. The bank subsequently appealed the 11th Circuit Court’s ruling.

The Supreme Court ruled on Monday that the second mortgages should not be treated as unsecured debt, hence upholding the Dewsnup decision. Justice Clarence Thomas, in delivering the opinion of the court, wrote that, “Section 506(d) of the Bankruptcy Code allows a debtor to void a lien on his property ‘[t]o the extent that [the] lien secures a claim against the debtor that is not an allowed secured claim.’ 11 U. S. C. §506(d). These consolidated cases present the question whether a debtor in a Chapter 7 bankruptcy proceeding may void a junior mortgage under §506(d) when the debt owed on a senior mortgage exceeds the present value of the property. We hold that a debtor may not, and we therefore reverse the judgments of the Court of Appeals.”

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“The Court has spoken, and we respect its ruling,” said Stephanos Bibas, an attorney for defendant David Caulkett, in an email to DS News. “But we are disappointed that the Court extended its earlier precedent in Dewsnup v Timm, even though it acknowledged that the plain words of the statute favor giving relief to homeowners such as Messrs. Caulkett and Toledo-Cardona. We hope that in the near future, the Administration’s home-mortgage-modification programs will offer more relief to homeowners in this situation struggling to save their homes.”

A Bank of America spokesman declined to comment on Monday’s Supreme Court’s ruling.

Click here to read the complete text of the Court’s ruling.