Gregory Birmingham v. PNC Bank, N.A.

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 15-1800
In Re: GREGORY BIRMINGHAM,
Debtor.
--------------------------
GREGORY BIRMINGHAM,
Plaintiff - Appellant,
v.
PNC BANK, N.A.,
Defendant - Appellee.
Appeal from the United States District Court for the District of
Maryland, at Greenbelt. Paul W. Grimm, District Judge. (8:15-
cv-00108-PWG; 14-18432; 14-00378)
Argued: October 26, 2016 Decided: January 18, 2017
Amended: January 20, 2017
Before THACKER and HARRIS, Circuit Judges, and Gerald Bruce LEE,
United States District Judge for the Eastern District of
Virginia, sitting by designation.
Affirmed by published opinion. Judge Lee wrote the opinion, in
which Judge Harris and Judge Thacker joined.
ARGUED: John Douglas Burns, THE BURNS LAW FIRM, LLC, Greenbelt,
Maryland, for Appellant. Daniel J. Tobin, BALLARD SPAHR LLP,
Washington, D.C., for Appellee. ON BRIEF: Bryan J. Harrison,
Matthew G. Summers, BALLARD SPAHR LLP, Baltimore, Maryland, for
Appellee.
2
LEE, District Judge:
The anti-modification clause in 11 U.S.C. § 1322(b)(2) of
the Bankruptcy Code protects a mortgagee from having its claim
in a Chapter 13 bankruptcy proceeding modified, if the mortgage
is secured “only by a security interest in real property that is
the debtor’s principal residence.” 11 U.S.C. § 1322(b)(2). The
issue in this appeal is whether reference in the Deed of Trust
to escrow funds, insurance proceeds, or miscellaneous proceeds
constitute additional collateral or incidental property for
purposes of § 1322(b)(2). We hold that these items constitute
incidental property, which entitles Appellee to anti-
modification protection under § 1322(b)(2). The district
court’s determination is therefore affirmed.
I.
On May 23, 2014, Appellant Gregory John Birmingham
(“Birmingham”) filed a voluntary petition for Chapter 13
bankruptcy. J.A. 342-45. One of the claims against Birmingham
is a mortgage in the amount of $343,101.87 held by Appellee PNC
Bank, N.A. (“PNC”), and secured by a deed of trust (“Deed of
Trust”) on Birmingham’s primary residence at 11721 Chilcoate
Lane, Beltsville, Maryland 20705 (“Property”). J.A. 329.
According to the District of Maryland Claims Register, there is
an arrearage on the mortgage of $93,386.58 as of June 23, 2015.
J.A. 329.
3
Birmingham filed his Original Chapter 13 Bankruptcy Plan on
June 4, 2014. J.A. 378. At that point in time, the Property
was valued at only $206,400. J.A. 362. The Bankruptcy Plan
included a cram-down of PNC’s interest in the Property. J.A.
385-86. After a series of objections and amendments to the
Bankruptcy Plan, Birmingham filed a Complaint for Declaratory
Action pursuant to 28 U.S.C. §§ 2201-2202; 11 U.S.C. §§ 105(a),
506(a), 2201 (11721 Chilcoate Ln Beltsville, MD 20705). J.A.
378-400. Birmingham’s Complaint requested a declaration that
that PNC’s claim be treated as a partially unsecured claim
subject to modification. J.A. 399-400.
Birmingham argued that certain provisions of the Deed of
Trust required collateral other than real property, which would
remove the claim from 11 U.S.C. § 1322(b)(2)’s anti-modification
protection. J.A. 397-99. Birmingham cited three specific
provisions of the Deed of Trust, involving escrow items (Section
Three), property insurance proceeds (Section Five), and
miscellaneous proceeds (Section Eleven). J.A. 398. PNC filed a
Motion to Dismiss the Adversary Complaint and an accompanying
memorandum, contending that the items referred to in the Deed of
Trust provisions cited by Birmingham constituted “incidental
property,” which is part of a debtor’s principal residence.
