The Fourth Circuit definitively held that escrows, insurance proceeds and miscellaneous proceeds are “incidental property” under a typical Fannie Mae/Freddie Mac home mortgage, do not allow bifurcation of a home loan, and preclude the debtor from cramming down the secured portion of the mortgage debt to the value of the property, under Section 1322(b)(2).
Section 1322(b)(2) allows modification of a secured claim in a chapter 13 plan, but not when it is “secured only by a security interest in real property that is the debtor’s principal residence.” In turn, Section 101(13A)(A) defines a “debtor’s principal residence” to include “incidental property,” and Section 101(27B) provides that “‘incidental property’ means . . . property commonly conveyed with a principal residence in the area where the real property is located.”
In a chapter 13 plan, the debtor sought to cram down his mortgage loan to the value of the property, contending that the anti-modification clause in Section 1322(b)(2) did not apply because the lender’s security interest included additional collateral in the form of escrows, insurance proceeds and miscellaneous proceeds.
On summary judgment, the bankruptcy judge ruled against the debt and was upheld on appeal in district court.
Writing for the circuit court on Jan. 18, District Judge Gerald Bruce Lee, sitting by designation, held that the disputed items were not “additional collateral.” Instead, he said they are “incidental property frequently conveyed in a deed of trust” and “do not extend a lender’s security beyond the real property.”
Judge Lee distinguished cases like Hammond, from the Third Circuit, where bifurcation was permitted because the security interest extended to appliances, machinery, furniture and equipment. Similarly, he said, the Third Circuit’s Scarborough decision was inapposite because the lender’s collateral was a multi-unit property where the debtor lived in one unit and the other was income-producing. Likewise, he distinguished cases where the language of the mortgage expressly says that escrows are “additional collateral.”