VIRGEN P MERCADO ALVAREZ

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IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF PUERTO RICO
IN RE: : CASE NO. 10-07374 (ESL)
:
VIRGEN P. MERCADO ALVAREZ : CHAPTER 13
:
:
Debtor :
____________________________________:
OPINION AND ORDER
Virgen P. Mercado Alvarez (hereinafter referred to as “Debtor”) filed an Objection to Claim
Number 8-1 by RNPM, LLC (hereinafter referred to as “RNPM”). RNPM, by and through Operating
Partners Co., Inc., filed its opposition thereto. The issue before the court is whether the reasonableness
standard in 11 U.S.C. §506(b) applies to pre-petition attorney’s fees fixed under a penal clause in the
mortgage agreement, or whether the anti-modification provision of 11 U.S.C. §1322(b)(2), in
conjunction with 11 U.S.C. §1322(e), are controlling. For the reasons stated herein, this court finds
that 11 U.S.C. §1322(e) is the controlling section for determining the amount of pre-petition mortgage
arrearages, and that the procedure to determine the reasonableness of attorney’s fees pursuant to Fed.
R. Bankr. P. 2016 is not applicable in the instant case. The court further finds that there are grounds
for equitable intervention to reduce the amounts claimed for attorney’s fees.
Facts and Procedural Background
Virgen P. Mercado Alvarez filed a bankruptcy petition under Chapter 13 of the Bankruptcy
Code on August 13, 2010. The Debtor included Operating Partners Co., Inc. in its Schedule D
(Creditor’s Holding Secured Claims) as a secured creditor over a property mortgage in the amount
of $79,000.00. On September 15, 2010, RNPM filed proof of claim #4-1 as a secured claim in the
amount of $77,589.67 with a property value of $105,000.00 (Claims Register, Claim #4-1). On
September 27, 2010, RNPM filed proof of claim #8-1 as a secured claim in the amount of $7,600.00
for “attorney fees by the complaint.” RNPM’s proof of claim for attorney fees included as a
supporting document a copy of the complaint filed against Debtor in November 2009 in the Court of
First Instance of the Commonwealth of Puerto Rico, Fajardo Section, Case #NSCI 2009-00887
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(Claims Register, Claim #8-1, pgs. 2-7).
On September 27, 2010, RNPM filed an objection to Debtor’s plan confirmation based on the
following: (i) “[i]n accordance with Mortgage Deed No. 568 as executed by debtor on November 7,
2003, the attorneys’ fees of 10% of the original balance owed ($76,000.00) are ‘liquid and payable
by the sole act of filing the complaint;’” and (ii) Debtor’s plan fails to provide for the payment of
secured attorney fees of RNPM in the amount of $7,600 and thus, the plan is insufficiently funded
and may not be confirmed under 11 U.S.C. §1325 (Docket No. 14). On October 5, 2010, Debtor filed
a motion objecting RNPM’s claim number 8-1 regarding the $7,600 in attorney fees based upon the
following: (i) the mortgage deed provides for attorney fees, but the $7,600.00 amount claimed in the
proof of claim is unreasonable for just filing a complaint in state court; and (ii) RNPM has failed to
provide a detailed description (explanation) of legal services rendered, number of hours worked and
the hourly rate in conformity with Fed. R. Bankr. P. 2016 (Docket No. 16). On November 5, 2010,
RNPM filed its answer to Debtor’s objection to claim number 8 alleging the following: (1) under the
terms of the mortgage agreement, particularly the Third paragraph , the entire amount of $7,600.001
became due and payable upon the filing of the complaint for mortgage foreclosure and is not subject
to a reasonableness determination regardless of whether any further action was taken by the creditor;
(2) the entire amount of $7,600.00 became due and payable pre-petition and constitutes an integral
component of Debtor’s pre-petition arrearage that must be cured through the plan; (3) the third
The Third paragraph of the Mortgage Agreements states: “[t]o secure to Lender or to the	1
holder by endorsement of the note (a) repayment of the indebtedness evidenced by the Note, with
interest thereon, (b) the performance of the covenants and agreements if Borrower herein contained,
(c) an amount of ten percent of the original principal amount of the Note to cover costs, expenses
and attorney’s fees in the event the holder of the Note is required to foreclose this Mortgage or seek
judicial collection, or collection in any proceeding in bankruptcy of the Borrower, which amount
shall be considered liquid and payable by the sole act of filing the complaint and shall be in addition
to the principal amount of the Note, (d) an amount of ten percent of the original principal amount of
the Note to cover any other advances which may be made under this Mortgage and (e) an amount of
ten percent of the original principal amount of the Note to cover, interest in addition to that secured
by law, Borrower does hereby create a voluntary first mortgage on the Property. In the event this
Mortgage is not recorded at the Registry with the agreed rank, the same shall constitute a default
hereunder entitling Lender to the remedies provided in paragraph 18 hereof” (Claims Register,
Proof of Claim #4-1).