J.A. 674. Consequently, PNC argued that the additional items
would not expose the PNC mortgage to a cram-down. J.A. 674.
4
After Birmingham filed a response to the motion to dismiss,
Bankruptcy Judge Wendelin I. Lipp granted the motion, noting
that “the issues raised by [Birmingham] were identical to
arguments that repeatedly have been denied by the Bankruptcy
Court for this District.” J.A. 674.
Birmingham then appealed the Bankruptcy Court’s decision to
the United States District Court for the District of Maryland.
J.A. 405. Birmingham raised the same arguments on appeal,
namely that the inclusion of miscellaneous proceeds, escrow
funds, and insurance proceeds in the Deed of Trust constitute a
waiver of the anti-modification provision of 11 U.S.C. §
1322(b)(2). J.A. 422. The district court affirmed the
bankruptcy court’s decision, holding that the miscellaneous
proceeds, escrow funds, and insurance proceeds provisions
describe “benefits which are merely incidental to an interest in
real property” and generally are not “additional security for
purposes of § 1322(b)(2).” J.A. 679. The district court
further noted that the items at issue do not “have any value of
their own separate and apart from the Property and the [PNC Deed
of Trust]; to the contrary, they all exist only to give effect
to the PNC’s security interest, which otherwise could be
frustrated by a superior lien or by destruction or condemnation
of the Property.” J.A. 681.
5
Birmingham filed a timely appeal before this circuit. J.A.
685-88. This case was consolidated with a nearly identical case
that similarly originated in the District Court of Maryland,
Akwa v. Residential Credit Solutions, Inc., No. 14-cv-02703-GJH,
530 B.R. 309 (D. Md. 2015). The Akwa appeal was dismissed on
February 16, 2016. ECF No. 69-2. Accordingly, only the
Birmingham appeal is currently before the Court.
II.
This dispute requires us to determine whether the district
court properly concluded that the bankruptcy court did not err
in dismissing the adversary proceedings against PNC.
Specifically, we are to analyze whether the district court
correctly affirmed the bankruptcy court’s finding that PNC is
entitled to the anti-modification protections of 11 U.S.C. §
1322 (b)(2).
Because the district court sits as an appellate tribunal in
bankruptcy, our review of the district court’s decision is
plenary. Bowers v. Atlanta Motors Speedway (In re Se. Hotel
Properties Ltd. P’ship), 99 F.3d 151, 154 (4th Cir. 1996)
(citation omitted). “We apply the same standard of review as
the district court applied to the bankruptcy court’s decision.”
Id. “Findings of fact are reviewed for clear error, and
conclusions of law are reviewed de novo.” Id. (citation
omitted).
6
A.
The bankruptcy court granted PNC’s motion to dismiss
Birmingham’s complaint under Federal Rule of Civil Procedure
12(b)(6). J.A. 675. The district court applied this same
standard of review to the bankruptcy court’s decision. Id.A motion to dismiss under Federal Rule of Civil Procedure
12(b)(6) tests the legal sufficiency of the complaint. Papasan
v. Allain, 478 U.S. 265, 283 (1986). The motion should be
granted unless the complaint “states a plausible claim for
relief.” Walters v. McMahen, 684 F.3d 435, 439 (4th Cir. 2012)
(citing Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009)). In
considering a Rule 12(b)(6) motion, the Court “must accept as
true all of the factual allegations contained in the complaint,”
drawing “all reasonable inferences” in the non-moving party’s
favor. E.I. du Pont de Nemours and Co. v. Kolon Indus., Inc.,
637 F.3d 435, 440 (4th Cir. 2011) (citations omitted). The
court is not obligated to assume the veracity of the legal
conclusions drawn from the facts alleged. Adcock v.
Freightliner LLC, 550 F.3d 369, 374 (4th Cir. 2008) (citing
Dist. 28, United Mine Workers of Am., Inc. v. Wellmore Coal
Corp., 609 F.2d 1083, 1085-86 (4th Cir. 1979)).
