Bank of America's case against two underwater Florida homeowners who filed for Chapter 7 bankruptcy in order to eliminate the liability on their second mortgages – a practice known as “stripping off” – has made it to the highest court in the nation.
The U.S. Supreme Court agreed earlier this week that it would hear the cases of Bank of America v. Caulkett and Bank of America v. Toledo-Cardona following the bank's appeal in both cases, which were both decided in favor of the homeowners by the 11th Circuit U.S. Court of Appeals back in May. The Supreme Court said in granting the petition on Monday that it would consolidate the two cases and allot one hour for oral arguments.
In the cases of the Florida homeowners in Melbourne and Tampa, each had second mortgages on their homes originated by Bank of America. When the homeowners could no longer pay their debts following the housing market crash of 2008, they both filed for Chapter 7 bankruptcy and asked the bankruptcy judge to extinguish their second mortgages based on the fact that they were underwater – or in other words, they owed more than the properties were worth. The judge erased both of the Bank of America mortgages, hence “stripping off” the mortgages, and the decision was upheld in the 11th Circuit Court of Appeals.
The bank argued that the practice of stripping off mortgages should be banned, just as “stripping down” mortgages were outlawed in a case the Supreme Court decided in 1992. In that decision, the court made it illegal for underwater homeowners to escape a claim from a creditor on a mortgage by “stripping down” the mortgage to its current market value.
Bank of America's representatives said in the court filing that this is a critical area of bankruptcy law that will affect many Chaper 7 bankruptcy filings.