Akwa v. Residential Credit Solutions, Inc.

Filing 20

MEMORANDUM OPINION. Signed by Judge George Jarrod Hazel on 4/30/2015. (jf2s, Deputy Clerk)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MARYLAND

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F,llED
.LODGED

,ENTERED
.RECEIVED

Southern Division

APR 3 0 2015
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EKAETTE

AT GREENBEbT
GbERK.U,S. DISTRIDT COURT

TOM AKWA
B1

Appellant,

aISr~~YLAND

BEP'lTV

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v.

Case No.: GJH-14-2703
Bank. Case Nos: PM 13-30265 &
ADV PM 14-267

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RESIDENTIAL
INC.

CREDIT SOLUTIONS,

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Appellees.

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MEMORANDUM

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OPINION

Appellant Ekitette Tom Akwa filed this appeal from the July 18, 2014 Order of the
United States Bankruptcy Court for the District of Maryland (the "Bankruptcy Court"), See ECF
No, I, The July 18,2014 Order dismissed Akwa's adversary proceeding, which requested
bifurcation of Appellee Residential Credit Solutions, Inc.'s secured claim into secured and
unsecured components, See ECF No, 1-15, This Court has appellate jurisdiction pursuant to 28
U,S,C.

S I 58(a),

Oral argument is unnecessary. See Fed. R. Bankr. P. 8012 & Loc, Rule 105.6.

For the reasons stated below, the Bankruptcy Court's Order will be AFFIRMED,
'I.

BACKGROUND
In December 2013, Appellant Akwa filed a voluntary petition for Chapter 13 bankruptcy.

See ECF No, 8 ~t 6. One of Akwa's named assets was her residence located at 3100 Memory
Lane in Silver, Spring, Maryland. See id. at 7. Appellee Residential Credit Solutions, Inc.
("Residential") is the current holder of the Deed of Trust for this property, See id. Residential
filed a Proof of Claim for $476,535,97 on January 24, 2014 in connection with Akwa's Chapter

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13 bankruptcy. See id Akwa then filed a complaint, triggering an adversary proceeding, against
Residential. See id Akwa's complaint requested that Residential's claim be bifurcated, or split,
into a secured claim representing the value of the property ($342,986.00) and an unsecured claim
representing the difference between the entire mortgage and the value of the property
($133,849.97). See id On June 9, 2014, Residential filed a motion to dismiss the complaint,
asserting that 11 U .S.C. S 1322(b )(2) did not permit splitting the claim into secured and
unsecured portions. See id at 8.
Akwa argued that certain provisions of the Deed of Trust I required collateral other than
the real property, which would have removed the claim from 11 U.S.C. SI322(b)(2)'s protection.
See Id at 2-3. Specifically, Akwa cited three provisions related to escrow funds (section three),
property insurance (section five), and miscellaneous proceeds (section eleven). The Bankruptcy
Court found that the provisions regarding escrow funds, insurance proceeds, and miscellaneous
proceeds were all inextricably bound to the real property itself. See ECF No. 1-15 at 3. The court
addressed each section cited by Akwa, stating:
... Section 3 deals with escrow payments for taxes, ground rents,
community association dues and insurance. Should the borrower
fail to make the payments, the lender may make these on the
borrower's behalf. Paragraph 5 contains the provisions requiring
the maintenance of insurance; failing such, the lender could place
insurance to protect its interest in the property. The provision also
covers use of insurance proceeds in the event of loss. Finally,
paragraph II of the Deed of Trust governs the use of proceeds paid
by a third party, such as insurance proceeds or condemnation
proceeds. Once again, no additional collateral is created, as such

I The Court considers the Deed of Trust when examining the complaint on a Rule 12(b)(6)
motion to dismiss. See Tellabs, Inc. v. Makar Issues & Rights. Ltd, 551 U.S. 308, 323 (2007) (" .
. . courts must consider the complaint in its entirety, as well as other sources courts ordinarily
examine when ruling on Rule 12(b)(6) motions to dismiss, in particular, documents incorporated
into the complaint by reference, and matters of which a court may take judicial notice.") (citation
omitted).

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payments are in substitution
appropriated collateral.

of the

original. damaged

or

Id Additionally, the court noted that the U.S. Bankruptcy Code defines escrow funds and
insurance proceeds as incidental property to a debtor's principal residence. Id (citing II U.S.C

99

10I(l3A)(A)

& (27B)(B». Thus, the court dismissed Akwa's complaint because Akwa's

principal residence is real property and is the only security for Residential's claim. See id at 2-4.
Akwa timely filed an appeal to this Court. See ECF No.1.
II.

STANDARD OF REVIEW
The district court reviews a bankruptcy court's findings of fact for clear error and

conclusions oflaw de novo. In re Official Comm. of Unsecured for DOI'nier Aviation (N Am).
Inc., 453 F.3d 225, 231 (4th Cir. 2006). A bankruptcy court's application oflaw to fact is
reviewed for abuse of discretion.

