In re Capretta

542 B.R. 774

In re: Darlene M. & Victor J. Capretta, Debtors.

Case No. 15–11057

United States Bankruptcy Court, N.D. Ohio.

Signed December 18, 2015

Lauren A. Helbling, Cleveland, OH, for Debtors.

MEMORANDUM OF OPINION

ARTHUR I. HARRIS, UNITED STATES BANKRUPTCY JUDGE

This case is currently before the Court on confirmation of the debtors' amended Chapter 13 plan and the objection of creditor Wells Fargo. If confirmed, the amended plan would bifurcate Wells Fargo's mortgage on the debtors' principal residence under Bankruptcy Code § 1322(b)(2) based on language in the mortgage that pledges escrow funds as additional security. For the reasons that follow, the Court finds that the mortgage falls within the anti-modification protection of § 1322(b)(2). Accordingly, the Court denies confirmation of the debtors' amended Chapter 13 plan, without prejudice to filing another plan.

JURISDICTION

The Court has jurisdiction over this proceeding under 28 U.S.C. § 1334 and General Order 2012–7 entered by the United States District Court for the Northern District of Ohio. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2).

PROCEDURAL HISTORY

The debtors filed for Chapter 13 relief on March 3, 2015, and filed a Chapter 13 plan on March 13, 2015 (Docket No. 17). Wells Fargo objected to confirmation of the plan on May 14, 2015 (Docket No. 20). The debtors responded to Wells Fargo's objection on June 8, 2015 (Docket No. 24). The debtors filed a Motion to Modify Plan and an Amended Chapter 13 Plan on June 23, 2015 (Docket Nos. 28, 29). Wells Fargo objected to the confirmation of the amended plan on July 14, 2015 (Docket No. 33). On August 13, 2015, the Court held a hearing on the debtors' amended plan and Wells Fargo's objection and issued a briefing scheduling order (Docket No. 35). The parties filed fact stipulations on September 2, 2015 (Docket No. 37). Before the Court are the debtors' Brief in Opposition to the Objection of Wells Fargo Bank and in Support of Confirmation of Plan (Docket No. 38), Wells Fargo's Reply to Debtors' Brief (Docket No. 39), and the debtors' Reply (Docket No. 40).

FACTUAL HISTORY

The debtors and Wells Fargo submitted the following stipulations:

1. On March 3, 2015, Debtors filed a voluntary petition for relief under Chapter 13 of Title 11 of the United States Bankruptcy Code.

2. Debtors stated that they own real property located at 4203 Kenmore Avenue, Parma, Ohio 44134 (the "Property" [or "Kenmore Property"] ) on their petition.

3. This Property is identified as a single tax parcel ID: 444–18–009.

4. On December 20, 1993, Debtors obtained a loan from Assured Mortgage Corporation in the amount of $76,800.00.

5. The loan was evidenced by a Note dated December 20, 1993 (the "Note").

6. Debtors also signed a Mortgage in favor of Assured Mortgage Corporation ("Assured") dated December 20, 1993 (the "Mortgage").

7. The Mortgage was filed with the Cuyahoga County Recorder on December 22, 1993 in Volume 93–14186, Pages 39–44.

8. The Mortgage was transferred as follows: From Assured Mortgage Corporation to Chemical Bank, N.A. on December 20, 1993. From Chemical Bank, N.A. to G.E. Capital Mortgage Services, Inc. on March 1, 1995. From G.E. Capital Mortgage Services, Inc. to Wells Fargo Bank, N.A. on November 1, 2005.

9. The loan was modified on August 16, 2010 with a new principal balance of $85,642.02 to be paid beginning October 1, 2010 at 7.25% interest with monthly principal and interest payments of $836.51 until the maturity date of January 1, 2024.

10. The escrow account associated with the Note and Mortgage has been, periodically, funded by the Debtors since the inception of this debt.

Docket No. 37.

In addition to the parties' stipulations, the Court makes the following additional findings based on the record in this case.

The mortgage contains a provision ("Funds for Taxes and Insurance") establishing an escrow account that the debtors are obligated to fund monthly (Docket No. 37, Ex. B). Pursuant to the mortgage, the funds in the escrow account are used to pay: (1) annual taxes; (2) annual leasehold payments or ground rents on the property, if any; (3) annual hazard or property insurance premiums; (4) any annual flood insurance premiums; (5) any annual mortgage insurance premiums; and (6) any sums due to Lender in lieu of mortgage insurance premiums (Docket No. 37–1, Ex. B, Page 4). According to the proof of claim filed by Wells Fargo, the debtors' escrow account is only used to pay property taxes and hazard insurance. Claim No. 8–1 at 38–40. The mortgage specifies that the escrow funds may not exceed the maximum amount a lender may require under the federal Real Estate Settlement Procedures Act of 1974 (RESPA). The escrow account provision of the mortgage contains the following language:

"The Funds are pledged as additional security for all sums secured by this Security Instrument."