The complaint must contain sufficient factual allegations,
taken as true, “to raise a right to relief above the speculative
level” and “nudge [the] claims across the line from conceivable
7
to plausible.” Vitol, S.A. v. Primerose Shipping Co., 708 F.3d
527, 543 (4th Cir. 2013) (quoting Bell Atl. Corp. v. Twombly,
550 U.S. 544, 555, 570 (2007)). The facial plausibility
standard requires pleading of “factual content that allows the
court to draw the reasonable inference that the defendant is
liable for the misconduct alleged.” Clatterbuck v. City of
Charlottesville, 708 F.3d 549, 554 (4th Cir. 2013) (quoting
Iqbal, 556 U.S. at 678). The plausibility requirement imposes
not a probability requirement but rather a mandate that a
plaintiff “demonstrate more than a ‘sheer possibility that a
defendant has acted unlawfully.’” Francis v. Giacomelli, 588
F.3d 186, 193 (4th Cir. 2009) (quoting Iqbal, 556 U.S. at 678).
Accordingly, a complaint is insufficient if it relies upon
“naked assertions” and “unadorned conclusory allegations” devoid
of “factual enhancement.” Id. (citations omitted). The
complaint must present “‘enough facts to raise a reasonable
expectation that discovery will reveal evidence’ of the alleged
activity.” US Airline Pilots Ass’n v. Awappa, LLC, 615 F.3d
312, 317 (4th Cir. 2010) (quoting Twombly, 550 U.S. at 556).
In addition to the complaint, the court will also examine
“documents incorporated into the complaint by reference,” as
well as those matters properly subject to judicial notice.
Clatterbuck, 708 F.3d at 557 (citations omitted); see also
Matrix Capital Mgmt. Fund, LP v. BearingPoint, Inc., 576 F.3d
8
172, 176 (4th Cir. 2009) (quoting Tellabs, Inc. v. Makor Issues
& Rights, Ltd., 551 U.S. 308, 322 (2007)).
B.
Certain provisions of the Bankruptcy Code are relevant to
this appeal. “Under Chapter 13 of the Bankruptcy Code,
individual debtors may obtain adjustment of their indebtedness
through a flexible repayment plan approved by a bankruptcy
court.” Nobelman v. Am. Sav. Bank, 508 U.S. 324, 327 (1993).
The relationship between 11 U.S.C. § 506(a) and § 1322(b)(2) is
pertinent to this circuit’s review of the district court’s
decision to affirm the bankruptcy court’s dismissal of
Birmingham’s complaint. Section 506(a) is used in conjunction
with § 1322 to allow modification, or bifurcation, of a secured
creditor’s claim into secured and unsecured portions when the
claim exceeds the value of the secured property. Nobelman, 508
U.S. at 328.
In Nobelman, the Supreme Court examined the nexus between
claim-bifurcation under § 506(a) and the anti-modification
provision of § 1322(b)(2) to ascertain whether a debtor could
bifurcate a single, under-secured residential mortgage claim
into secured and unsecured components pursuant to § 506(a). Id.
at 326. The debtor in Nobelman argued that § 1322(b)(2)’s anti-
modification provision applied only to the secured component of
her mortgage claim, as defined in § 506(a). Id.
9
Section 506(a) states that:
(a)(1) An allowed claim of creditor secured by a lien
on property in which the estate has an interest . . .
is a secured claim to the extent of the value of such
creditor’s interest in the estate’s interest in such
property . . . and is an unsecured claim to the extent
that the value of such creditor’s interest is less
than the amount of such allowed claim. Such value
shall be determined in light of the purpose of the
valuation and of the proposed disposition or use of
such property, and in conjunction with any hearing on
such disposition or use or on a plan affecting such
creditor’s interest.
11 U.S.C. § 506(a). Accordingly, under § 506(a), “an allowed
claim secured by a lien on the debtor’s property is a secured
claim to the extent of the value of the property; to the extent
the claim exceeds the value of the property, it is an unsecured
claim.” Nobelman, 508 U.S. at 328 (internal quotation marks
omitted).
Notwithstanding, § 1322(b)(2) provides:
(b) Subject to subsections (a) and (c) of this
section, the plan may—
. . .
