In re: Manuel Ferandos v. MANUEL FERANDOS Appeal from the United States District Court for the District of New…

PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 03-4716
IN RE: MANUEL FERANDOS,
Debtor
1 2 MORTGAGE CO. OF NJ, INC.,ST ND
Appellant
v.
MANUEL FERANDOS
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
Argued December 6, 2004

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Before: RENDELL and FISHER, Circuit Judges,
and YOHN*, District Judge.
(Filed: March 18, 2005)
Robert B. Farrington [ARGUED]
Law Office of Frank J. Martone
1455 Broad Street
Bloomfield, NJ 07003
Counsel for Appellant
Thomas E. Shields [ARGUED]
755 Berdan Avenue
Wayne, NJ 08619
Counsel for Appellee
OPINION OF THE COURT
RENDELL, Circuit Judge.
In this appeal, we must decide under what circumstances
a mortgagee may qualify for the anti-modification protection
*Honorable William H. Yohn, Jr., Senior District Court Judge
for the Eastern District of Pennsylvania, sitting by designation.

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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

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The District Court noted that this additional issue was raised1
on appeal, not in the Bankruptcy Court, then addressed the
merits without objection by the parties. We will also address
this issue here, lest on remand it remain unresolved.
4
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. The District Court1

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Additionally, we cannot engage in a full and complete
determination regarding the application of § 1322(b)(2) to the
mortgage at issue without considering the effect of the escrow
provision.
5
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 1322(b)(2), whereby a debtor may:

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modify the rights of holders of
secured claims, other than a claim
secured only by a security interest
in real property that is the debtors
principal residence, or of holders of
unsecured claims, or leave
unaffected the rights of holders of
any class of claims.
11 U.S.C. § 1322(b)(2). The issue, therefore, is whether the
claim is secured “only” by the real property, or whether
additional collateral has been taken by the mortgagee to secure
the amount due under the mortgage.
The legislative history of § 1322(b)(2) “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.” In
re Davis, 989 F.2d 208, 210 (6th Cir. 1993) (citations omitted).
The statute does that by affording anti-modification protection
to home mortgage lenders in order to “to encourage the flow of
capital into the home lending market.” See Nobelman v. Am.
Sav. Bank, 508 U.S. 324, 331 (1993) (Stevens, J., concurring).
As the court noted in In re Williams, 109 B.R. 36, 42 (Bankr.
E.D.N.Y. 1989), although there is little legislative history
available for § 1322(b)(2), “what does exist appears to indicate
that by placing particular language into Section 1322(b)(2) . . .
Congress intended to protect only the long-term residential
home market financing industry . . . This court concurs with the
cases that hold that the true congressional intent behind the
Section 1322(b)(2) exception for claims secured only by an

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interest in the debtor’s principal residence is to protect the
traditional mortgage lender who provides long-term financing
that enables individuals to purchase their home . . .”
On the several occasions that we have had the
opportunity to apply § 1322(b)(2), we have focused on the plain
language of the section and have found that the grant of
additional collateral sealed the mortgagee’s fate. In Wilson v.
Commonwealth Mortgage Corp., 895 F.2d 123, 124 (3d Cir.
1990), the mortgage agreement included not only real estate, but
also “any and all appliances, machinery, furniture and
equipment (whether fixtures or not) of any nature whatsoever
now or hereafter installed in or upon the premises.” We
rejected the argument that the items listed had no “independent
value,” and had little difficulty determining that their inclusion
rendered the mortgage subject to modification. Wilson, 895
F.2d at 129.
In Sapos v. Provident Institution of Savings, 967 F.2d
918, 922 (3d Cir. 1992), the mortgagee acknowledged that:
The collateral which is the subject
of the Mortgage includes the
Residence together with “ . . . the
following described household
appliances, which are, and shall be
deemed to be fixtures and a part of
the realty, and are a portion of the
security for the indebtedness herein
mentioned, namely, wall to wall
carpeting . . .”

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In our opinion in Sapos we did not focus specifically on2
rents, nor was the issue of whether rents are personalty or realty
ever discussed. We view our conclusory treatment of rents as
personalty there to not be controlling here. The parties have
raised this issue, and, as discussed below, the Supreme Court
has imposed an overarching obligation on federal courts to
consult state law in determining the nature and scope of property
interests in a bankruptcy estate, and to ensure that a creditor “is
afforded in federal bankruptcy court the same protection [it]
would have under state law if no bankruptcy had ensued.”
Butner v. Untied States, 440 U.S. 48, 55-56 (1979). In the
instant case, therefore, we must look to New Jersey law, which,
as explained below, classifies rents as real property. Because,
under Butner, we cannot “upend” the law of New Jersey on this
point, see In re Jason Realty, 59 F.3d 423, 427 (3d Cir. 1995),
Sapos does not bind us on the proper characterization of the
assignment of rents here.
8
In addition, the mortgage was secured by rents, profits, and
appliances. Id. We stated there that taking personalty, not just
realty, as collateral, was fatal. Id. at 925. We further warned2
that if the lender does not want its claim to fall outside of the
protection of § 1322(b)(2), it should not seek to “get every last
piece of collateral.” Id. at 925.
Additionally, in In re Hammond, 27 F.3d 52, 57 (3d Cir.
1994), we found that the taking of appliances, machinery,
furniture, and equipment removed the mortgage from §
1322(b)(2) protection. There we considered not only our
previous opinion in Wilson, but also the effect of the Supreme