(Docket No. 37–1, Ex. B, Page 4).

On their Voluntary Petition, the debtors list the Kenmore property as their principal residence (Docket No. 1). The debtors' initial Chapter 13 plan, filed March 13, 2015, included special provisions in paragraph 11, as follows:

Pursuant to 11 U.S.C. § 1322(b)(2), the mortgage is being modified. Wells Fargo Bank, N.A.'s mortgage is secured by the escrow funds in addition to the real property. See, Daniel E. Stevens, Jr. et. al., v. Suntrust Mortgage, Inc. U.S. Bankruptcy Court, Northern District, Case No. 14–41709, Adv. No. 14–4059, Judge Kay Woods (Feb. 5, 2015).

The debtors' most recent Chapter 13 plan (Docket No. 29) increased the amount of Wells Fargo's secured claim to $94,900.00, the value of the Kenmore property according to the Cuyahoga County fiscal office. Additionally, the amended plan proposes that the debtors will reimburse Wells Fargo $8,091.00 for escrow advances. The special provisions in the amended plan are identical to those in the debtors' initial plan. The amended plan does not appear to provide for the ongoing payment of postpetition property taxes and property insurance, which the debtors estimate on their Schedule J at $222 per month and $91 per month, respectively.

According to the proof of claim filed by Wells Fargo, as of the petition date, the debtors owe Wells Fargo $125,237.97, including a prepetition arrearage of $58,852.41. (Claim No. 8–1). Thus, the debtors' amended plan would bifurcate Wells Fargo's claim into a secured claim of $94,900, representing the current value of the Kenmore property, and a general unsecured claim of approximately $30,000. The new secured portion of $94,900 would be paid in full within five years, with interest at the new, lower rate of 5.25 percent, in monthly payments of $1,864.00. The unsecured portion of approximately $30,000 would be paid a pro rata share of $10,000 or 35 percent, whichever is greater (Docket No. 29).

WELLS FARGO'S OBJECTION TO CONFIRMATION & REPLY BRIEF

Wells Fargo objects to its treatment in Paragraph 11 of the amended plan, wherein the debtors propose to bifurcate the mortgage and reduce Wells Fargo's secured claim down to the current value of the real property securing the claim. Wells Fargo asserts that its claim falls within the anti-modification protection of § 1322(b)(2), notwithstanding language in the mortgage pledging the escrow funds as additional security. First, Wells Fargo states that there was an escrow shortage when the debtors filed their petition, and therefore, the property is not secured by additional collateral. Additionally, Wells Fargo asserts that even if the escrow account contained funds at the time of filing, the Sixth Circuit's decision in Allied Credit Corp. v. Davis (In re Davis ), 989 F.2d 208 (6th Cir.1993), dictates that escrow accounts are inextricably entwined with the real property and serve the purpose of protecting the mortgage holder's security interest. For these reasons, Wells Fargo believes the Davis case requires the conclusion that the mortgage cannot be modified under 11 U.S.C. § 1322(b)(2).

THE DEBTORS' BRIEF IN OPPOSITION TO WELLS FARGO'S OBJECTION TO CONFIRMATION & REPLY IN OPPOSITION TO THE OBJECTION OF WELLS FARGO

In support of their attempt to modify Wells Fargo's secured claim, the debtors rely primarily on a recent decision by the Honorable Kay Woods, which holds that escrow funds are not real property under Ohio law, and therefore, if a mortgagee takes an interest in escrow funds as additional security, the mortgage falls outside the anti-modification protection of 11 U.S.C. § 1322(b)(2). See Daniel E. Stevens, Jr. & Mara J. Stevens v. Suntrust Mortgage, Inc. (In re Stevens ), Case No. 14–41709, Adv. No. 14–4059 (Bankr.N.D.Ohio Feb. 5, 2015).

THE ANTI–MODIFICATION PROVISION OF § 1322(b)(2)

Section 1322 of the Bankruptcy Code provides in pertinent part:

(b) Subject to subsections (a) and (c) of this section, the plan may—

* * *

(2) 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....

As Judge Lundin notes in his comprehensive and well-respected treatise on Chapter 13, in 2005, Congress "reached for more protection for claims secured by real property that is a Chapter 13 debtor's principal residence." Keith M. Fundin & William H. Brown, Chapter 13 Bankruptcy, 4th Edition, § 454.1 at ¶ 3, Sec. Rev. July 13, 2007, www.Ch13online.com (hereinafter "Fundin"). " ‘Reached for’ is descriptive because it is anything but clear whether any new protection was realized." Id.

In Section 306 of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), entitled "Giving Secured Creditors Fair Treatment in Chapter 13," Congress added two new definitions to § 101 of the Bankruptcy Code :

(13A) The term "debtor's principal residence"—

(A) means 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; and

(B) includes an individual condominium or cooperative

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