473 B.R. 853
1st Cir. BAP2012Background
- Debtor Virgen Mercado Alvarez defaulted on a Note secured by a Mortgage on a PR residence; Mortgage included a Penalty Clause equal to 10% of original principal for costs, expenses and attorney’s fees if foreclosure or bankruptcy collection occurred.
- RNPM, as holder, foreclosed and later filed proofs of secured claim totaling about $7,600 in attorney’s fees, plus a larger secured claim amount; Debtor filed objections seeking detailed fee disclosure and challenging reasonableness.
- Debtor filed a chapter 13 petition; plan proposed cure of arrears and maintenance of payments to RNPM; RNPM objected to confirmation asserting the Claim amount and Penalty Clause must be honored under the Mortgage and PR law.
- Bankruptcy court initially found that the FEES issue under 506(b) reasonableness was not applicable and later, relying on Puerto Rico law, equitably reduced the penalty from $7,600 to $2,000 under Article 1108.
- Panel treated the order as final and within its jurisdiction; standard of review was de novo for legal questions and abuse-of-discretion for equitable reductions; §1322(e) governs calculation of pre-petition arrearages where underlying nonbankruptcy law applies.
- Court’s decision balanced punitive/compensatory aims of the penal clause, the Debtor’s intent to cure arrears through plan, and equity under PR law.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the court abused discretion in moderating the penalty. | RNPM argues court failed to respect compensatory/dissuasive purposes and industry standard. | Mercado Alvarez contends court properly balanced interests and equity under PR law. | No abuse; reduction affirmed as equitable. |
| Whether §1322(e) controls the amount of pre-petition attorney’s fees and PR law governs the penalty. | RNPM asserts PR law governs penalty and §1322(e) limits cure amount accordingly. | Mercado Alvarez contends §1322(e) directs that cure amounts follow underlying agreement and nonbankruptcy law. | §1322(e) controls; PR law governs enforceability/modification of penalty. |
| Whether the court adequately explained the factors and reasoning for reducing the penalty. | RNPM argues no explicit formula and insufficient factor delineation. | Mercado Alvarez asserts detailed findings and balancing were present and sufficient. | Detailed findings justified; no formula required to satisfy standard. |
Key Cases Cited
- In re Plant, 288 B.R. 635 (Bankr.D.Mass.2003) (look to state law to determine arrearage when curing through chapter 13)
- Jack’s Beach Resort, Inc., 12 P.R. Offic. Trans. 430 (P.R.1982) (moderation of penalty requires extraordinary circumstances and proportionality between penalty and harm)
- Rochester Capital Leasing Corp., 3 P.R. Offic. Trans. 226 (P.R.1974) (court wide latitude in moderating penalties but not to undermine damages)
- Levitt & Sons of P.R., Inc. v. D.A.C.O., 5 P.R. Offic. Trans. 248 (P.R.1976) (emphasizes proportional harms in penal clause moderation)
- Consol. Mortgage & Fin. Corp. v. Cooley, 3 P.R. Offic. Trans. 9 (P.R.1974) (penal clause aims to press performance; equity guided by proportionality)