Coggins & Harman. P.A. v. Rosen (In re Rood), No. DKC-12-

1623,2013 WL 55650, at *2 (D. Md. Jan. 2, 2013).
The Bankruptcy Court granted Residential's motion to dismiss Akwa's complaint under
Fed. R. Civ. P. 12(b)(6). See ECF Nos. 1-6 & 1-16. Federal Rule of Civil Procedure 12(b)(6)
permits a defendant to present a motion to dismiss for failure to state a claim upon which relief
can be granted. See Fed. R. Civ. P. 12(b)(6). When deciding a motion to dismiss under Rule
12(b)(6), a court "must accept as true all of the factual allegations contained in the complaint,"
and must "draw all reasonable inferences [from those facts] in favor of the plaintiff." EJ du
Pont de Nemours & Co. v. Kalan Indus .. Inc .. 637 F.3d 435, 440 (4th Cir. 2011) (citations and
internal quotation marks omitted). To survive a motion to dismiss invoking 12(b)(6), "a
complaint must contain sufficient factual matter, accepted as true, 'to state a claim to relief that is
plausible on its face'" Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citing Bell Atlantic Corp. v.
Twombly, 550 U.S. 544, 570 (2007». The complaint "must be enough to raise a right to relief
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above the speculative level on the assumption that all of the complaint's allegations are true."
Twombly, 550 U.S. at 545.
III.

DISCUSSION
Chapter 13 of the United States Bankruptcy Code permits a debtor to obtain a flexible

repayment plan approved by a bankruptcy court. As part of the plan, II U.S.C. ~ 1322(b)(2)
permits modification of secured claims. II U.S.c. ~ 506(a) explains when a secured claim can
be bifurcated into secured and unsecured portions. Section 506(a) provides that "an allowed
claim ... secured by a lien ... is a secured claim to the extent of the value of such creditor's
interest in the estate's interest in such property." Under this definition, to the extent a secured
creditor's claim is worth more than the value of the property, the surplus is deemed to be
unsecured for purposes of bankruptcy. See Nobelman v. Am. Savings Bank, 508 U.S. 324, 328
(1993). Section 506(a) is used in tandem with ~ 1322 to permit modification of a secured
creditor's claim into secured and unsecured portions when the claim exceeds the value of the
secured property. Id. Importantly, however, "a claim secured only by a security interest in real
property that is the debtor's principal residence" cannot be bifurcated into secured and unsecured
portions. See I I U.S.C. ~ 1322(b)(2). In Nobelman, 508 U.S. at 327-32, the Supreme Court
confirmed that ~ 1322(b )(2) protects the entire claim from modification when the secured
interest is in real property that is the debtor's principal residence. See also In re Ennis, 558 F.3d
343,345-46

(4th Cir. 2009).

Here, the parties agree that 3 I 00 Memory Lane is real property and Akwa's principal
residence. Bank. ECF No. I & ECF NO.8 at 7. Akwa alleges, however, that the mortgage on her
residence can still be modified through her Chapter 13 plan. Akwa maintains, as she did before
the Bankruptcy Court, that the Deed of Trust required additional collateral-insurance

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proceeds,

escrow funds, and miscellaneous proceeds. See ECF No. 1-69 at ~~ 12-16. Thus, Akwa contends
that Residential's claim is not secured only by real property that is the debtor's principal
residence.Id.

at ~ 17. Conversely, Residential argues that the Deed of Trust creates a security

interest only in the debtor's home and no other collateral. See ECF No. II at 5-6.
The Bankruptcy Code defines a security interest as a "lien created by an agreement." 11
V.S.c.

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101(51). Additionally, a lien is defined as a "charge against or interest in property to

secure payment of a debt or performance of an obligation." I I V.S.C.

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101(37). The Code also

specifically recognizes items bound to a debtor's principal residence as "incidental property." A
debtor's principal residence is "a residential structure, including incidental property, without
regard to whether that structure is attached to real property." II V.S.c.

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101(l3A)(A).

Incidental property, with respect to a debtor's principal residence, is:
(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; and
(C) all replacements or additions.
II V.S.c.

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101(27B)(B).

Consistent with II V.S.C.

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101, the Sixth Circuit has 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 interest beyond the real property. In re Davis, 989 F.2d 208, 213 (6th
Cir. 1993). In specifically discussing the requirement of insurance, the Sixth Circuit reasoned
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 for the purposes of
J322(b)(2)." Id. at 211 (citing Maller o{Washington,

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967 F.2d 171, 174-75 (5th Cir. 1992».