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paragraph of the Mortgage Agreement is a valid and enforceable penal clause which was triggered
by the filing of the complaint in state court on November 3, 2009; (4) “[a]ccording to the Supreme
Court of Puerto Rico, the purposes of the referenced mortgage provisions are (i) to anticipate the
liquidation of the damages that a breach of contract may produce; and (ii) to introduce elements of
restriction and threat to compel the mortgagor to perform its obligations under the agreement;” (5)
Section 506(b) of the Bankruptcy Code and Fed. R. Bankr. P. 2016 are inapplicable to this matter and
are displaced by 11 U.S.C. §1322(e); (6) “[u]nder §1322(e), the terms of the underlying mortgage
agreement and applicable state law determine the default cure amount when a Chapter 13 plan
provides for the curing of the default and maintenance of payments to a creditor whose claim is
secured only by a security interest in real property that is debtor’s residence;” (7) “[i]nasmuch as
§1322(e) overrides Section 506(b) of the Bankruptcy Code, the default cure amount is the same
regardless of whether the claim is undersecured or oversecured;” (8) Section 1322(e) is not limited
to interest but is equally applicable to costs, expenses and attorneys’ fees; and (9) “[t]he anti-
modification provisions of §1322(b)(2) of the Bankruptcy Code have limited exceptions. Although
§1322(b)(5) allows the debtor to cure a default through the plan, it does not allow the debtor to
modify the rights of a home mortgage lender beyond the scope of the limited exceptions of the anti-
modification provisions of §1322(b)(2)” (Docket No. 21). Subsequently, the court on November 16,
2010, entered an Order granting Debtor’s objection to Claim Number 8 based on the reasonableness
requirement under Section 506(b) and on the loadstar approach (Docket No. 22).
On November 23, 2010, RNPM filed its Supplemental Objection to Debtor’s Plan
Confirmation whereby it argues the following: (i) Sections 1322(b)(2) and (5) must be read in
conjunction with Section 1322(e); (ii) “[t]he clear purpose of section 1322(e) was to limit the rights
of the parties to those contemplated in the original transaction and to ‘limit the secured creditor to the
benefit of the initial bargain with no court contrived windfall’” In re Plant, 288 B.R. 635, 641 (Bankr.
D. Mass. 2003) (Docket No. 27, pgs. 5-6); (iii) “...section 1322(e) clearly provides that the underlying
agreement executed between the parties and state law–not section 506(b)– will determine the amount
of the arrearage necessary to cure a default pursuant to the Section 1322(b)(5);” In re Plant, 288 B.R.
at 640-641; (iv) Section 1322(e) “‘applies with respect to interest, fees and costs to every contract
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effective after October 22, 1994, regardless of whether a particular claim is secured or unsecured,
oversecured or undersecured’” In re Plant, 288 B.R. at 642 (v) “a creditor is, thus, entitled, to interest
and other charges only if: (1) as a matter of threshold they are required under the underlying
agreement; and (2) they are not prohibited by state law;” (vi) the Court’s November 16, 2010 Order
is in conflict with the provisions of Section 1322(e) because the reasonableness requirements under
Section 506(b) for pre-petition attorney’s fees are inapplicable due to the following: (1) the underlying
mortgage agreement does not subject the costs, expenses and attorneys’ fees to a reasonableness test;
and (2) the pertinent provisions of the underlying mortgage agreement are not prohibited under the
applicable state law; (vii) clause 19 of the fourth paragraph (“the referenced contractual provisions2
contain the standard FHA-insured mortgage cure mechanism”) of the mortgage agreement provides
the Debtor with the right to reinstate and decelerate the mortgage loan if certain requirements are
satisfied such as making a lump sum payment to cure all the arrearage and to bring the mortgage
current; (viii) borrower’s right to reinstatement allows for the payment of reasonable attorney’s fees
related to enforcing the covenants and agreements of the borrower; and (ix) Debtor may not elect “the
benefits if the fee shifting contractual provision that would apply under the contractual mortgage
reinstatement scenario and at the same time invoke the benefits of the provisions of §1322(b)(5) In
re Tudor, 342 B.R. 540, 563-564 (Bankr. S.D. Ohio 2005)(Docket No. 27). Subsequently, RNPM
on November 23, 2010 filed a motion requesting extension of time to appeal Order entered on
