Shhh… Did you hear that? It sounded like a bunch of lobbyists pulling out their wallets…

Now I am not an attorney, but this one seems like a real doozy. 

In re: Bradsher, Case No. 09-80942, USBC M.D. N.C., Durham Division (February 16, 2010).

  • The applicable provisions of the Bankruptcy Code (ie. sections 506(a) and 1322(b)(2)) provide a mechanism for modifying the rights of a holder of a secured claim by bifurcating the secured creditor’s claim into secured and unsecured portions if the amount of the claim exceeds the value of the collateral securing the claim;
  • However, under section 1322(b)(2), some secured claims are protected against modification. Specifically, section 1322(b)(2) excludes from modification “a claim secured only by a security interest in real property that is the debtor’s principal residence.” [bold text emphasis mine, not in the statute];
  • Under the terms of the deed of trust in this case, the Debtor was to include in her monthly payment principal and interest plus an additional sum to cover the payment of “Escrow Items” consisting of taxes and special assessments, leasehold payments or ground rents, and insurance premiums; and
  • The lender’s loan documents required the borrower to pledge the escrow funds as “additional security” for the principal and interest due under the promissory note and deed of trust.

In this case, the bankruptcy court, relying on the legal analysis by a Federal appeals court in In re Ennis, 558 F.3d 343 (4th Cir. 2009), found that the deed of trust was not “a claim secured only by a security interest in real property […]” as set forth in section 1322(b)(2) – it was a claim secured by both:

  • a security interest in real property, and
  • a security interest in the funds sitting in the escrow account which, under North Carolina law, was found by the court to constitute personal property.

On the basis that the security for the deed of trust was not limited only to an interest in real property, but also included personal property in the form of the escrow funds sitting in the escrow account, the court ruled that the anti-modification clause was inapplicable and, accordingly, the Debtor was permitted to modify (ie. cram down) her home loan.

Checkmate?

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In re: Bradsher, Case No. 09-80942, USBC M.D. N.C., Durham Division