Similarly, items such as "rents, royalties, profits, and fixtures" are incidental benefits of the real
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property and not additional security. See id. at 212-13. This rationale also applies to escrow
funds and miscellaneous

proceeds that are explicitly tied to the real property. Deeming these

items additional security for the purposes of
anti-modification

exception of

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1322(b )(2) would "completely eviscerate" the

I 322(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. See id. at 211 (quoting in re Braylock, 120 B.R. 61, 63 (Bankr. N.D. Miss. 1990)); see
also In re Jackson, 136 B.R. 797, 802 (Bankr. N.D. Ill. 1992)

C...

the boilerplate language

granting the mortgagee the right to receive and use property insurance proceeds in the event of
some destruction of the property does not create an additional type of collateral securing the
mortgage obligation").
additional

Indeed, "[i]t would contravene the purpose of [9] 1322(b)(2) to find

security in the mere attempt to ensure protection

of the primary security, the

[r]esidence [p]roperty." In re Rosen, 208 B.R. 345, 354 (Bankr. D.N.J. 1997) (emphasis in
original)

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Here, the Deed of Trust secures "the repayment of the Loan, and all renewals, extensions
and modifications of the Note; [] the performance of Borrower's covenants and agreements
under th[e] Security Instrument and the Note." ECF No. 18-1 at 3. The Deed of Trust specifies
that the borrower "grants and conveys ... the following described property" and then notes the
address of Akwa's residence. Id. This language creates a security interest in the residence.
Stated another way, it creates a "charge against or interest in property to secure payment of a
debt or performance of an obligation." See II U.S.C.

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101(37). There is no similar language in

In Nobleman, 508 U.S. 324, the parties did not appear to raise the issue of escrow funds or
insurance proceeds to the Supreme Court, however, it is worth noting that the Court found the
lender's claim to be secured only by a lien on the debtor's principal residence even though "[t]he
deed of trust also provided for a security interest in an undivided .67% interest in the common
areas of the condominium complex, escrow funds, proceeds of hazard insurance, and rents."
Matter a/Nobleman, 968 F.2d 483,484 n. 3 (5th Cir. 1992) alJ"d, Nobleman, 508 U.S. 324.
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the document's discussion of escrow funds, insurance proceeds, or miscellaneous proceeds.
Indeed, the language contained in these provisions explicitly ties the funds to ensuring that the
lender's collateral-the

real property-is

preserved. See ECF No. 18-1 at 4-9. For example, the

lender may collect funds for escrow to ensure that all property-related payments, like taxes and
ground rents, are paid. See id. at 4. 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 the lender's satisfaction. The same is true for

miscellaneous proceeds paid by a third party, which the lender can use for repairs or restoration.
See id. at 9.
This language is unambiguous and "construction of an unambiguous written agreement is
left to the court as a matter oflaw." Fed. Leasing, Inc. v. Amperi(Corp.,

840 F.Supp. 1068, 1073

(D. Md. 1993) (citation omitted). Here, the provisions are not "separate or additional security
interest[s]' but merely [] provision[s] to protect the lender's security interest in the real property."
In re Keitzer, 489 B.R. 698, 705-06 (Bankr. S.D. Ohio 2013). As the Bankruptcy Court stated,
"no additional collateral is created, as such payments are in substitution of the original damaged
or appropriated collateral." ECF No. I-IS at 3. Thus, the Bankruptcy Court properly found, as a
matter oflaw, that the escrow funds, insurance proceeds, and miscellaneous proceeds3 are

The Court notes that miscellaneous proceeds are not explicitly included in the Bankruptcy
Code's definition of incidental property; however, they are similar to insurance proceeds and are
an incidental benefit that is part of the possessory bundle of rights to the real property itself. See
In re Keitzer, 489 B.R. 698, 705 (Bankr. S.D. Ohio 2013); In re Givens, 20 I 0 WL 5092980 at *
4 (Bankr. D. Del. 2010) C... the types of interests assigned as Miscellaneous Proceeds are not
within the gambit of additional security interests that generally remove the anti-modification
protections ... ").
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incidental property that do not represent their own separate security interests4 Cf In re Inglis,
481 B.R. 480, 484 (Bankr. S.D. Ind. 2012) ("The escrow here was established solely for the
purpose of sequestering property taxes and insurance premiums ....

The escrow account was no

more than an enhancement that was a component part of the real property and was of little or no
independent value."); In re Mullins, 2012 WL 2576625 at

* 2 (Bankr.