Clause 19 of the Fourth Paragraph of the Mortgage Agreement states: “Notwithstanding	2
Lender’s acceleration of the sums secured by this Mortgage, Borrower shall have the right to have
any proceedings begun by Lender to enforce this Mortgage discontinued at any time prior to entry of
a judgment enforcing this Mortgage if (a) Borrower pays Lender all sums which would be then due
under this Mortgage and the Note including advances, if any, had no acceleration occurred; (b)
Borrower cures all breaches of any other covenants or agreements of Borrower contained in this
Mortgage; (c) Borrower pays all reasonable expenses incurred by Lender in enforcing the covenants
and agreements of Borrower contained in this Mortgage and in enforcing Lender’s remedies as
provided in paragraph 18 hereof, including, but not limited to, attorney’s fees; and (d) Borrower
takes such action as Lender may reasonably require to assure that the lien of this Mortgage,
Lender’s interest in the Property and Borrower’s obligation to pay the sums secured by this
Mortgage shall continue unimpaired. Upon such payment and cure by Borrower, this Mortgage and
the obligations secured hereby shall remain in full force and effect as if no acceleration had
occurred.” (Docket No. 27, pg. 13).
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November 16, 2010 (Docket No. 22) pursuant to Fed. R. Bankr. P. 8002(c)(2) (Docket No. 28). On
November 24, 2010, the court granted RNPM’s request by extending the time to file a notice to
appeal by twenty-one (21) days from the expiration of the time to file the notice of appeal (Docket
No. 29).
On December 1, 2010, a confirmation hearing was held. The Chapter 13 Trustee favorably
recommended Debtor’s Chapter 13 plan and RNPM objected to the same based on the legal
arguments contained herein (Docket No. 36). The court granted Debtor 20 days to answer the
supplemental objection and thereafter the matter would be taken under advisement (Docket No. 39).
On January 11, 2011, Debtor filed its Supplemental Objection to Claim #8-1 filed by RNPM and
presented the same arguments included in its prior objection to claim #8-1 (Docket No. 21). On
February 11, 2011, RNPM filed its answer to Debtor’s Supplemental Objection to Claim Number 8
(Docket No. 41). On February 14, 2011, RNPM filed a motion to submit power of attorney in
conformity with Fed. R. Bankr. P. 9010(c) (Docket No. 42).
The main issue before this court is whether a chapter 13 debtor that wants to cure pre-petition
mortgage arrearages pursuant to Section 1322(b)(5), must determine the amount of the pre-petition
arrearages (in particular pre-petition attorney’s fees) in conformity with Section 506(b) or pursuant
to Section 1322(e).
Applicable Law & Analysis
Curing Pre-Petition Mortgage Arrearages Through a Chapter 13 Plan
The Supreme Court in Rake v. Wade held that pursuant to Sections 506(b), 1322(b) and
1325(b)(5) holders of oversecured claims had an unqualified right to pre-confirmation and post-
confirmation interest on mortgage arrearages, irrespective of whether the agreement giving rise to3
such claim was silent or state law prohibited the same. In this particular case, the mortgage notes did
There is a difference between post-petition and post-confirmation interest. Post-petition	3
interest accrues on a pre-petition claim from the commencement of the case and the effective date
of a confirmed plan. Post-confirmation interest starts accruing on and after the effective date of the
plan. See Allan N. Resnick & Henry J. Sommer, 4 Collier on Bankruptcy ¶506.04[2] (16 ed.	th
2010).
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not provide interest on arrearages and applicable state law did not require payment of interest on
arrearages. Rake v. Wade, 508 U.S. 464, 124 L. Ed. 2d 424, 113 S. Ct. 2187 (1993). Subsequent to
the Supreme Court’s decision in Rake v. Wade, Section 1322(e) was enacted by the Bankruptcy
Reform Act of 1994, Pub. L. No. 103-394, §305, 108 Stat. 4106 (1994) to overrule the Supreme
Court’s holding in Rake v. Wade, for agreements entered into after October 22, 1994. 4
Section 506(b) of the Bankruptcy Code provides, “[t]o the extent that an allowed secured
claim is secured by property the value of which, after any recovery under subsection (c) of this
section, is greater than the amount of such claim, there shall be allowed to the holder of such claim,
interest on such claim, and any reasonable fees, costs, or charges provided for under the agreement
or State statute under which such claim arose.” 11 U.S.C. §506(b). Section 506(b) mandates the
allowance of post-petition interest, fees, costs and charges for over-secured claims. See Allan N.
