Puerto Rican Law Justifies Reduction of Attorney Fee Penalty

Posted by NCBRC - July 10, 2012

The Bankruptcy Appellate Panel for the First Circuit affirmed the bankruptcy court’s reduction of the mortgage creditor’s attorney fee “penalty” against the debtor where the penalty, ten percent of the original loan, was provided for in the mortgage document. RNPM, LLC v. Alvarez, No. 11-80 (B.A.P. 1st Cir. June 28, 2012).

The debtor filed a chapter 13 plan in which she proposed to “cure and maintain” her mortgage. Debtor objected to RNPM’s claim for $7,600 in attorney fees pursuant to the penalty clause of the mortgage agreement on the grounds that the amount was excessive and RNPM had not offered any breakdown of hours and work performed to justify the amount. RNPM countered that section 1322(e), which provides that where a debtor chooses to cure and maintain a mortgage, “the amount necessary to cure the default, shall be determined in accordance with the underlying agreement and applicable nonbankruptcy law,” permits application of contractual penalty clauses and overrides the reasonableness review that would otherwise be permitted under section 506(b) and Bankruptcy Rule 2016(a).

Acknowledging that section 1322(e) takes the federal reasonableness inquiry off the table, the bankruptcy court turned to “nonbankruptcy” Puerto Rican law which permits modification of penal clauses in contracts. 31 L.P.R.A. § 3133. Acknowledging the “coercive and punitive” purposes of the penalty clauses in general, the bankruptcy court nonetheless found that the “extraordinary circumstances” contemplated by state law warranted reduction of the penalty where the amount claimed under the mortgage would have exceeded the amount of the arrearage and would render the plan unduly onerous.

Alvarez opinion


Post a Comment

You must be logged in to post a comment.