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9
Court’s intervening ruling in Nobelman, which involved a
mortgage that granted a security interest in the common areas of
a condominium complex, escrow funds, proceeds of hazard
insurance, and rents.
In Hammond, 27 F.3d at 57, we characterized our
reasoning with respect to Wilson:
We held in Wilson that section
1322(b)(2)’s language plainly states
that a mortgagee who has an
additional security interest gets no
p r o t e c t i o n f r o m t h e
antimodification clause of section
1322(b)(2). Id. (“The language of
section 1322(b)(2) is unambiguous.
The language of the bankruptcy
ju d g e b e a rs re p e a ting: ‘If
Commonwealth wishes otherwise,
it should delete such language from
its agreements.’”). We also relied
on Collier on Bankruptcy to
buttress our holding that creditors
who demand additional security
interests in personalty or escrow
accounts and the like pay a price.
Their claims become subject to
modification. Their recourse, if
they wish to avoid modification, is
to forego the additional security.

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10
Id. (citing 5 Collier on Bankruptcy
P 1322.06 at 1322-14-15).
Regarding Nobelman, we concluded that although the
Supreme Court’s ultimate ruling was that the mortgage at issue
could not be modified, the Court there concerned itself not with
the nature of the lien on the items of the collateral, but, rather,
with a different issue, namely whether section 1322(b)(2)
permits a debtor to modify the unsecured portion of the claim as
determined under section 506(a). See Hammond, 27 F.3d at 56-
57. In Nobleman, 508 U.S. 324 at 332, the Supreme Court
rejected the debtor’s argument and concluded, without
discussing the nature of the collateral:
[T]o give effect to § 506(a)’s
valuation and bifurcation of
s e c u re d c la im s th r o u g h a
Chapter section 1322(b)(2) plan in
the manner petitioners propose
would require a modification of the
rights of the holder of the security
interest. Section 1322(b)(2)
prohibits such a modification
where, as here, the lender’s claim is
secured only by a lien on the
debtor’s principal residence.
We concluded in Hammond, 27 F.3d at 57, that this
language “does not overrule our holding in Wilson or Sapos that
a mortgagee who wishes to avoid bifurcation of its claim on a
residential mortgage must limit its lien to the real estate.”

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Our most recent pronouncement regarding § 1322(b)(2)
was in the 1994 case of In re Johns, 37 F.3d at 1024, where we
found the mortgage given by the debtors that contained the grant
of a lien on appliances, machinery, furniture, and equipment to
be essentially indistinguishable from the security interest given
in Hammond. Therefore, in Johns, as in Hammond, we found
that the anti-modification protection of § 1322(b)(2) did not
apply.
The mortgage before us for consideration on this appeal
does not include appliances, machinery, or equipment as
collateral. The collateral description reads as follows:
To secure to Lender the
repayment of the indebtedness
evidenced by the Note, with interest
thereon; the payment of all other
sums with interest thereon,
advanced in accordance herewith to
protect the security of this
Mortgage; and the performance of
the covenants and agreements of
B orrow er herein co n tained.
Borrower does hereby mortgage,
grant and convey to Lender the
following described property
located in the Dover Township,
New Jersey... Together with all the
improvements now or hereafter
erected on the property; and all
easements, rights, appurtenances

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and rents, all of which shall be
deemed to be and remain a part of
the property covered by this
Mortgage...
It also contains a separate provision entitled “Assignment
of Rents; Appointment of Receiver” that grants an assignment
of rents “as additional security” and a covenant that establishes
a fund for insurance and taxes which states that “The Funds are
pledged as additional security for the sums secured by this
Mortgage.”
We have never been faced with a mortgage claimed to
grant additional collateral where the property purporting to
constitute something other than real property was the property
at issue here, namely, only rents and the insurance and tax
escrow. Appellant urges that our case law is not necessarily
controlling when the grant is only of items of this nature. The
unique attributes of these specific types of property lead us to
conclude that our precedent to date is controlling only in one
sense: that is, if the mortgagee’s claim is, as a matter of fact and
law, secured by assets other than the real property at issue, and
a lien or security interest in personal property has, in fact and
law, been granted, then the antimodification provisions of
section 1322(b)(2) do not apply.
But that, we believe, is just the beginning of the analysis
of the issue as presented in this case. The real inquiry is
whether the assignment of rents was a grant of a lien on real
property, and whether a security interest in the escrow at issue
ever existed as a matter of law. We note that the language

