“Strip Off” of a Wholly Unsecured Second Mortgage Impermissible

By: Michael J. Casaceli

St. John’s University Law Student

American Bankruptcy Institute Law Review Staff

Joining a majority of courts, the New Jersey District Court, in Cook v. IndyMac Bank,[1] held that the debtor, Cook, could not use section 506(d) of the Bankruptcy Code (the “Code”) to “strip off” a wholly unsecured junior lien.[2]  Cook’s home was encumbered by a first and second mortgage.  Cook sought to strip off the second mortgage pursuant to section 506(d),[3] because the first mortgage exceeded the appraised value of the home.[4]  The court denied Cook’s attempted “strip off” because it would grant a windfall to debtors whose property unexpectedly sells for more than its appraised value.[5]  The court found that the only way to “strip off” a second mortgage is to contest its status as an allowed claim under section 502 of the Bankruptcy Code.[6]

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