Birmingham v. PNC Bank, N.A., Case No.: PWG-15-108

GREGORY JOHN BIRMINGHAM, Appellant, v. PNC BANK, N.A., INC., et al., Appellees.

In re: GREGORY JOHN BIRMINGHAM, Debtor.

Case No.: PWG-15-108

Aversary Proc. No. 14-00378

Case No. 11-16614-WIL

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MARYLAND Southern Division

July 7, 2015

United States District Court

Chapter 7

MEMORANDUM OPINION

Appellant-Debtor appeals the Bankruptcy Court's dismissal of an adversary proceeding that sought a declaratory ruling that a Chapter 13 plan could modify the undersecured mortgage on Debtor's primary residence. Appellant argues that, because the deed of trust also conveyed rights to certain insurance proceeds, escrow funds, and condemnation awards, the loan is not secured "only" by the Debtor's primary residence and therefore can be modified. Appellee asks me to affirm the ruling of the Bankruptcy Court and hold that those other sources of payment merely were incidental to the security interest in the property itself. I agree with Appellee and affirm.

I. FACTUAL AND PROCEDURAL BACKGROUND

Appellant-Debtor Gregory John Birmingham filed his voluntary Chapter 13 Petition on May 23, 2014. Ch. 13 Pet., ECF No. 2. Among the claims against Debtor is a mortgage (the "PNC Mortgage") in the amount of $309,449.51 held by Appellee PNC Bank, N.A. ("PNC") and secured by a deed of trust (the "Deed of Trust") on Debtor's primary residence, 11721 Chilcoate Lane, Beltsville, Maryland 20706 (the "Property"). See Schedule D, ECF No. 2-10. According to Debtor's Schedule D, the Property is valued at only $206,500.00 and there is an $86,000 arrearage on the mortgage. Id.

The Deed of Trust grants PNC a security interest in the Property and provides certain additional protections to PNC. Section 3 of the Deed of Trust states:

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 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 RESPA, Lender shall account to Borrower for the excess funds in accordance with RESPA. If there is a shortage of Funds held in escrow, as defined under RESPA, Lender shall notify Borrower as required 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, ECF No. 1-13.

Section 5 of the Deed of Trust provides:

Borrower shall keep the improvements now existing or hereafter erected on the Property insured against loss by fire, hazards included within the term "Extendedcoverage," 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 coverages 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 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.

Id. § 5.

Finally, Definition (M) of the Deed of Trust creates a category of "Miscellaneous Proceeds," which includes

any 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 omissions as to, the value and/or condition of the Property.

Id. ¶ (M).

Pursuant to Section 11,

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 Borrower and Lender otherwise agree in writing, the Miscellaneous Proceeds shall be applied to the sums secured by this Security Instrument whether or not the sums are then due.

Id. § 11.

On June 4, 2014, Debtor filed his Original Chapter 13 Plan, which included a cram-down on PNC's mortgage on the Property. ECF No. 2-13. PNC objected to the plan arguing, inter alia, that the cram-down violated § 1322(b)(2) of the Bankruptcy Code, PNC's Obj. to Confirmation of Debtor's Ch. 13 Plan, ECF No. 2-33, and the Bankruptcy Court denied confirmation with leave to amend, Order Denying Confirmation of Ch. 13 Plan with Leave to Am., ECF No. 2-35. Debtor filed an Amended Chapter 13 Plan on September 18, 2014, again seeking to cram-down on the PNC mortgage, Am. Ch. 13 Plan, ECF No. 3-4, and again drawing an objection from PNC, PNC's Obj. to Confirmation of Debtor's Am. Ch. 13 Plan, ECF No. 3-18. Again the amended plan was denied confirmation. Order Denying Confirmation of Ch. 13 Plan with Leave to Am., ECF No. 3-28.

On June 25, 2014, Debtor filed a Complaint for Declaratory Action to Determine Scope, Validity, and Extent of Lien of Defendant Pursuant to 28 U.S.C. §§ 2201-2202; 11 U.S.C. §§ 105(a), 506(a), 2201 (11721 Chilcoate Ln Beltsville, MD 20705) ("Compl."), ECF No. 1-2. According to the Complaint, although 11 U.S.C. § 1322(b)(2) prohibits a debtor from cramming down a debt secured by the debtor's principal residence, the provisions in the Deed of Trust for Miscellaneous Proceeds, Escrow Items, and certain insurance items (collectively, the "Additional Items") represent additional security interests created by the Deed of Trust that bring it outside the scope of § 1322(b)(2). See Compl. ¶¶ 6-11. Accordingly, Debtor sought a declaration that the PNC Mortgage could—and should—be treated as a partially unsecured claim subject to modification. Id. ¶ 15.

PNC filed a Motion to Dismiss Adversary Complaint ("Def.'s Mot. to Dismiss"), ECF No. 1-9, and a supporting Memorandum ("Def.'s Dismiss Mem."), ECF No. 1-11, arguing thatthe Additional Items constitute "incidental property" considered part of the debtor's principal residence, and therefore they do not expose the PNC Mortgage to a cram-down. Debtor filed a placeholder Response, ECF No. 1-24, followed by a substantive response memorandum, ECF No. 1-25, reiterating and expanding upon the legal positions set forth in the Complaint, and PNC filed a its Reply, ECF No. 1-29.

On December 1, 2014, Bankruptcy Judge Wendelyn I. Lipp granted the motion to dismiss, Order, ECF No. 1-33, noting that the issues raised by Debtor were identical to arguments that repeatedly have been rejected by the Bankruptcy Court for this District.

Debtor timely noticed this appeal on December 16, 2014, Notice of Appeal, ECF No. 1, and it was docketed in this Court on January 13, 2015. Pursuant to Fed. R. Bankr. P. 8019(b)(3), I have examined the briefs and find that the facts and legal arguments are adequately presented in the briefs and record, and the decisional process would not be significantly aided by oral argument.

II. STANDARD OF REVIEW

The district court reviews a bankruptcy court's findings of fact for clear error and conclusions of law de novo. Fairchild Dornier GMBH v. Official Cmte. of Unsecured Creditors (In re Dornier Aviation (N. Am.), Inc.), 453 F.3d 225, 231 (4th Cir. 2006). "With respect to the bankruptcy court's application of the law to the facts, the district court reviews 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).

III. DISCUSSION

The Bankruptcy Court dismissed Birmingham's complaint pursuant to Fed. R. Civ. P. 12(b)(6), as incorporated through Fed. R. Bankr. P. 7012(b). See Order, ECF No. 1-33. Federal Rule of Civil Procedure 12(b)(6) provides for "the dismissal of a complaint if it fails to state a claim upon which relief can be granted." Velencia v. Drezhlo, No. RDB-12-237, 2012 WL 6562764, at *4 (D. Md. Dec. 13, 2012). This rule's purpose "'is to test the sufficiency of a complaint and not to resolve contests surrounding the facts, the merits of a claim, or the applicability of defenses.'" Id. (quoting Presley v. City of Charlottesville, 464 F.3d 480, 483 (4th Cir. 2006)). To that end, the Court bears in mind the requirements of Fed. R. Civ. P. 8, Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), and Ashcroft v. Iqbal, 556 U.S. 662 (2009), when considering a motion to dismiss pursuant to Rule 12(b)(6). Specifically, a complaint must contain "a short and plain statement of the claim showing that the pleader is entitled to relief," Fed. R. Civ. P. 8(a)(2), and...