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quoted above from our opinion in Hammond seems at first blush
to suggest a ruling that escrow accounts are to be treated like
personalty; however, we consider this to be dicta, since the
effect of the escrow provision was not the issue before our Court
in that case. Further, as will become clear from the discussion
which follows, the factual and legal setting presented here
dictates a different conclusion in any event.
Since our most recent opinion in 1994, numerous courts
in our circuit and elsewhere have considered the precise issue
before us, and we find several of their opinions helpful guides
in our analysis of both of the types of collateral presented. We
note at the outset that our Court’s reasoning to date has followed
what we might describe as a plain meaning approach to our
application of this section of the Bankruptcy Code. That is, in
each of the four opinions we have rendered, we have read
section 1322(b)(2) to mean what its language literally states: that
claim will be subject to modification unless only the real
property stands as security.
Several courts in our circuit and elsewhere, however,
have crafted tests that would permit us to draw a line based on
the nature of the additional collateral, or look to the intent of
Congress, and reject readings of section 1322(b)(2) that seem to
eviscerate or undo what the courts believe was intended. See,
e.g., In re Rodriguez, 218 B.R. 764, 775 (Bankr. E.D. Pa. 1998)
(urging courts to consider the Congressional intent behind the
implementation of the anti-modification provision when
outlining its contours); In re French, 174 B.R. 1, 7 (Bankr. D.
Mass. 1994) (crafting the “independent value” test which states
that “‘additional collateral’...[that] is nothing more than an

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In Wilson, 895 F.2d at 128-29, we rejected the argument that3
items of personalty would not constitute additional security
because they lacked independent value. We did so on the basis
that the items in question clearly had independent value, but we
did not comment further on whether lack of “independent
value” could serve as an appropriate “test.” And, we did not
look to this factor as a “test” in any of the three opinions we
penned thereafter.
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enhancement which is or can, by agreement of the parties, be
made a component part of the real property or is of little or no
independent value” does not result in the forfeiture by the lender
of the anti-modification protections of § 1322(b)(2) ); In re3
Davis, 989 F.2d 208, 211 (6th Cir. 1993) (holding that benefits
which are merely incidental to an interest in real property do not
remove a mortgage from the anti-modification protection of §
1322(b)(2)); In re Rosen, 208 B.R. 345, 350 (D.N.J. 1997)
(holding that because rents and profits would not exist but for
the real property, they are not additional collateral).
These tests and rationales have been adopted by courts to
limit the types of security the taking of which can eliminate
protection for mortgagees. They have done so because to do
otherwise is to deny mortgagees the very protection that was to
be afforded by § 1322(b)(2). For, § 1322(b)(2) was enacted in
order “to increase the accessibility of home mortgage funds to
homeowners by assuring lenders that their expectations would
not be frustrated.” In re Rosen, 208 B.R. at 354 (citing
Nobelman, 508 U.S. at 332).

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Although Appellant argues that here there were no rents and4
no escrow at the time of the section 1322(b)(2) proceeding, so
the claim as such was not actually “secured by” additional
collateral, we read our case law as focusing on the effect of the
grant in the instrument, not the actual existence of collateral
available later to the creditor. See Wilson, 895 F.2d at 129.
This issue does not appear to have been specifically raised in the
Bankruptcy Court or the District Court, and we have no reason
to change what we said in Wilson and will not stray from our
view regarding the importance of precedent.
15
By drawing a line between the “normal” scope of the
mortgagee’s bargained-for security and protection – thought to
encompass aspects normally associated with the real estate – and
those that add the value of personalty separate and apart from
real estate-related collateral, the law is allowed to function as
the courts believe Congress intended. As salutary and correct as
the perception of Congress’s intent probably is, however,
Congress has written the provision in a way that leaves little
room for disagreement as to its meaning. Unless and until we
reconsider en banc our previous rulings, we believe we are
constrained to conclude that if the language granting additional
personal property collateral is included in the mortgage, and is
effective to grant an interest in such collateral, the mortgagee is
at its peril in not deleting it. See In re Hammond, 27 F.3d at 57
(acknowledging the congressional intent behind § 1322(b)(2),
but emphasizing the need to focus on its plain language, which
mandates the protection of mortgages secured only by an interest
in real property that is the debtor’s principal residence). Thus,4
the language and its effect is key, and if other property is

