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Media Alerts - Birmingham v. PNC Bank -- Fourth Circuit
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March 14, 2017
  Birmingham v. PNC Bank -- Fourth Circuit
Homeowner Underwater and Out of Luck

Areas of Law: Bankruptcy Law, Statutory Interpretation

Issue Presented: Whether reference in the deed of trust to escrow funds, insurance proceeds, and miscellaneous proceeds constituted additional collateral for purposes of 11 U.S.C. § 1322(b)(2) such that the creditor was not entitled to protection against claim being crammed down.

Brief Summary: In a published opinion, the United States Court of Appeals for the Fourth Circuit held that the district court did not err in affirming the bankruptcy court's determination that PNC Bank, the creditor, was entitled to protection from having its claim crammed down. The Fourth Circuit found that PNC Bank's loan was secured solely by debtor Birmingham's principal residence, and not by any additional collateral. Therefore, PNC Bank was entitled to 11 U.S.C. § 1322(b)(2)'s anti-modification protection of its claim against Birmingham.

Extended Summary: On May 23, 2014, Gregory Birmingham filed a voluntary petition for Chapter 13 bankruptcy. PNC Bank had a claim against Birmingham for a mortgage in the amount of $343,101.87, which was secured by a deed of trust on Birmingham's primary residence in Beltsville, Maryland. Birmingham was in arrears on his mortgage in the amount of $93,386.58. Birmingham filed his Original Chapter 13 Bankruptcy Plan on June 4, 2014. The plan included a cram-down (or modification) of PNC's interest in the property. A cram-down occurs when the principal balance of a debt is reduced to the value of the property securing the debt. At that time, Birmingham's property was valued at $206,400.

The anti-modification provision in the bankruptcy code protects a secured creditor from having its claim in a Chapter 13 bankruptcy proceeding modified. Birmingham sought to avoid application of this provision with regard to the debt he owed PNC. In particular, Birmingham filed a Complaint for Declaratory Action requesting that PNC's claim be treated as a partially unsecured claim subject to modification. He argued that certain provisions of the Deed of Trust ("Provisions") required collateral other than real property, which would remove the claim from 11 U.S.C. § 1322(b)(2)'s anti-modification protection. PNC filed a motion to dismiss contending that the items referred to in the Deed of Trust constituted incidental property, which was a part of Birmingham's principal residence. Therefore, PNC argued that the additional items did not expose the PNC mortgage to a cram-down. The bankruptcy court granted PNC's motion, noting that arguments identical to Birmingham's had been repeatedly denied by the bankruptcy court. Birmingham appealed to the United States District Court for the District of Maryland. The District Court affirmed the bankruptcy court's determination, holding that the Provisions were benefits that were "merely incidental" to the interest in real property and were not additional security for purposes of § 1322(b)(2). Birmingham then appealed to the Fourth Circuit.

The Fourth Circuit held that the district court properly affirmed the bankruptcy court's determination that PNC Bank was entitled to the protection of the anti-modification provisions of § 1322(b)(2) because the Provisions of the Deed of Trust were incidental property.

The court first analyzed the relevant statutory provisions. It noted that under Chapter 13, debtors may obtain adjustment of their debt through flexible repayment plans approved by a bankruptcy court. The adjustment of a debtor's debt depends on two statutory provisions, 11 U.S.C. § 506(a) and 11 U.S.C. § 1322(b)(2). Under § 506(a), a secured creditor's claim can be modified, or bifurcated, into secured and unsecured portions when the claim exceeds the value of the secured property. However, relying on the Supreme Court precedent Nobelman v. Am. Sav. Bank., 508 U.S. 324 (1993), the Fourth Circuit noted that a debtor's debt cannot be modified if the mortgage is secured "only by a security interest in real property that is the debtor's principal residence." The court looked to the Bankruptcy Code for the definition of "debtor's principal residence," which is "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." Additionally, it defined "incidental property" as including "escrow funds" and "insurance proceeds."

Furthermore, the Fourth Circuit pointed to several cases from sister circuits, which held that the insurance and other items mentioned in the Provisions were only incidental property and did not create additional security in the property. For example, in Allied Credit Corp v. Davis, 989 F.2d 208 (6th Cir. 1993), the Sixth Circuit found that certain items that 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. The Fourth Circuit found this reasoning persuasive as it applied to the provisions involving the escrow items, property insurance proceeds and miscellaneous proceeds. Therefore, the court found the Deed of Trust on Birmingham's property was secured only by real property that was his principal residence. Therefore, the Fourth Circuit affirmed the District Court's judgment.

To read the full opinion, click here.

Panel: Judges Thacker and Harris, and District Judge Lee

Argument Date: 10/26/2016

Date of Issued Opinion: 01/18/2017

Docket Number: 15-1800

Decided: Affirmed by published opinion.

Case Alert Author: Lauren Harrison, Univ. of Maryland Carey School of Law

Counsel: 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.

Author of Opinion: District Judge Lee

Case Alert Supervisor: Professor Renée Hutchins

    Posted By: Renee Hutchins @ 03/14/2017 12:22 PM     4th Circuit  

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