Resnick & Henry J. Sommer, 4 Collier on Bankruptcy ¶506.04[1] (16 ed. 2010). The rate of post-	th
petition interest is mandated in accordance with the underlying contract or applicable nonbankruptcy
law. See Allan N. Resnick & Henry J. Sommer, 4 Collier on Bankruptcy ¶506.04[2] (16 ed. 2010).	th
However, the contractual interest rate may not be enforced if it is greater than the rate allowed by
applicable nonbankruptcy law. Id. “In the case of postpetition fees, costs and charges, the allowance of
these expenses as part of an oversecured claim is subject to a determination as to their reasonableness
Congress’ express intent of overruling Rake v. Wade is evident from Congressman Brooks	4
analysis of Section 1322(e) which stated: “[t]his section will have the effect of overruling the
decision of the Supreme Court in Rake v. Wade. In that case, the Court held that the Bankruptcy
Code required that interest be paid on mortgage arrearages paid by the debtors curing defaults on
their mortgages. Notwithstanding state law, this case has had the effect of providing a windfall to
secured creditors at the expense of unsecured creditors by forcing debtors to pay the bulk of their
income to satisfy the secured creditors’ claims. This had the effect of giving secured creditors
interest on interest payments, and interest on the late charges and other fees, even where applicable
law prohibits such interest and even when it was something that was not contemplated by either
party in the original transaction. This provision will be applicable prospectively only, i.e., it will be
applicable to all future contracts, including transactions that refinance existing contracts. It will
limit the secured creditor to the benefit of the initial bargain with no court contrived windfall. It is
the Committee’s intention that a cure pursuant to a plan should operate to put the debtor in the same
position as if the default had never occurred.” Keith M. Lundin & William H. Brown, Chapter 13
Bankruptcy, 4 Edition, §135.1, at ¶ [3], Sec. Rev. June 1, 2004, www.Ch13online.com. citing 140	th
Cong. Rec. H10, 770 (section by section analysis by Congressman Brooks).
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under federal bankruptcy law.” Id.
Section 1322(e) provides, “[n]otwithstanding subsection (b)(2) of this section and sections
506(b) and 1325(a)(5) of this title, if it is proposed in a plan to cure a default, the amount necessary
to cure the default shall be determined in accordance with the underlying agreement and applicable
nonbankruptcy law.” 11 U.S.C. §1322(e). Section 1322(e) does not apply exclusively to the curing
of interest on arrears but also includes other charges that comprise the arrerage mortgage claim such
as attorney’s fees, costs and late charges. See Keith M. Lundin & William H. Brown, Chapter 13
Bankruptcy, 4 Edition, §135.1, at ¶ [8], Sec. Rev. June 1, 2004, www.Ch13online.com. (“The recovery	th
of attorneys’ fees, costs and late charges as components of curing default with respect to a contract
after October 22, 1994, will be determined by the agreement and nonbankruptcy law.”); Deutsche
Bank Nat’l Trust Co. v. Tucker, 621 F. 3d 460, 464 (6 Cir. 2010); In re Plant, 288 B.R. 635, 641th
(Bankr. D. Mass. 2003)(“When a debtor seeks to cure a prepetition payment default over the life of
a Chapter 13 plan pursuant to §1322(b)(5), the amount of the arrearage must be ‘determined in
accordance with the underlying agreement and applicable nonbankruptcy law’”); In re Gagne, 378
B.R. 439, 443 (Bankr. D. N.H. 2007); In re Adejobi, 404 B.R. 78, 81 (Bankr. E.D.N.Y. 2009).
Moreover, it is important to note that Section 1322(e) does not provide a different treatment for curing
pre-petition defaults for undersecured or oversecured debts. See In re Plant, 288 B.R. 635 at 642;
Keith M. Lundin & William H. Brown, Chapter 13 Bankruptcy, 4 Edition, §138.1, at ¶ [10], Sec. Rev.	th
June 1, 2004, www.Ch13online.com. (“The extent of security is irrelevant to new §1322(e)– even if
the residential mortgage is entirely unsecured, if the plan cures default, the mortgage holder will be
entitled to recover whatever charges are allowed by the underlying agreement and nonbankruptcy
law”).