Modify the rights of holders of secured claims,
other than a claim secured only by a security
interest in real property that is the debtor’s
principal residence . . . .
11 U.S.C. § 1322(b)(2). This “anti-modification” provision
precludes reduction or cramming down the value of a claim
secured by an interest in real property that is the debtor’s
principal residence. In other words, a claimant’s interest in
10
real property that is secured solely by the debtor’s principal
residence may not be bifurcated.
C.
Congress clarified the meaning of a key term in the anti-
modification clause, “debtor’s principal residence,” in the
Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCP
Act”) of 2005. The Bankruptcy Code now defines the term as “a
residential structure if used as the principal residence by the
debtor, including incidental property, without regard to whether
that structure is attached to real property.” 11 U.S.C. §
101(13A)(A)(emphasis added). The BAPCP Act also defined
“incidental property,” as it relates to a debtor’s principal
residence, as follows:
(A) property commonly conveyed with a principal
residence in the area where the real property is
located;
(B) all easements, rights, appurtenances, fixtures,
rents, royalties, mineral rights, oil or gas rights or
profits, water rights, escrow funds, or insurance
proceeds;
(C) all replacements or additions.
11 U.S.C. § 101(27B). The Code defines a security interest as a
“lien created by an agreement.” 11 U.S.C. § 101(51). Moreover,
a lien is defined as a “charge against or interest in property
to secure a payment of a debt or performance of an obligation.”
11 U.S.C. § 101(37).
11
With this framework in mind, and for the reasons that
follow, we hold that the district court’s decision to affirm the
bankruptcy court’s dismissal of Birmingham’s complaint was
correct. PNC’s loan was secured solely by Birmingham’s
principal residence and not any additional collateral. The
Bankruptcy Code’s anti-modification provision precluded the
bifurcation sought by Birmingham. Consequently, Birmingham’s
complaint was appropriately dismissed.
III.
The Birmingham Deed of Trust not only grants PNC a security
interest in the Property, but also provides additional
protections for PNC. However, saliently, the auxiliary
protections are not additional collateral and do not remove
PNC’s claim from the protection of § 1322(b)(2).
A.
Of particular importance to this Court’s analysis are
Sections 3, 5, and 11 of the Deed of Trust, all of which will be
analyzed in turn. Section 3 of the Deed of Trust pertains to
escrow funds and states, in pertinent part, the following:
Funds for Escrow Items. Borrower shall pay to Lender
on the day Periodic Payments are due under the Note,
until the Note is paid in full, a sum (the “Funds”) to
provide for payment of amounts due for: (a) taxes and
assessments and other items which can attain priority
over this Security Instrument as a lien or encumbrance
on the Property; (b) leasehold payments or ground
12
rents on the Property, if any; (c) premiums for any
and all insurance required by Lender under Section 5;
and (d) Mortgage Insurance Premiums, if any, or any
sums payable by Borrower to Lender in lieu of the
payment of the Mortgage Insurance premiums in
accordance with the provisions of Section 10. These
items are called “Escrow Items.”
. . .
If there is a surplus of Funds held in escrow, as
defined under [the Real Estate Settlement Procedures
Act (“RESPA”)], Lender shall account to Borrower for
the excess funds in accordance with RESPA. If there
is shortage of funds held in escrow, as defined under
RESPA, Lender shall notify Borrower as requested by
RESPA, and Borrower shall pay to Lender the amount
necessary to make up the shortage in accordance with
RESPA, but in no more than 12 monthly payments.
Deed of Trust § 3, J.A. 621-22.
Section 5 of the Deed of Trust addresses the topic of
property insurance, and provides as follows:
Borrower shall keep the improvements now existing or
hereafter erected on the Property insured against loss
by fire, hazards included within the term “Extended
coverage,” and any other hazards including, but not
limited to, earthquakes and floods, for which Lender
requires insurance . . . .