M.D.N.C. July 3, 2012)

("Nor is there any language in the escrow provisions found on pages five and six of the deed of
trust purporting to create a security interest in escrow funds to be paid by the plaintiffs."); In re
Leiferman, 2011 WL 166170 at *2 (D.S.D. Jan. 19,2011) (" ... those covenants and agreements
are not additional security ... any sums [the Lender] might advance or disburse would be added
to the amount secured by the mortgage ... Debtors did not grant Wells Fargo a security interest
in the miscellaneous proceeds .... ") (emphasis in original); In re Rosen, 208 B.R. at 353-54 ("A
review of the entire Funds Provision and the nature of the Funds contributions dcmonstrates that
the Funds do not constitute additional security because they do not represent a property interest
of the Debtor separate from the Residence Property.").
Akwa urges that the Bankruptcy Court should have looked to Maryland law to determine
if the Deed of Trust created additional security interests in the escrow funds, insurance proceeds,
and miscellaneous proceeds. However, state laws are suspended to the extent they contlict with
the Bankruptcy Code. See Butner v. United States, 440 U.S. 48, 54 n. 9 (1979); Tidewater
Finance v. Kenney, 531 F.3d 312,318 (4th Cir. 2008). Here, the Bankruptcy Code defines

Akwa focuses a large portion of her argument on whether insurance proceeds, escrow funds,
and miscellaneous proceeds constitute real property. See ECF NO.8 at 12-18. Specifically,
Akwa argues that "incidental property" to the debtor's principal residence is not real property. Id.
Because the Deed of Trust is secured by real property, however, it is protected from modification
by the exception in 11 U.S.C. !l1322(b)(2) unless it is also secured by other collateral, whether
or not the additional property is real or personal. Thus, the relevant inquiry is whether these
items are additional collateral. They are not.
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"incidental property" to a debtor's principal residence. See II U.S.C.

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101(27)(B). As

explained above, the Bankruptcy Court properly found that the provisions in the Deed of Trust
were incidental property, and thus, were not additional security interests under the Bankruptcy

Code.s
Akwa's complaint may have been on more solid ground ifthe Deed of Trust explicitly
attempted to take a security interest in additional collateral. Some courts have found an
additional security interest in escrow accounts when the loans explicitly state that the funds are
additional security for the loan. See In re Murray, 2011 WL 6909638 at

* 2 (E.D.N.C.

May 31,

2011) (finding mortgagee's interest was not protected from modification under II U.S.C.

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1322(b )(2) because the loan provided that escrow funds were "pledged as additional security for
all sums secured by this Security Instrument.") (internal quotation marks omitted); In re Hughes,
333 B.R. 360, 363 (Bankr. M.D.N.C. 2005) ("The GMAC loan documents do not simply provide
for escrow payments for taxes and insurance and the establishment of an escrow account for such
payments. Instead, the loan documents in the present case require the borrower to pledge the
escrow funds as 'additional security' for the principal and interest due under the promissory note
and deed oftrust."); In re Reed, 247 B.R. 618 (Bankr. E.D. Pa. 2000) (finding mortgagee's
interest was not protected from modification under 11 U.S.C.

S 1322(b)(2)

because the loan took

Even if Maryland law did apply, the result may not be different. Under Maryland law, a
security interest is defined as "an interest in personal property or fixtures that secures payment or
performance of an obligation." Md. Code, Comm. Law Art. S 1-201(b)(35). To create a security
interest under Maryland law, there must be language that leads to the conclusion that it was the
intention of the parties to create a security interest. See Tilghman Hardware. Inc. v. Larrimore,
628 A.2d 215, 220-21 (Md. 1993). While Maryland courts have not addressed the issue in this
case, Maryland's definition of a security interest is similar to the Bankruptcy Code's definition.
Thus, even under Maryland law, strong reasons exist, as explained above, to find that the escrow
funds, insurance proceeds, and miscellaneous proceeds ensure the preservation of the property
and do not constitute independent interests securing payment of an obligation. Further, the Deed
of Trust does not explicitly attempt to assert additional security interests in escrow funds,
insurance proceeds, or miscellaneous proceeds.
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an express security interest in escrow funds); In re Jackson, 136 B.R. at 802 (" ... [l]anguage
which goes beyond the traditional right to use proceeds to payoff the obligation ...

may

constitute the pledge of additional security.") (citations omitted); But see In re Lunger, 370 B.R.
649,649-51
II U.S.C.

(Bankr. M.D. Pa. 2007) (finding interest was still protected from modification under

S 1322(b)(2)

even where loan claimed to take security interest in escrow funds

because Bankruptcy Code defined escrow funds as incidental property and escrow funds do not
represent additional collateral). Here, the Deed of Trust does not contain language attempting to
take additional security interests in the escrow funds, insurance proceeds, or miscellaneous
proceeds. Thus, these cases do not support Akwa's claim.

IV.

CONCLUSION
The Deed of Trust on Akwa's residence is secured only by real property that is also

Akwa's principal residence. Thus, Akwa's complaint fails to state a claim for relief that
plausible on its face. The Bankruptcy Court's dismissal of the complaint is AFFIRMED.
A separate Order shall follow.

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Dated: April 30, 2015

George 1. Hazel
United States District Judge

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