In re Mendez, Case No.: 18-19332-ABA

• Decision Date: 10 April 2019
• Docket Number: Case No.: 18-19332-ABA
• Parties: IN RE: Felix A. MENDEZ, Sr., Debtor.
• Court: U.S. Bankruptcy Court — District of New Jersey

600 B.R. 321

IN RE: Felix A. MENDEZ, Sr., Debtor.

Case No.: 18-19332-ABA

United States Bankruptcy Court, D. New Jersey.

Signed April 10, 2019

Robert A. Loefflad, Ford, Flower, Hasbrouck & Loefflad, for Debtor.

MEMORANDUM DECISION

Andrew B. Altenburg, Jr., United States Bankruptcy Judge

Before the court is a Motion to Reduce Claims of RKL Financial Corporation (Doc. No, 19) (the "Motion") filed by Felix A. Mendez, Sr. (the "Debtor") in the above referenced matter. In the Motion, the Debtor argues that the secured claim of RKL Financial Corporation ("RKL") must be reduced as the attorneys' fees and costs included therein (the "Fees")¹ are excessive and unreasonable, and exceed the statutory limits set by the New Jersey Fair Foreclosure Act (the "Act") and the New Jersey Rules of Court (the "NJ Rule" or "NJ Rules"). RKL filed a cross-motion seeking relief from the automatic stay, asserting that the relief sought violates the anti-modification provision of 11 U.S.C. § 1322(b)(2), and further, that the Debtor's plan is not feasible (the "Cross-Motion").

The parties, through the various submissions and oral arguments, are asking this court to determine the reasonableness and/or limit of the Fees under the Act, the NJ Rules, state law and/or the parties' contract. However, because RKL does not consent to a loan modification, the Debtor may only address the fully matured secured claim of RKL under section 1322(c)(2), and that provides only two options: payment of the final judgment in foreclosure (limiting the Fees as allowed thereunder), or payment of the mortgage (to pay the default under the mortgage, which by its terms, provides for payment of the Fees). Regardless of which option the Debtor chooses, RKL insists that it is entitled to the Fees. Because the court chooses to abstain from determining the reasonableness and/or limit of the Fees as the state court is the better court to determine that issue, relief from the stay will be granted, limited to allowing the state court to consider the Fees under state law. Once that determination is made, this court will allow any Fees granted by the state court, and absent an amicable resolution between the parties, the Debtor will have to file a modified plan addressing RKL's allowed claim under section 1322(c)(2) of which the feasibility will be determined in the ordinary course.

Accordingly, the Motion will be held in abeyance until the state court determines the reasonableness and/or limit of the Fees. The Cross-Motion will be denied on the grounds stated but the court will vacate the automatic stay for the limited purpose of allowing the parties to proceed in state court on a determination of the amount of the Fees.

JURISDICTION AND VENUE

This matter before the court is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(B), and the court has jurisdiction pursuant to 28 U.S.C. § 1334, 28 U.S.C. § 157(a) and the Standing Order of Reference issued by the United States District Court for the District of New Jersey on July 23, 1984, as amended on September 18, 2012, referring all bankruptcy cases to the bankruptcy court. The following constitutes this court's findings of fact and conclusions of law as required by Federal Rule of Bankruptcy Procedure 7052.

PROCEDURAL HISTORY

On May 7, 2018, the Debtor filed his chapter 13 case. Doc. No. 1. On July 6, 2018, the Debtor filed the Motion. RKL opposed the Motion and filed the Cross-Motion. Doc. No. 24. Debtor then filed a response to RKL's opposition and Cross-Motion, Doc. No. 25, to which RKL filed a response. Doc. No, 27. Thereafter, the court sent a letter to the parties in an attempt to narrow the issues. Doc. No, 28. The Debtor responded with a supplemental letter brief, Doc. No. 29. Likewise, RKL also filed a supplemental response. Doc. No. 30. A hearing was held on September 18, 2018, after which the court allowed the parties to submit post-hearing submissions. The deadline to submit pleadings was extended from time to time to allow the parties to amicably resolve the matter. With no settlement reached, the parties made their final submissions. Docs, No. 37 and 38. This matter is now ripe for disposition.

Pursuant to Fed. R. Bankr. P. 7052, the court issues the following findings of fact and conclusions of law.

FINDINGS OF FACT

In making these findings, the court has considered the arguments of the parties, the documentary evidence, and the totality of the record.

RKL is a secured creditor of the Debtor, Doc. No. 19, p.3. The obligation to RKL was evidenced by a fifteen-year note with a balloon payment that matured on May 7, 2014. Id. at 4. The note was secured by a mortgage against the Debtor's residence. Id. at 3.

