RNPM, LLC v. Mercado Alvarez (In re Mercado Alvarez)

Summarized by Bruce Harwood , US Bankruptcy Court - District of New Hampshire
13 years 8 months ago

Citation:

Case No. PR-080 (1st Cir. BAP June 28, 2012)

Tag(s):

Ruling:

Pursuant to Section 1322(e) of the Bankruptcy Code, the amount of an arrearage under a mortgage secured by the debtor’s principal residence, including the amount of the mortgagee’s attorneys fees and costs recoverable under the mortgage, is determined by applicable nonbankruptcy law, and not the reasonableness, lodestar-based standards of Section 506(b) or Bankruptcy Rule 2016, which are overridden by Section 1322(b). Since applicable Puerto Rico law provides that the amount of attorneys’ fees and costs recoverable under “penal clauses”—which permit recovery of attorneys’ fees and costs as a percentage of the original principal of the mortgage note—is subject to adjustment on equitable grounds, the Bankruptcy Court properly considered those grounds in reducing the mortgagee’s claim for attorneys’ fees from $7,600 (the contract rate, equal to 10% of the original principal amount) to $2,000.

Procedural context:

Mortgagee appealed from Bankruptcy Court’s order sustaining objection to its proof of claim for attorneys’ fees and costs in an amount equal to 10% of the original principal amount of the debt secured by the mortgage, and awarding mortgagee only $2,000 of the $7,600 sought. BAP accepted appeal, finding that the order denying the mortgagee’s claim was final and appealable. After reviewing the Bankruptcy Court’s order under an abuse of discretion standard, the BAP affirmed.

Facts:

Debtor defaulted on mortgage note in original principal amount of $76,000. At the time of the default, the debtor had not made a mortgage payment in over a year, and the total arrearage was $6,400. Shortly after the mortgagee filed a complaint to foreclose its mortgage, the debtor filed her chapter 13 case, and proposed to cure the arrearage and reinstate the mortgage under her plan. The mortgagee filed two proofs of secured claims in debtor’s chapter 13 case: one for principal and interest due under the mortgage note in the amount of $77,589.67; and one for attorneys’ fees and costs which were secured under a “penal clause” in the mortgage, in the contract amount of 10% of the original principal of the mortgage note, or $7,600—an amount in excess of the entire mortgage arrearage. The debtor objected to allowance of fees and costs at the contract rate, asserting that they should be reduced on equitable grounds, and that no detailed time records were submitted in support of the claim. The Bankruptcy Court at first sustained debtor’s objection without prejudice to mortgagee filing fee application, which the court would evaluate under “federal law.” The mortgagee filed a supplemental objection, but did not provide any time records, disputing instead that Section 506 and Rule 2016’s reasonableness/lodestar factors applied to calculation of the attorneys’ fees and costs, which had become due upon the debtor’s pre-petition default. Instead, it reiterated its entitlement to its “penal clause” recovery of a flat 10%, as permitted under the Civil Code of Puerto Rico (31 L.P.R.A. §3131). The debtor reasserted her equitable arguments, including that imposition of the full 10% penal fee was disproportionate to the mortgagee’s attorneys’ actual efforts, and that it would make it impossible for her to cure her mortgage arrearage and retain her home. Applying equitable principles approved under Puerto Rico Supreme Court precedent, the Bankruptcy Court found that an award of attorneys’ fees and costs of $2,000 would appropriately balance the relative harms and benefits to the debtor and the mortgagee, and still adequately serve the deterrent purposes of the penal clause.

Judge(s):

Boroff, Deasy, Bailey

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