This court concludes that in a chapter 13 case in which a secured creditor is solely secured by
the debtor’s principal residence, 11 U.S.C. §1322(e) is the applicable section of the Bankruptcy Code
that must be employed to determine the amount of the pre-petition arrearages (in this case, pre-
petition attorney’s fees) that must be paid pursuant to Section 1322(b)(5) or (1322(b)(3)) based on
“[o]rdinary canons of statutory construction [which] would interpret ‘notwithstanding’ in §1322(e)
to mean that §1322(e) controls whether and to what extent fees, costs and other charges are allowed
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to cure default with respect to all mortgages entered into after October 22,1994– including
oversecured mortgages and including entitlements during the period between the petition and
confirmation of a plan.” Keith M. Lundin & William H. Brown, Chapter 13 Bankruptcy, 4 Edition,	th
§138.1, at ¶ [12], Sec. Rev. June 1, 2004, www.Ch13online.com. Thus, Section 506(b) reasonableness
requirement for curing arrearages (in particular attorney’s fees) is not applicable in the instant case,
since Section 1322(e) is the controlling section. Section 506(b) has no applicability in the cure5
situation in which a debtor is merely keeping the original contract in place and bringing it up to date.
In other words, the amount necessary to cure a default through 11 U.S.C. §1322(b)(5) is the same
amount as would be required to cure if the debtor were not in bankruptcy.”).
The court clarifies that the anti-modification provisions of Section 1322(b)(2) regarding the6
rights of secured mortgage holders secured solely with the debtor’s residence is subject to the
exceptions found in subsections 1322(c) and (e). See Allan N. Resnick & Henry J. Sommer, 8 Collier
on Bankruptcy ¶1322.06[1] (16 ed. 2010). However, the exception found in Section 1322(e) for the	th
anti-modification provision of Section 1322(b)(2) for the claims of secured mortgage holders should
only be employed when these two sections are in conflict.
Section 1322(e) may be an unfortunate section of the Bankruptcy Code because it fails to	5
impose a reasonableness requirement on curing defaults for attorney’s fees, meaning that it opens
the door for unreasonable attorney’s fees to be allowed by contract and state law in direct
contravention to the principle of affording debtors with a fresh start. See Keith M. Lundin &
William H. Brown, Chapter 13 Bankruptcy, 4 Edition, §138.1, at ¶ [33], Sec. Rev. June 1, 2004,	th
www.Ch13online.com. (“When §506(b) is not applicable, and with respect to all agreements after
October 22, 1994, the Bankruptcy Code does not impose a reasonableness condition on attorney
fees as an element of curing defaults– if allowed by contract and state law, even unreasonable
attorney fees may creep into the arrearage claim.”); Padilla v, GMAC Mortg. Corp. (In re
Padilla), 389 B.R. 409, 438-439 (Bankr. D. Pa. 2008) (“By its very terms, 11 U.S.C. §1322(e)
“trumps” 11 U.S.C. §506(b)).
Section 1322(b)(2) provides, that a debtor subject to subsections (a) and (c) of this	6
section through a Chapter 13 plan may, “modify the rights of holders of secured claims, other
than a claim secured only by a security interest in real property that is the debtor’s 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).
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Enforceability of Penal Clause in Mortgage Deed under the Civil Code of Puerto Rico
The Mortgage Agreement entered into by Debtor and the prior mortgage holder, R&G Mortgage
Corporation, contains a penal clause in its Third paragraph which states:
“[t]o secure to Lender or to the holder by endorsement of the note (a) repayment of the
indebtedness evidenced by the Note, with interest thereon, (b) the performance of the covenants
and agreements of Borrower herein contained, (c) an amount of ten percent of the original
principal amount of the Note to cover costs, expenses and attorney’s fees in the event the holder
of the Note is required to foreclose this Mortgage or seek judicial collection, or collection in any
proceeding in bankruptcy of the Borrower, which amount shall be considered liquid and payable
by the sole act of filing the complaint and shall be in addition to the principal amount of the
Note, (d) an amount of ten percent of the original principal amount of the Note to cover any
other advances which may be made under this Mortgage and (e) an amount of ten percent of the
original principal amount of the Note to cover, interest in addition to that secured by law,
Borrower does hereby create a voluntary first mortgage on the Property. In the event this
Mortgage is not recorded at the Registry with the agreed rank, the same shall constitute a default
hereunder entitling Lender to the remedies provided in paragraph 18 hereof” (Claims Register,
Proof of Claim #4-1).
