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In re Fernados

March 18, 2005


Appeal from the United States District Court for the District of New Jersey (D.C. Civil No. 03-cv-03599) District Judge: Honorable Anne E. Thompson

The opinion of the court was delivered by: Rendell, Circuit Judge.


Argued December 6, 2004

Before: RENDELL and FISHER, Circuit Judges, and YOHN, *fn1 District Judge.


In this appeal, we must decide under what circumstances a mortgagee may qualify for the anti-modification protection afforded by 11 U.S.C. § 1322(b)(2). Section 1322(b)(2) of the Bankruptcy Code protects a mortgagee from having its mortgage modified in a chapter 13 bankruptcy proceeding. It applies only if the mortgagee's claim is secured "only by a security interest in real property that is the debtor's principal residence."

We have previously examined mortgages under this template and found them ineligible for protection under 11 U.S.C. § 1322(b)(2). The District Court, considering itself bound to do so by our precedent, held that the instant mortgage was modifiable because it fell outside of the protections of § 1322(b)(2). However, we conclude that the mortgage does qualify for the protection afforded by § 1322(b)(2) because it is secured by rents, which are part of the real property in New Jersey, and by an escrow fund for insurance and taxes, which funds are not the property of the debtor once put into escrow. We will, therefore, reverse and remand.

The District Court had jurisdiction over the appeal from the Bankruptcy Court pursuant to 28 U.S.C. § 158(a)(1). We have jurisdiction under 28 U.S.C. § 1291. Our standard of review is plenary because the issues before us involve statutory interpretation and conclusions of law. In re Johns, 37 F.3d 1021, 1023 (3d Cir. 1994).

I. Factual and Procedural Background

Manuel Fernandos filed for relief under chapter 13 of the Bankruptcy Code in 2002, listing as one of his assets his principal residence located at 1212 Jasam Court, Toms River, New Jersey. Two mortgages encumbered the property: the first held by Litton Loan Servicing Inc., and a second mortgage held by Appellant in the principal amount of $47,000. Appellant filed a proof of claim for $71,694.45. Ferandos filed a motion to "cram down" the second mortgage, contending that the value of the property was no more than the amount of the first mortgage, and that since the mortgage contained an assignment of rents clause, it failed to qualify for protection of section 1322(b)(2) and could therefore be "crammed down." The Bankruptcy Court determined that the value of the property exceeded the first mortgage by only $11,000 and entered an order in favor of the debtor, cramming Appellant's secured claim down to $11,000, based on the Bankruptcy Court's view that the assignment of rents clause constituted additional collateral that would take it out of the ambit of 11 U.S.C. § 1322(b)(2). In other words, since the claim was not secured "only" by the residential real property, but also by rents, § 1322(b)(2) did not provide Appellant the protection from modification that it needed in order to avoid a cramdown.

The District Court considered not only whether the "assignment of rents" clause constituted additional collateral but also whether the escrow provision of the mortgage rendered it ineligible for section 1322(b)(2) protection. *fn2 The District Court held that our Court's precedent compelled the conclusion that the assignment of rents and the escrow provision gave additional collateral to the mortgage, thus removing it from section 1322(b)(2) protection, and accordingly affirmed the Bankruptcy Court's order.

II. Discussion

We now turn to the precedent on which the District Court relied. By way of background, it is clear that the normal treatment of a purportedly secured claim in bankruptcy depends on the value of the collateral, and the claim will be considered to be a secured claim for the amount of the value and as an unsecured claim for the remainder. See In re Johns, 37 F.3d at 1023-24; In re Hammond, 27 F.3d 52, 55-56 (3d Cir. 1994). Thus, a claim that is not fully collateralized can be modified, and the creditor said to be "crammed down" to the value of the collateral. 11 U.S.C. § 506(a).

However, this treatment is proscribed for those secured claims that qualify for "antimodification" protection under section ...

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