March 18, 2005 - Law Office of Frank J. Martone, P.C. wins Precedential  Case in the U.S. Court of Appeals for the Third Circuit.

We are proud that our firm recently obtained a very favorable decision for secured lenders in the United States Court of Appeals for the Third Circuit.  Our firm successfully argued that the typical boilerplate language appearing in most mortgage forms, which refer to assignment of rents and escrows for taxes and insurance, do not subject a lien to a cram-down attack.

On appeal, the Third Circuit clarified their position as to what constitutes "additional collateral" under 11 U.S.C. § 1322 (b)(2) of the Bankruptcy Code.  Under § 1322 (b)(2), a mortgagee is secured "only by a security interest in real property that is the debtor's principal residence."

In this matter, the Bankruptcy Court in the District of New Jersey and the District Court both held that an assignment of rents clause and an escrow clause for payment of insurance and taxes, that were included in the mortgage, constituted "additional collateral" under § 1322 (b)(2).  These courts held that the Lenders' mortgage was not protected by the anti-modification provision in § 1322 (b)(2) and could be "crammed down" by the debtor, who would only have to pay the secured portion of the mortgage under his Chapter 13 Plan.

Upon review, the Third Circuit held that their previous conclusory treatment of rents and escrow accounts as personalty were not controlling, but only dicta, as the issue of rents and escrow accounts has not been directly addressed by the Court.

The Third Circuit held that, under the law of New Jersey, the assignment of rents clause and the escrow clause did not constitute "additional collateral" under § 1322 (b)(2) as they did not convey an interest in anything other than the real property.  Accordingly, the Court reversed the decisions of the Bankruptcy Court and the District Court and remanded the case to allow payment by the debtor of the Lender's full payoff amount.

Not only did we prevent a loss of $75,000.00 for our client, we also narrowed the parameters available to debtors on which to base a cram-down. This is an important decision in New Jersey, and we believe, in the rest of the Third Circuit and beyond.

Frank J. Martone, Esq. would be pleased to discuss the opinion and its place in the broad scope of our representation of our lender/servicer clients. Please feel free to contact us to arrange for a meeting at which we can also review your origination documents to insure that this thorny issue does not cause any loss to your institution.

To read the complete opinion of the Court, please click here.