If Borrower fails to maintain any of the coverage
described above, Lender may obtain insurance coverage,
at Lender’s option and Borrower’s expense. Lender is
under no obligation to purchase any particular type or
amount of coverage. Therefore, such coverage shall
cover Lender, but might or might not protect Borrower,
Borrower’s equity in the Property, or the contents of
the Property, against any risk, hazard or liability
and might provide greater or lesser coverage than was
previously in effect.
. . . .
Borrower hereby assigns to Lender (a) Borrower’s
rights to any insurance proceeds in an amount not to
13
exceed the amounts unpaid under the Note or this
Security Instrument, and (b) any other of Borrower’s
rights (other than the right to any refund of unearned
premiums paid by Borrower) under all insurance
policies covering the Property, insofar as such rights
are applicable to the coverage of the Property.
Lender may use the insurance proceeds either to repair
or restore the Property or to pay amounts unpaid under
the Note or this Security Instrument, whether or not
then due.
Deed of Trust § 5, J.A. 623-24.
Lastly, Section 11 of the Deed of Trust discusses
miscellaneous proceeds and contains the following language:
Assignment of Miscellaneous Proceeds; Forfeiture. All
Miscellaneous Proceeds are hereby assigned to and
shall be paid to Lender.
. . . .
In the event of a partial taking, destruction, or loss
in value of the Property in which the fair market
value of the Property immediately before the partial
taking, destruction, or loss in value is less than the
amount of the sums secured immediately before the
partial taking, destruction, or loss in value, unless
the Borrower and Lender otherwise agree in writing,
the Miscellaneous Proceeds shall be applied to the
sums secured by this Securing Instrument whether or
not the sums are then due.
Deed of Trust § 11, J.A. 626.
Miscellaneous Proceeds include:
[A]ny compensation, settlement, award of damages, or
proceeds paid by any third party (other than insurance
proceeds paid under the coverages described in Section
5) for: (i) damage to, or destruction of, the
Property; (ii) condemnation or other taking of all or
any part of the Property; (iii) conveyance in lieu of
condemnation; or (iv) misrepresentations of, or
omission as to, the value and/or condition of the
Property.
14
Deed of Trust ¶ M.
The issue presented is whether these provisions of the Deed
of Trust constitute sufficient collateral so that PNC’s interest
is secured by more than Birmingham’s principal residence. We
hold that the aforementioned provisions do not entitle
Birmingham to the bifurcation sought.
B.
Birmingham argues that Sections 3, 5, and 11 of the Deed of
Trust provide additional security for PNC’s interest such that
it is no longer secured solely by an interest in real property.
Appellant Br. at 19-25. These items, however, are incidental
property frequently conveyed in a deed of trust and defined in
11 U.S.C. §§ 101(27B) and 101(13A)(A) as part of a debtor’s
principal residence.
The case Allied Credit Corp. v. Davis (In re Davis), 989
F.2d 208 (6th Cir. 1993) is illustrative. There, the Sixth
Circuit found that “[i]tems which are inextricably bound to the
real property itself as part of the possessory bundle of rights”
do not extend a lender’s security beyond the real property. Id.
at 213; see also Akwa, 530 B.R. at 313 (D. Md. 2015). On the
topic of insurance, the Davis court explained that “hazard
insurance is merely a contingent interest — an interest that is
irrelevant until the occurrence of some triggering event and not
an additional security interest for the purposes of §
15
1322(b)(2).” In re Davis, 989 F.2d at 211 (citation omitted)
(emphasis added). This reasoning similarly applies to
miscellaneous proceeds and escrow funds that are tied to the
real property at issue. See In re Ferandos, 402 F.3d 147, 156
(3d Cir. 2005) (“[F]unds for taxes and insurance, paid over and
placed in escrow, exist precisely for the purpose of paying said
taxes and insurance — a cost incurred by the debtor in
connection with the ownership of real property.”); see also
Kreitzer v. Household Realty Corp. (In re Kreitzer), 489 B.R.
698, 703-06 (Bankr. S.D. Ohio 2013) (holding that a security
interest which residential mortgage lender took in miscellaneous
proceeds was not an additional security interest that the lender
possessed other than in the residential mortgage property
itself).
