In Re Iris June Davis, Debtor. Allied Credit Corporation v. Iris June DavisIn Re Iris June Davis, Debtor. Allied Credit Corporation v. Iris June Davis
This case began in bankruptcy court when Allied Credit Corporation (Allied Credit) filed an objection to confirmation of a debtor’s plan under Chapter 13 of the Bankruptcy Code. The bankruptcy court overruled Allied Credit’s objection on June 27, 1991, and the district court affirmed. For the reasons discussed herein, we reverse.
I.
Allied Credit holds a promissory note on the debtor’s principal residence in the original amount of $60,000.00, with a stated interest rate of 19% per annum. Of the $60,000.00, $24,594.90 is principal and the balance is interest, with the annual percentage rate at 21.5%. The terms of the loan require payments through 1999. Allied Credit does not contend that it is underse-cured.
The debtor, Mrs. Davis, owned her residence at the time that she signed the note. In the deed of trust which secures the note,
Mrs. Davis proposed in her Chapter 13 plan that she pay Allied Credit’s net claim of $24,000.00 plus 10% interest at $509.93 per month, with the lien to be released at the completion of the five year plan. She sought confirmation of her plan under the cram-down provision of section 1325(a)(5)(B) of the Bankruptcy Code. 11 U.S.C. § 1325(a)(5)(B). Section 1325(a)(1) requires a bankruptcy court to confirm a Chapter 13 plan if it “complies with the provisions of this chapter and with the other applicable provisions of [the Bankruptcy Code].” Section 1322(b)(2), however, precludes a debtor from modifying the rights of any secured creditor who holds “a claim secured only by a security interest in real property that is the debtor’s principal residence.” 11 U.S.C. § 1322(b)(2).
II.
The district court and the bankruptcy court held that language in the deed of trust which required fire insurance and/or language which covered “rents, royalties, profits, and fixtures” removed Allied Credit’s security interest from the protection of § 1322(b)(2), because the additional language amounted to a security interest in something in addition to Mrs. Davis’ principal residence. Although the debtor argued in her brief that these holdings were correct, at oral argument the debtor argued principally that § 1322(b)(2) does not apply to short-term loans which are not used to purchase or construct a principal residence. Both courts below expressly rejected this argument, as do we.
11 U.S.C. § 1322(b) states in relevant part that a 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. ...
The legislative history of the statute indicates that it was designed to protect and promote “the increased production of homes and to encourage private individual ownership of homes as a traditional and important value in American life.”
Federal Land Bank of Louisville v. Glenn (In re Glenn),
III.
Having determined that the protection of § 1322(b)(2) is theoretically available to a holder of a short-term, non-purchase-money loan on a principal residence, we turn next to the security instrument at hand. Language in the deed of trust requires the debtor to “keep the buildings on said premises insured ... in some good and solvent fire insurance company ... the proceeds of which insurance shall be payable to the
The district court held that this fire insurance requirement, standing alone, is sufficient to take Allied Credit’s claim out of the protection of § 1322(b)(2), reasoning that through the insurance, Allied Credit’s claim is secured by more than the debtor’s principal residence. Several relevant cases have been published since the decision by the district court in this case, including
Matter of
Washington,
As noted by one bankruptcy court:
Practically every deed of trust which encumbers improved real property contains a provision requiring the borrower to acquire and maintain insurance coverage to protect against fire and other casualty losses. To hold that this type insurance coverage constitutes an additional security interest would completely eviscerate the protective exception for residential lenders found in- Section 1322(b)(2). Congress would not have enacted a meaningless statute, knowing that practically all of the lenders for whom the protective exception was intended, would be eliminated from the protection solely because they routinely require fire and casualty insurance. As such, the logical, if not inescapable, conclusion is that a fire and casualty insurance policy, naming the lender as a beneficiary, additional insured, or loss payee, does not constitute an additional security interest.
In re Braylock,
Although the district court cited several cases in which the presence of insurance was held to take away the protection of § 1322(b)(2), most of these cases may be distinguished because they involved a security interest in premiums or in credit life and disability insurance, not hazard insurance. For example, in
Transouth Financial Corp. v. Hill,
Allied Credit also points to another provision of the Bankruptcy Code, 11 U.S.C. § 362(d)(1), under which courts have held that a secured creditor is not adequately protected if no hazard insurance exists on the collateral.
See In re Miller,
IV.
In addition to its requirement of hazard insurance, the deed of trust conveys to Allied Credit an interest in “the Heredita-ments and Appurtenances, rents, royalties, profits, and fixtures thereto appertaining.” The bankruptcy court held that Allied Credit's interest in “rents, royalties, profits, and fixtures” constitutes additional security for purposes of § 1322(b)(2). The district court indicated some disagreement with this holding, noting significant case law to the contrary. We hold that the referenced phrase refers to benefits which are merely incidental to an interest in real property, and find that Allied Credit’s interest in these incidental benefits does not constitute additional security for purposes of § 1322(b)(2).
Unlike the insurance issue, on which the courts are more evenly split, the clear weight of authority supports a finding that the addition of the boilerplate phrase “rents, royalties, profits, and fixtures” to a mortgage or deed of trust will not generally remove the claim from the protection of § 1322(b)(2). The case at bar is distinguishable from the few cases which support a contrary holding.
For example, in
In re Reeves, supra,
a retail installment contract granted a security interest in the real estate “together with all improvements, tenements, easements, fixtures and appurtenances ..as well as “the above-described goods and all accessories, parts and other property now or hereafter at any time owned by buyer and installed therein or affixed thereto and all proceeds thereof,” and further provided that “any proceeds of disposition of the goods after repossession thereof by the seller may first be applied by the seller to the payment of expenses.”
Id.,
By contrast, the language in the case
sub judice
does not extend Allied Credit’s security interest beyond items which are inextricably bound to the real property itself as part of the possessory bundle of rights. Accordingly, Allied Credit remains within the class protected by § 1322(b)(2), as a creditor whose claim is secured only by a security interest in real property that is the debtor’s principal residence.
Accord In re Hougland,
V.
Although we express a belief that the interest rate charged by Allied Credit on the principal loan is exorbitant, that opinion does not constitute a reason to remove Allied Credit from the protection to which Congress has entitled it. As we have concluded that Allied Credit is within the class of creditors protected by § 1322(b)(2), its claim cannot be modified by the debtor’s proposed plan under Chapter 13. For the reasons stated, the decision of the district court is hereby REVERSED and the cause is REMANDED for further proceedings in compliance herewith.
Notes
. The
Jackson
court held that although an interest in fixtures did not constitute additional security, an interest in rents and profits did. However,
Jackson
involved a rental property, a two-flat residence, and the language was added by the lender in acknowledgement "that the property may be used for a commercial, income-producing purpose.”
Id.
at 803. Where an interest in “rents and profits” is taken in purely residential, non-rental property, courts have rejected the proposition that the interest constitutes additional security.
See, e.g., In re Lee,