RNPM argues that the above referenced penal clause, in particular section (c) of the Third
paragraph of the Mortgage Deed was triggered by the filing of a complaint for collection of monies
action in state court and in conformity with said penal clause, 10% of the original principal amount (in
this case $7,600) became liquid and payable upon the filing of the complaint to cover costs, expenses
and attorney’s fees. Debtor does not contest that such penal clause is applicable but argues that
attorney’s fees in the amount of $7,600 is unreasonable, given that the mortgage payment in arrears is
about the same amount as the attorney’s fees. Debtor also argues that this particular claim is burdensome
for the Debtor to the extent that it makes it almost impossible for her to retain her residential property
(Docket No. 40). In the Commonwealth of Puerto Rico, penal clauses are mandated by Articles 1106-
1109 of the Civil Code of Puerto Rico, 31 L.P.R.A. §§3131-3134.
Articles 1106-1109 of the Puerto Rico Civil Code, 31 L.P.R.A. §§3131-3134
Pursuant to the Puerto Rico Civil Code penal clauses have a punitive function that compels the
debtor to perform due to the additional security they provide for creditors and which penalizes a debtor’s
nonperformance of the obligation by making the same more burdensome and increasingly onerous for
the debtor. See Jack’s Beach Resort, Inc. v. Puerto Rico Tourism Development Company, 112 D.P.R.
344 (1982), 12 P.R. Offic. Trans. 430 (1982). In the Commonwealth of Puerto Rico, penal clauses are
governed by Articles 1106-1109 of the Civil Code of Puerto Rico, 31 L.P.R.A. §§3131-3134.
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Article 1106 of the Puerto Rico Civil Code provides,
“[i]n obligations with a penal clause the penalty shall substitute indemnity for damages and the
payment of interest in case of nonfulfilments, should there be no agreement to the contrary. This
penalty can only be enforced when it is demandable in accordance with the provisions of this
title.” 31 L.P.R.A. §3131.
Article 1107 of the Puerto Rico Civil Code states,
“[t]he debtor cannot exempt himself from the fulfilment of the obligation by paying the penalty,
unless such right has been expressly reserved to him. Neither may the creditor exact the
fulfilment of the obligation and also the payment of the penalty, unless such right has been
clearly granted him.” 31 L.P.R.A. §3132.
Article 1108 of the Puerto Rico Civil Code states,
“[t]he court or judge shall equitably modify the penalty if the principal obligation should have
been partly or irregularly fulfilled by the debtor.” 31 L.P.R.A. §3133.
Article 1109 of the Puerto Rico Civil Code states,
“[t]he nullity of the penal clause does not carry with it that of the principal obligation. The
nullity of the principal obligation carries with it that of the penal clause.” 31 L.P.R.A. §3134.
Article 1108 of the Puerto Rico Civil Code, 31 L.P.R.A. §3133 provides for the modification
of the penal clause if the principal obligation should have been partly or irregularly fulfilled by the
debtor. The Puerto Rico Supreme Court in the seminal case (with respect to penal clauses contained
in mortgage agreements) of Jack’s Beach Resort, Inc. v. Puerto Rico Tourism Development Company,
112 D.P.R. 344 (1982), 12 P.R. Offic. Trans. at 438, explains that this equitable remedy against the
excessive burden of the penal clause should only be used with “great caution and notorious justification”
in extraordinary circumstances “as a means of mitigating its excessive onerousness for the obligee, or
the alarming lack of proportion.” Id. The reason the court must exercise “great caution and notorious
justification” when modifying a contractual penal clause is based on the doctrines of the autonomy of
the parties to enter into contracts pursuant to Article 1207 of the Puerto Rico Civil Code and the	7
principle of pacta sunt servanda based on Article 1044 of the Puerto Rico Civil Code, 31 L.P.R.A.	8
Article 1207 of the Puerto Rico Civil Code provides, “[t]he contracting parties may make	7
the agreement and establish the clauses and conditions which they may deem advisable, provided
they are not in contravention of law, morals, or public order.” 31 L.P.R.A. §3372.
