Akwa v. Residential Credit Solutions, Inc.

530 B.R. 309

Ekaette Tom AKWA, Appellant

v.RESIDENTIAL CREDIT SOLUTIONS, INC., Appellees.

No. GJH–14–2703.

Bankruptcy Nos. PM 13–30265

ADV PM 14–267.

United States District Court, D. Maryland, Southern Division.

Signed April 30, 2015.

John Douglas Burns, The Burns Law Firm LLC, Greenbelt, MD, for Appellant.

Christina M. Williamson, Paul Jay Adams, Jr., BWW Law Group, LLC, Rockville, MD, for Appellee.

MEMORANDUM OPINION

GEORGE J. HAZEL, District Judge.

Appellant Ekaette 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. 1. 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. § 158(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 at 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 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. § 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 Trust¹ required collateral other than the real property, which would have removed the claim from 11 U.S.C. § 1322(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 11 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 payments are in substitution of the original damaged or appropriated collateral.

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 11 U.S.C. §§ 101(13A)(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 of law de novo . In re Official Comm. of Unsecured for Dornier Aviation (N. Am.), Inc., 453 F.3d 225, 231 (4th Cir.2006). A bankruptcy court's application of law 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.”

E.I. du Pont de Nemours & Co. v. Kolon 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, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (citing Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) ). The complaint “must be enough to raise a right to relief above the speculative level on the assumption that all of the complaint's allegations are true.” Twombly, 550 U.S. at 545, 127 S.Ct. 1955.

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, 11 U.S.C. § 1322(b)(2) permits modification of secured claims. 11 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, 113 S.Ct. 2106, 124 L.Ed.2d 228 (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 11 U.S.C. § 1322(b)(2). In Nobelman, 508 U.S. at 327–32, 113 S.Ct. 2106, 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 3100 Memory Lane is real property and Akwa's principal residence. Bank. ECF No. 1 & 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 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. 11 at 5–6.

The Bankruptcy Code defines a security interest as a “lien created by an agreement.” 11 U.S.C. § 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.” 11 U.S.C. § 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.” 11 U.S.C. § 101(13A)(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.

11 U.S.C. § 101(27B)(B).

Consistent with 11 U.S.C. § 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 § 1322(b)(2).” Id. at 211 (citing Matter of Washington, 967 F.2d 173, 174–75 (5th Cir.1992) ). Similarly, items such as “rents, royalties, profits, and fixtures” are incidental benefits of the real 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 § 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....