The district court in Akwa, which involved the same
standard Fannie Mae/Freddie Mac deed of trust that is at issue
in this appeal, correctly noted:
[T]he lender may collect funds for escrow to ensure
that all property-related payments, like taxes and
ground rents, are paid. Likewise, the Deed of Trust
also permits the lender to hold insurance proceeds if
an insurer pays for repairs to the house to ensure
that the lender’s investment — the real property — is
repaired to lender’s satisfaction. The same is true
for miscellaneous proceeds paid by a third party,
which the lender can use for repairs or restoration.
Akwa, 530 B.R. at 313-14.
16
PNC accurately states that this perspective has been
recognized by a number of courts in analogous circumstances.
See Abdosh v. Ocwen Loan Servicing (In re Abdosh), 513 B.R. 882,
886 (Bankr. D. Md. 2014), aff’d sub nom. Abdosh v. Ocwen Loan
Servicing, LLC, No. CIV. PJM 14-2916, 2015 WL 4635103 (D. Md.
July 30, 2015) (noting that “[t]here is no need to re-visit in
detail this clear legal issue”); In re Kreitzer, 489 B.R. at
703-06 (discussing miscellaneous proceeds); In re Mullins, No.
11-11176C-13G, 2012 WL 2576625, at *2 (Bankr. M.D.N.C. July 3,
2012) (discussing escrow funds); In re Inglis, 481 B.R. 480,
482-83 (Bankr. S.D. Ind. 2012) (“[U]nder the express terms of
these provisions . . . a lender does not lose its § 1322(b)(2)
protection by taking a security interest in escrow funds as
‘escrow funds’ are part of the ‘incidental property’ which
comprise ‘the debtor’s principal residence.’”); In re Leiferman,
No. BR 10-40718, 2011 WL 166170, at *2 (Bankr. D.S.D. Jan 19,
2011) (analyzing miscellaneous proceeds).
In his opposition, Birmingham cites a series of cases where
courts have held that certain additional collateral existed
beyond real property. For instance, Birmingham cites the Third
Circuit’s decision Hammond v. Commonwealth Mortg. Corp. of Am.,
27 F.3d 52 (3d Cir. 1994) for the proposition that “supplemental
collateral in a deed of trust will cause a waiver of the anti-
modification rights of 11 U.S.C. § 1322(b).” Appellant Br. at
17
43-44. However, the lien in Hammond explicitly “covered more
than the real property.” See Abdosh, 513 B.R. at 886.
The security contrivance in Hammond created “an additional
security interest in: any and all appliances, machinery,
furniture and equipment (whether fixtures or not) of any nature
whatsoever.” Hammond, 27 F.3d at 53-54 (internal quotation
marks omitted). Here, the Deed of Trust does not expressly
attempt to take a security interest in additional collateral.
As the Akwa court concluded, the language found in these
provisions “explicitly ties the funds to ensuring that the
lender’s collateral — the real property — is preserved.” Akwa,
530 B.R. at 313. Accordingly, Birmingham’s reliance on Hammond
is misplaced.
Relatedly, Birmingham’s arguments premised on the holdings
of other cases cited in his brief are inapposite for the same
reason: the security instruments at issue explicitly granted the
debtee an interest secured by more than just real property. For
example, In re Ennis – in which we found the anti-modification
clause of § 1322(b)(2) inapplicable to a security agreement for
personal property, i.e. a mobile home on leased property –
provides no guidance for a home mortgage that includes the
typical incidental benefits intended to protect the interest in
real property. See Ennis v. Green Tree Servicing, LLC (In re
Ennis), 558 F.3d 343, 347 (4th Cir. 2009); see also Scarborough
18
v. Chase Manhattan Mortg. Corp. (In re Scarborough), 461 F.3d
406, 412 (3d Cir. 2006) (holding that when a mortgage lender
takes an interest in real property that includes income
producing property, the lender’s interest is also secured by
property that is not the debtor’s principal residence, and its
claim may be modified); Lomas Mortg., Inc. v. Louis, 82 F.3d 1,
7 (1st Cir. 1996) (finding that § 1322(b)(2) does not bar
modification of a secured claim on a multi-unit property in
which one unit is debtor’s principal residence and the security
interest extends to other income-producing units); Sapos v.