After the Debtor failed to make the balloon payment, on December 17, 2014, RKL initiated a foreclosure action. The Debtor heavily contested this action, and due to that, plus attempts to negotiate a workout, RKL incurred extensive attorneys' fees. On April 10, 2018, RKL finally obtained a final judgment of foreclosure from the Superior Court of New Jersey (the "Final Judgment"). Id. at 4-5. The Final Judgment awarded RKL $ 161,639.05 in principal and interest, but only $ 1,766.39 of its Fees, as calculated by, or rather limited under, NJ Rule 4:42-9(a). Id. at 30. Neither the mortgage (and for that matter, the note) nor the Final Judgment clearly evidenced an intent to preserve the effect of any of the mortgage obligations post-Final Judgment. Doc. No. 24, pp. 18-31; Doc. No. 19, pp. 29-31.

In his case, the Debtor proposes a 36-month plan, which makes the last payment thereunder due in 2021. Doc. No. 2. Under the plan, the Debtor intends to address the claim of RKL through a loan modification. Id. at 2. RKL timely filed a proof of claim claiming it is owed the total of $ 197,280.18, including the $ 32,839.81² in Fees. Claim No. 2. The Fees represent all the fees RKL asserts it incurred in connection with enforcing its rights under the note and mortgage as opposed to the amount awarded in the Final Judgment that were limited pursuant to the NJ Rules. Doc. No. 24, p.15-16.

Thereafter, the Debtor filed the Motion, arguing that RKL's request for the Fees is excessive and unreasonable and exceeds the maximum recoverable attorneys' fees and costs allowed under the Act and the NJ Rules. Doc. No, 19, p.33. The Debtor argued that pursuant to the Act, RKL may only recover a maximum of $ 1,794.41 in attorneys' fees. Accordingly, RKL's total claim should be reduced to $ 166,234.78. Id.

Of course, RKL opposed the reduction of its claim and filed the Cross-Motion. It stated "[b]y law Bankruptcy Court may not approve a bankruptcy plan filed in a Chapter 13 case that modifies the terms of a mortgage loan on the homeowner's principal residence." Doc. No. 24, p.10, RKL argued that the Motion violates Section 1322(b)(2) of the Bankruptcy Code because that section prohibits any modification of the rights of holders of claims secured solely by a security interest in real estate that is the debtor's principal residence. Id. at 11. See generally , 11 U.S.C.A. § 1322. On that basis, RKL argued that there can be no modification of its claim and therefore, its claim, including all of its Fees, must be paid. RKL declared:

Here, the Court need not consider Debtor's Motion to Reduce RKL's claim. Debtor's Plan violates 1322(b)(2) and therefore cannot be confirmed, and therefore a motion to reduce or modify the lender's claim is moot and irrelevant. The court can see that Debtor seeks, by way of a Motion to Reduce Claim, to do what bankruptcy law expressly prohibits. Debtor seeks to impermissibly modify the lender's claim, via this Motion and via his Plan which violates 1322(b)(2).

Id. at 12. For this reason, RKL also averred that the Debtor's plan is not feasible, and the Cross-Motion must be granted. In support of its position, RKL relied, inter alia, on Nobelman v. American Savings Bank, 508 U.S. 324, 113 S.Ct. 2106, 124 L.Ed.2d 228 (1993) and In re Scarborough , 461 F.3d 406 (3d Cir. 2006).

DISCUSSION

Initially, the court entertained the Motion, believing it to be a straight-forward issue about the reasonableness of the Fees. In addition, since the court was hopeful that the parties might amicably resolve the issue, it refrained from making its decision. But when settlement negotiations failed, and the parties submitted their latest submissions, it became apparent that the reasonableness of the Fees was really a secondary issue. Rather, first, a determination had to be made as to whether the Debtor could even propose a plan that provided for a loan modification, and if so, whether the Debtor could reduce RKL's secured claim by excluding the Fees. As there appears to be a misunderstanding as to what a debtor can and cannot do under Section 1322,³ some clarification is necessary. This requires an examination of the impact of section 1322(c) on section 1322(b)(2).

1. Section 1322(c)

Simply put, RKL's strict reading of subsection 1322(b)(2) is not supported by the law. Section 1322(b)(2) provides:

(b) Subject to subsections (a) and (c) of this section, the plan may—...

(2) 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). (emphasis added). Hence, by its own terms, section 1322(b)(2) is subject to section 1322(c).

Subsection (c) provides:

(c) Notwithstanding subsection (b)(2) and applicable nonbankruptcy law—

(1) a default with respect to, or that gave rise to, a lien on the debtor's principal residence may be cured under paragraph (3) or (5) of subsection (b) until such residence is sold at a foreclosure sale that is conducted in accordance with applicable nonbankruptcy law; and

(2) in a case in which the last payment on the original payment schedule for a claim secured only by a security interest in real property that is

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