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The debtor makes a halfhearted attempt to convince us that5
state law does not apply because for federal tax purposes rents
are taxed as personal income, and there is case law
acknowledging that the parties can define “rents” as they see fit.
See Fargo Realty, Inc. v. Harris, 173 N.J. Super. 262 (App. Div.
1980). One court has concluded, in In re French, 174 B.R. 1, 7
(Bankr. D. Mass. 1994), that we should look to federal law,
believing that the need to interpret the federal bankruptcy laws
requires resort to federal principles. But we find the Supreme
Court’s statement in Butner to the contrary, and our view as we
have stated it in In re Jason Realty, to be more persuasive.
16
actually pledged, neither a court’s perception of its precise
nature, nor congressional policy, will alter the analysis or
outcome. This language directs us to ask only one question:
Does the mortgagee have a security interest in property other
than real property?
In order to respond to that question, we must define “real
property,” and do so by reference to state law, here, the law of
New Jersey. See Butner v. United States, 440 U.S. 48, 54-55
(1979); In re Jason Realty, 59 F.3d 423, 427 (3d Cir. 1995).5
Under New Jersey law, real property is defined to include
“rents.” See N.J. STAT. ANN. § 46:3-16 (2004); In re Mendez,
255 B.R. 143, 146 (Bankr. D. N.J. 2000); In re Eastwood, 192
B.R. 96, 106 (Bankr. D. N.J. 1996); In re Cerevelli, 213 B.R.
900, 903 (Bankr. D.N.J. 1997). Accordingly, the grant of an

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interest in rents does not render the claim secured by anything
other than the real property. Therefore, the protections of §
1322(b)(2) still apply to a mortgage in New Jersey where the
debt is also secured by rents.
Additionally, the grant of a security interest in the escrow
funds did not convey additional collateral under the law of the
state of New Jersey. The covenant setting up the escrow
requires the debtor to:
[P]ay to Lender on the day
monthly payments of principal and
interest are payable under this Note,
until the Note is paid in full, a sum
(herein “Funds”) equal to one-
twelfth of the yearly taxes and
a s s e s s m e n t s ( i n c l u d i n g
condominium and planned unit
development assessments, if any)
which may attain priority over this
Mortgage and ground rents on the
Property, if any, plus one-twelfth of
yearly premium installments for
hazard insurance, plus one-twelfth
of yearly premium installments for
mortgage insurance, if any, all as
reasonably estimated initially and
from time to time by Lender on the
basis of assessments and bills and
reasonable estimates thereof.

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It is hornbook law that the debtor can only grant a
security interest in whatever rights he has in the collateral.
“‘[Article 9 of the UCC] does not specify the quantum of
‘rights’ which a debtor must have in collateral to support a
security interest: evidently less than full ‘legal title’ will do and
the secured party will get whatever rights the debtor had . . .” 1
G. Gilmore, Security Interests in Personal Property § 11.5, at
353 (1965) (also cited in In re Atchison, 832 F.2d 1236, 1239
(11th Cir. 1987)). Under New Jersey law the mortgagor retains
no interest in such funds once escrowed. See In re Libby, 200
B.R. 562 at 566; Am. Nat’l Bank & Trust v. Leonard, 166 N.J.
Super. 216, 218-19 (App. Div. 1979). “Such payments [are]
intended to benefit the mortgagee, not the mortgagors, and the
mortgagors do not retain any beneficial interest in the money
deposited. A mortgagor ceases to have any control over or
interest in advance tax payments once the funds are delivered to
a mortgagee.” Id. at 219. Accordingly, we conclude that any
grant of a security interest was meaningless and conveyed
essentially no interest at all.
New Jersey’s view of escrow funds, and our conclusion
that they are not collateral, makes sense. Escrow funds are
simply not akin to property whose value is applied by
mortgagees in the event of default to pay down the outstanding
debt. Rather, funds for taxes and insurance, paid over and
placed in escrow, exist precisely for the purpose of paying said
taxes and insurance – a cost incurred by the debtor in connection
with the ownership of the real property. The debtor simply pays
these costs in advance and retains no interest in the funds once
placed in escrow. Given the common sense view of the funds
endorsed by the New Jersey courts and our deference to state

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law when it comes to defining property interests, we view these
escrowed funds as not constituting additional collateral.
Therefore, since the only additional security claimed to take the
mortgage outside the protection of section 1322(b)(2) was the
rents and escrow, and since the rents are “real property,” and
since the escrow does not constitute additional collateral as a
matter of law, the mortgage qualifies under section 1322(b)(2).
III. Conclusion
For the reasons stated above, the order of the District
Court affirming the order of the Bankruptcy Court will be
reversed and the case will be remanded for further proceedings
consistent with this opinion.

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