Provident Inst. of Sav. in Town of Boston, 967 F.2d 918, 921 (3d
Cir. 1992) (holding that the anti-modification provision is
inapplicable where the note was also secured by wall-to-wall
carpeting, rents, and profits), overruled on other grounds by
Nobelman v. Am. Sav. Bank, 508 U.S. 324 (1993); Wilson v.
Commonwealth Mortg. Corp., 895 F.2d 123, 128 (3d Cir. 1990)
(finding § 1322(b)(2) not applicable where a mortgage agreement
stated that the lender had “a security interest in appliances,
machinery, furniture, and equipment”), abrogated on other
grounds by Nobelman, 508 U.S. 324.
Sections 3, 5, and 11 of the Deed of Trust do not create
‘‘separate or additional security interest[s], but [are] merely
[] provision[s] to protect the lender’s security interest in the
real property.’’ Akwa, 530 B.R. at 314 (quoting In re Kreitzer,
19
489 B.R. 698, 705-06). Accordingly, the district court properly
found, as a matter of law, that escrow funds, insurance
proceeds, and miscellaneous proceeds are incidental property
that do not constitute separate security interests.
C.
Birmingham additionally relies on a line of cases from
North Carolina bankruptcy courts that ostensibly found “where an
assignment of alternative collateral exists in a deed of trust
other than real property, the lender will be subject to
modification of its secured debt.” Appellant Br. at 26 (citing
In re Bradsher, 427 B.R. 386 (Bankr. M.D.N.C. 2010); Bradshaw v.
Asset Ventures, LLC (In re Bradshaw), Nos. 13-06176-8-RDD, 14-
00023-8-RDD, 2014 WL 2532227 (Bankr. E.D.N.C. June 4, 2014); In
re Murray, No. 10-10125-8-JRL, 2011 WL 5909638 (Bankr. E.D.N.C.
May 31, 2011); In re Martin, 444 B.R. 538 (Bankr. M.D.N.C.
2011); In re Hughes, 333 B.R. 360 (Bankr. M.D.N.C. 2005)). As
the district court in this case correctly stated, however, the
loan documents in both Bradsher and Hughes “expressly provided
that escrow payments constituted additional security for the
loan.” J.A. 680 (citing Bradsher, 427 B.R. at 388-89 (“[T]he
loan documents purport to provide a security interest for the
indebtedness secured by the deed of trust in escrow funds in
addition to a security interest in the residential land and
housing structure.”); Hughes, 333 B.R. at 363 (noting that the
20
loan documents “require the borrower to pledge the escrow funds
as ‘additional security’”)). Hence, the language of the loan
documents in both Bradsher and Hughes is unequivocally
distinguishable from the language present in the Birmingham Deed
of Trust. The holdings of Bradsher and Hughes therefore do not
apply to this case.
Moreover, in Mullins, the same judge who presided over
Bradsher held that nothing in the deed of trust “suggests that a
security interest is also being granted in escrow funds. Nor is
there any language in the escrow provisions [] purporting to
create a security interest in escrow funds to be paid by the
[debtors].” In re Mullins, 2012 WL 2576625 at *2. Further, in
Bynum v. CitiMortgage, Inc. (In re Bynum), Nos. 12-10660, 12-
2031, 2012 WL 2974694 (Bankr. M.D.N.C. July 19, 2012), the
bankruptcy judge found that a standard Fannie Mae/Freddie Mac
deed of trust “do[es] not contain elements required to create a
security interest in Escrow Funds.” Id. at *3.
To the extent that Birmingham also relies upon In re
Daniels, No. 15-666-5-SWH, 2015 WL 9283153 (Bankr. E.D.N.C. Dec.
18, 2015), a case that addresses the district court decision
that is currently before us, the Court in Daniels stated that
“Birmingham involved a deed of trust that did not contain
explicit language creating a security interest in escrow funds.”