Article 1044 of the Puerto Rico Civil Code provides, “[o]bligations arising from contracts	8
have legal force between the contracting parties, and must be fulfilled in accordance with their
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§2994, which holds parties to strict compliance with the terms of their bargain. Moreover, Article 1233
of the Puerto Rico Civil Code provides that, “[i]f the terms of a contract are clear and leave no doubt as
to the intentions of the contracting parties, the literal sense of its stipulations shall be observed. If the
words should appear contrary to the evident intention of the contracting parties, the intention shall
prevail.” 31 L.P.R.A. §3471. In its analysis of the modification of penal clauses, the Supreme Court
in Jack’s Beach Resort, Inc. v. Puerto Rico Tourism Development Company noted that it was not
necessary for the debtor to pray for such equitable remedy but that the debtor’s mere objection to the
foreclosure proceedings was sufficient to activate the court’s equitable intervention. Id. at 439. Morever,
the Supreme Court held that the mitigation of attorney’s fees pursuant to a penal clause, “should be
geared to an adjustment that, without eliminating the penal nature of the clause, reduces the penalty to
make it proportional to the degree of fault and the magnitude of the harm caused.” Id. at 441.
After thoroughly reviewing the totality of circumstances in the instant case, this court finds
that there are grounds for equitable intervention pursuant to Article 1108 of the Puerto Rico Civil
Code, 31 L.P.R.A. §3133. The Debtor has partly fulfilled her mortgage payment obligations under
the mortgage note since January 2004, and she (Debtor) intends to cure the mortgage arrears on her
mortgage and continue making her monthly mortgage payments through her Chapter 13 plan. The
court is aware that at the time of Debtor’s bankruptcy petition filing she had not made any mortgage
payments to RNPM for over a year. Debtor’s Chapter 13 Payment Plan details $6,400 of arrears to
Operating Partners (Docket No. 2) and Debtor’s Chapter 13 Statement of Current Monthly Income
and Calculation of Commitment Period and Disposable Income (Form B22C) lists monthly mortgage
payments of $491 (Docket No. 1). In the instant case, RNPM’s collection action in state court9
proceeded up to the point of the filing of the complaint by RNPM.
This court finds that the penalty of $7,600.00 for attorney’s fees in a case which proceeded
only up to the point of the filing of the complaint by RNPM lacks proportion to the circumstances
stipulations.” 31 L.P.R.A. §2994.
The court notes that there is a discrepancy between the amount for the home mortgage	9
listed in Schedule J, line item #1 reflects an amount of $461.00 and Form B22C, Subpart C, line
item #47 reflects an amount of $491 (Docket No. 1).
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present in the instant case, wherein an individual intends to cure the mortgage payment arrears and
continue making the monthly mortgage payments through a chapter 13 plan. Moreover, this court
finds that the imposition of the $7,600 penalty for attorney’s fees for initiating a collection of monies
action would result inequitable unfair consequences, namely the creditor’s attorney getting a windfall
at the expense of the unsecured debtors and negating the honest but unfortunate debtor its fresh start.
Thus, this court modifies the penalty for attorney’s fee should be equitably reduced to $2,000.00.10
The court clarifies that the Debtor is not before a reinstatement procedure as described in
clause 19 of the fourth paragraph of the Mortgage Agreement which affords the borrower the right
to reinstate and decelerate the mortgage loan, after acceleration and foreclosure procedures have11
begun, if certain requirements are satisfied. The cure of mortgage arrearages paid over several
payments through a Chapter 13 plan does not constitute a contractual mortgage reinstatement which
requires a lump sum payment of the mortgage arrearages. See In re Tudor, 342 B.R. 540, 563-566
(Bankr. S.D. Ohio 2005); Dollar Bank v. Petroff (In re Petroff), 2001 Bankr. Lexis 1594 (B.A.P. 6th
Cir. 2001).
See Manuel Albaladejo García, Comentarios al Código Civil y Compilaciones Forales, t.	10
XV, Vol. 2, 485-488, Madrid, Ed. Revista de De Derecho Privado,1983 for a discussion regarding
the Judge’s discretion to mitigate equitably the contractual penalty.
