600 B.R. 321
Bankr. D.N.J.2019Background
- Debtor Felix A. Mendez, Sr. filed Chapter 13 and moved to reduce RKL Financial Corp.'s secured claim, arguing RKL's attorneys' fees ("Fees") are excessive and exceed amounts allowed under the New Jersey Fair Foreclosure Act and NJ Rules of Court.
- RKL filed a cross-motion for relief from the automatic stay, arguing Debtor's plan impermissibly modifies a home mortgage in violation of 11 U.S.C. § 1322(b)(2) and that the plan is not feasible.
- The underlying loan had a balloon payment that matured prepetition; RKL obtained a prepetition final foreclosure judgment that awarded principal/interest and a modest amount of fees under NJ Rule 4:42-9(a).
- RKL’s proof of claim sought a much larger sum of fees (originally ~$32,839, later offered to be reduced), while the Final Judgment reflected a smaller fee award; neither the mortgage nor the judgment clearly preserved post-judgment contractual fee rights.
- Court found § 1322(c)(2) applies because the loan's last scheduled payment predated the plan; absent creditor consent to modify, debtor may either (1) pay the foreclosure judgment as entered (fees limited to judgment and any state-court amendments), or (2) address the fully matured mortgage (reinstating mortgage terms, including contractual fees).
- The bankruptcy court abstained from deciding the reasonableness/allowability of fees beyond the Final Judgment and lifted the stay limitedly to permit the state foreclosure court to resolve fee issues; RKL’s stay-relief motion was otherwise denied.
Issues
| Issue | Plaintiff's Argument (Debtor) | Defendant's Argument (RKL) | Held |
|---|---|---|---|
| Whether § 1322(b)(2) bars debtor from proposing plan that addresses matured home mortgage | Debtor: § 1322(c) exceptions permit curing or paying matured mortgage in chapter 13; he may treat the claim and limit fees to judgment amounts | RKL: § 1322(b)(2) prohibits modification of home-mortgage rights; plan and fee-reduction are impermissible | Court: § 1322(c) (especially § 1322(c)(2)) limits § 1322(b)(2); debtor may address fully matured claim but only under § 1322(c)(2) options |
| If debtor proceeds without creditor consent, what options are available under § 1322(c)(2)? | Debtor: could seek loan modification or limit fees to amounts in Final Judgment | RKL: debtor cannot modify; must pay full contractual claim including all fees | Court: Without creditor consent debtor has only two choices under § 1322(c)(2): pay the Final Judgment (fees limited to judgment unless state court amends) or pay/rehabilitate the fully matured mortgage (reinstating mortgage terms, including contractual fees) |
| Whether the mortgage’s fee-shifting clause survives the foreclosure judgment (merger doctrine) | Debtor: Fees should be limited to what the Final Judgment awarded; mortgage merged into judgment | RKL: contractual fee rights remain enforceable | Court: Merger doctrine extinguished the mortgage unless mortgage clearly preserved post-judgment rights; here no clear preservation, so judgment controls unless state court amends it |
| Whether bankruptcy court should decide reasonableness/allowability of additional fees beyond the Final Judgment | Debtor: bankruptcy court should limit RKL’s claim under state caps and NJ Rules | RKL: bankruptcy court may not reduce claim that is non-modifiable; fees remain | Court: Abstains to state court—fee reasonableness/amendment of judgment is state-law matter; limited stay relief granted so state court can decide; bankruptcy court will accept state-court determination into claim allowance |
Key Cases Cited
- Nobelman v. American Sav. Bank, 508 U.S. 324 (1993) (interpretation of § 1322(b)(2) anti-modification rule)
- In re Connors, 497 F.3d 314 (3d Cir. 2007) (application of § 1322(c)(1) and timing of cure rights under New Jersey foreclosure practice)
- In re A & P Diversified Techs. Realty, Inc., 467 F.3d 337 (3d Cir. 2006) (merger of mortgage into foreclosure judgment and impact on fee-shifting claims)
- In re Stendardo, 991 F.2d 1089 (3d Cir. 1993) (mortgage-into-judgment merger and exception where mortgage clearly preserves post-judgment provisions)
- Matter of Roach, 824 F.2d 1370 (3d Cir. 1987) (foreclosure judgment declares sum due and effect on debtor’s interest)