Id. at *3 (citation omitted). Highlighting this difference, the
21
Court in Daniels found that “Birmingham’s rejection of Bradsher
and Murray is not instructive.” Id.In short, the North Carolina bankruptcy courts agree that
the anti-modification clause applies to the Fannie Mae/Freddie
Mac Deed of Trust before us in this case. We thus have no
occasion to consider the effect – if any – of additional
language in a deed purporting to create a separate security
interest in escrow funds, insurance proceeds, or miscellaneous
proceeds, in light of our interpretation of § 1322(b)(2).
D.
Birmingham also argues that both the bankruptcy court and
the district court should have looked to Maryland law to
determine whether the Deed of Trust created additional security
interests in escrow funds, insurance proceeds, and miscellaneous
proceeds as “real property.” Appellant Br. at 21-24. The
Bankruptcy Code, however, explicitly defines “incidental
property” to a debtor’s principal residence, which includes both
escrow funds and insurance proceeds. 11 U.S.C. § 101(27B).
State laws are suspended if they conflict with the Bankruptcy
laws. Butner v. U.S., 440 U.S. 48, 54 n.9 (1979). Thus, it is
not necessary for us to examine Maryland law on this issue.
Even if Maryland law were to apply, it is far from clear
that the resulting holding would be favorable for Birmingham. A
security interest is created, under Maryland law, when there is
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language present in the security instrument that leads to the
logical conclusion that it was the intention of the parties to
create a security interest. Tilghman Hardware, Inc. v.
Larrimore, 628 A.2d 215, 220 (Md. 1993) (citation omitted). We
have already found that the Deed of Trust did not contain
language wherein a security interest was granted in escrow
funds, insurance proceeds, or miscellaneous proceeds.
Therefore, Birmingham’s argument with respect to the application
of Maryland law is unavailing.
Finally, the policy arguments that Birmingham puts forth
are similarly ineffective. Birmingham asks this circuit to
ignore various cases that characterize escrow funds, insurance
proceeds, and miscellaneous proceeds as “part and parcel” of
real property. Appellant Br. at 44 (citing In re Kreitzer, 489
B.R. at 704; In re Ferandos, 402 F.3d at 151; Davis, 989 F.2d at
211; In re Rosen, 208 B.R. 345, 354 (D.N.J. 1997)).
Additionally, Birmingham relies on In re Escue, 184 B.R. 287(Bankr. M.D. Tenn. 1995) to contend that the bankruptcy court
erred by not finding that the pertinent incidental items at
issue constitute supplemental collateral, in light of the
legislative history of the Bankruptcy Code. Appellant Br. at
48-49. The Escue decision came before §§ 101(13A)(A) and (27B)
were enacted, however. Furthermore, as with many of the other
cases that Birmingham has cited, the deed of trust at issue in
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Escue expressly created a security interest in certain fixtures
with granting language that is wholly absent from the Birmingham
Deed of Trust. Consequently, Birmingham’s reliance on Escue is
misplaced.
Characterizing escrow funds, insurance proceeds, and
miscellaneous proceeds as additional security for § 1322(b)(2)
“would completely eviscerate the anti-modification exception of
§ 1322(b)(2) because many deeds of trust which encumber improved
real property contain these provisions to protect the lender’s
investment in the real property.” Akwa, 530 B.R. at 313
(internal quotation marks omitted). Moreover, as the district
court noted, Congress did not intend for Birmingham’s position
and “this principle cannot be squared with an interpretation
that would render the anti-modification provision inapplicable
to virtually all residential mortgages.” J.A. 682.
IV.
The Deed of Trust on Birmingham’s residence is secured only
by real property that is also Birmingham’s principal residence.
Escrow funds, insurance proceeds, and miscellaneous proceeds do
not constitute additional collateral. Accordingly, Birmingham’s
complaint fails to state a claim for relief that is plausible.
For the foregoing reasons, the district court’s judgment is
affirmed.
AFFIRMED
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