Clause 18 of the Fourth Paragraph of the Mortgage Agreement states: “Except as provided	11
in paragraph 17 hereof, upon borrower’s breach of any covenant or agreement of Borrower in this
Mortgage, including the covenants to pay when due any sums secured by this Mortgage, Lender
prior to acceleration shall mail notice to Borrower as provided in paragraph 14 hereof specifying:
(1) the breach; (2) the action required to cure the breach; (3) a date, not less than thirty (30) days
from the date the notice is mailed to Borrower, by which such breach must be cured; and (4) that
failure to cure such breach on or before the date specified in the notice may result in acceleration of
the sums secured by this Mortgage, foreclosure by judicial proceeding and sale of the Property. The
notice shall further inform Borrower of the right to reinstate after acceleration and the right to assert
the non-existence of a default or any other defense of Borrower to acceleration and foreclosure in
the foreclosure proceeding. If the breach is not cured on or before the date specified in the notice,
Lender at Lender’s option may declare all of the sums secured by this Mortgage to be immediately
due and payable without further demand and may foreclose this Mortgage by judicial proceeding.
Lender shall be entitled to collect in such proceeding all expenses of foreclosure, including, but not
limited to, attorney’s fees, and costs of documentary evidence, abstracts and title reports.” (Claims
Register, Proof of Claim #4-1)
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Applicability of Fed. R. Bankr. P. 2016 to 11 U.S.C. §1322(e)
Fed. R. Bankr. P. 2016(a) provides in pertinent part, “[a]n entity seeking interim or final
compensation for services, or reimbursement of necessary expenses, from the estate shall file an
application setting forth a detailed statement of (1) the services rendered, time expended and expenses
incurred, and (2) the amounts requested.” Fed. R. Bankr. P. 2016(a). Fed. R. Bankr. P. 2016 is
applicable for claims for attorney’s fees pursuant to Section 506(b) of the Bankruptcy Code. See Allan
N. Resnick & Henry J. Sommer, 9 Collier on Bankruptcy ¶2016.04(16 ed. 2010). Thus, a creditor	th
requesting attorney’s fees pursuant to Section 506(b) must abide by Fed. R. Bankr. P. 2016(a). In the
instant case, this court has determined that the controlling section to determine the amount of pre-
petition attorney’s fees is Section 1322(e) of the Bankruptcy Code, meaning that the mortgage
agreement and/or state law is determinative of the pre-petition attorney’s fees.
In the case of In re Plant, 288 B.R. at 642-644 (Bankr. D. Mass. 2003), the bankruptcy court
held that a mortgage holder’s entitlement to pre-petition attorney’s fees and the standards employed
to determine the same were in accordance with Massachusetts state law, which in turn employs
several factors to determine the reasonableness of attorney’s fees. The court also determined that Fed.
R. Bankr. P. 2016 governed the procedure for determining the reasonableness of the attorney’s fees
supporting its reasoning on the following: (i)”... a federal court interpreting state law is bound to
employ the substantive law of that state, matters of procedure are determined by the rules of the
forum;” (ii) the creditor’s claim of attorney’s fees would be paid from estate property in conformity
with 11 U.S.C. §1306 and Fed. R. Bankr. P. 2016 provides in pertinent part that, “an entity seeking
interim or final compensation for services, or reimbursement of necessary expenses, from the estate,
shall file an application”; and (iii) “[w]hile MBLR 2016-1 does not specifically reference §1322(e),
§105(a) provides more than sufficient support for this Court’s authority to require compliance with
that rule. This procedural device not only allows the Court to effectuate FRBP 2016’s purpose of
protecting assets of the bankruptcy estate, but also ensures that Congress’ intent codified in §1322(e)
is upheld. Secured creditors may not enjoy a ‘court contrived windfall’ at the expense of debtors or
unsecured creditors by collecting unjustified attorney fees.” In re Plant, 288 B.R. at 643-644. In the
case before this court, the substantive law of the Commonwealth of Puerto Rico as discussed herein
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regarding the mortgage holder’s entitlement to pre-petition attorney’s fees does not employ a
reasonableness standard for attorney’s fees. Thus, if the substantive law of the state does not employ
a reasonableness standard, then the court is unable to employ Fed. R. Bankr. P. 2016 which governs
the procedure to determine the reasonableness of pre-petition attorney’s fees.
Conclusion
In view of the foregoing, the court finds that 11 U.S.C. §1322(e) is the controlling section for
determining the amount of pre-petition mortgage arrearages and that the procedure to determine the
reasonableness of attorney’s fees pursuant to Fed. R. Bankr. P. 2016 is not applicable in the instant
case. This court also finds that pursuant to Article 1108 of the Puerto Rico Civil Code, 31 L.P.R.A.
§3133, there are grounds for equitable intervention regarding the above referenced penal clause and
as such finds that the penalty for attorney’s fee should be equitably reduced to $2,000.00.
SO ORDERED.
In San Juan, Puerto Rico, this 6th day of September 2011.
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