In re Hatala, 03-14407 (RTL).

• Decision Date: 11 July 2003
• Docket Number: No. 03-14407 (RTL).,03-14407 (RTL).
• Citation: 295 B.R. 62
• Parties: In re John HATALA, Debtor.
• Court: U.S. Bankruptcy Court — District of New Jersey

295 B.R. 62

In re John HATALA, Debtor.

No. 03-14407 (RTL).

United States Bankruptcy Court, D. New Jersey.

July 11, 2003.

COPYRIGHT MATERIAL OMITTED

Diane Ault Cullen, Diane Ault Cullen, P.C., Toms River, NJ, for Debtor.

Jeremy D. Countess, Moorestown, NJ, for Wachovia Bank, N.A.

OPINION

RAYMOND T. LYONS, Bankruptcy Judge.

Debtor moved to modify the claim of Wachovia Bank, N.A., ("Wachovia") the first mortgagee of debtor's home. Wachovia asserted a claim for arrears that included $4,441.20 in attorney's fees. Debtor objected to the fees on the grounds that they exceed the amount allowed by New Jersey law. The issue is whether a lender is entitled to its actual legal fees under a chapter 13 plan to cure arrears or if it is limited to the amount allowed in its foreclosure judgment under the New Jersey Court Rules. Because 11 U.S.C. § 1322(e) directs that the amount necessary to cure default under a chapter 13 plan is determined in accordance with both the underlying agreement and applicable non-bankruptcy law, and because New Jersey law on foreclosures caps attorney's fees at the amount allowed in the New Jersey Court Rules, the lender is limited to the fees allowed in the foreclosure judgment. Debtor's motion is granted.

The court has jurisdiction over this contested matter under 28 U.S.C. §§ 1334(a) and 157(a) and the Standing Order of the United States District Court dated July 10, 1984 referring all bankruptcy cases to the bankruptcy court. This is a core proceeding under 28 U.S.C. § 157(b)(2)(B) concerning the allowance of claims.

Facts

The facts are not disputed. Debtor gave Wachovia a note and mortgage on his home on April 21, 1997. Under the section entitled "Attorney's fees," the note provided, "If you [the bank] hire an attorney to collect what I owe, I agree to pay your reasonable attorney's fees which will be 15% of the total amount I owe you, plus court costs." The mortgage agreement stated, "If you [the bank] foreclose on the Property, you shall have the right to collect in that proceeding, all expenses of foreclosure, including but not limited to, reasonable attorney's fees and costs of documents, abstracts, and title reports."

Debtor defaulted on his obligation and Wachovia commenced a foreclosure action on November 5, 2001. The debtor filed for chapter 13 protection on April 2, 2002. Wachovia filed a proof of claim and a pro forma objection to confirmation. Although debtor made several payments to the trustee, at the confirmation hearing, he moved to dismiss his case which was done on October 30, 2002. Wachovia obtained a final judgment of foreclosure on January 6, 2003. The judgement allowed for $76,929.68 in principal, interest and late charges, and $919.30 in attorney's fees.

On February 11, 2003, debtor filed the instant chapter 13 case. His plan proposed to cure the arrears on Wachovia's mortgage by monthly payments to the trustee over 60 months and to maintain current payments directly to Wachovia pursuant to 11 U.S.C. § 1322(b)(5). Wachovia filed a proof of claim on February 18, 2003, which included attorney's fees in the amount of $4,441.20. Of the total fees, $3,841.20 represented work performed pre-petition, including 9.1 hours for work on the initial foreclosure proceeding, 6.1 hours for work during the first debtor's bankruptcy case, and 5.1 hours for continuing with the foreclosure after the debtor's initial bankruptcy case was dismissed, for a total of 20.3 hours. Wachovia multiplied the number of hours its counsel expended on the case by counsel's hourly rate of $125, then added disbursements of $1,303.70 to arrive at the pre-petition figure.

Because Wachovia enjoys the benefit of a flat fee for certain services, this was not the amount actually charged by Wachovia's counsel. Wachovia's counsel charged the lender a flat fee of $1,050.00 for the initial, uncontested foreclosure action, billed in three equal installments, $550.00 for the uncontested bankruptcy work in the first case, and $350 (an amount equal to the last installment payment for uncontested foreclosure work) for continuing with the foreclosure after the dismissal of debtor's bankruptcy, plus disbursements. Counsel's pre-petition statements for services totaled $3,241.97.

The remaining $600.00 in the proof of claim was an estimate for post-petition services in the second bankruptcy case. Debtor objected on the grounds that the amount of attorney's fees exceeded the amount allowable under New Jersey law. In a subsequent cross motion to amend its proof of claim, Wachovia increased its estimated post-petition attorney's fees to $1,350.00 to include work performed in connection with defending the objection to its proof of claim. Wachovia's attorney's fees appear summarized in the following chart:

                                               Proof of
                                               Claim           Actual
                Foreclosure                    $1,137.50       $1,050.00
                1st Bankruptcy                 $  762.50       $  550.00
                Foreclosure Continued          $  637.50       $  350.00
                2nd Bankruptcy (projected)     $  600.00       N/a
                Total Attorney's Fees          $3,137.50       $1,950.00
                Expenses                       $1,303.70       $1,291.97
                Total                          $4,441.20       $3,241.97
                

Discussion

Where a chapter 13 plan proposes to cure a default, the amount necessary to effectuate the cure "shall be determined in accordance with the underlying agreement and applicable nonbankruptcy law." 11 U.S.C. § 1322(e) (1993 & Supp.2003). In the instant case, Wachovia argues, the note entered into by the parties states that in the event of default, the debtor will pay Wachovia's reasonable attorney's fees. The note defines reasonable attorney's fees to be 15% of the outstanding balance due on the loan. However, Wachovia did not sue debtor on the note; it brought an action to foreclose on debtor's property. Where a mortgagee forecloses on the secured property, the allowable attorney's fees are governed by N.J. Ct. R. 4:42-9(a)(2), and not the note stipulation. Coastal State Bank v. Colonial Wood Products, Inc., 172 N.J.Super. 320, 411 A.2d 1172, 1174 (App.Div.1980). Moreover, Wachovia does not seek 15% of the outstanding balance of the loan, per the terms of the note; it seeks to be reimbursed for the actual costs of its attorney's fees. Thus, any argument based on the terms of the note is irrelevant, and the pertinent agreement is the mortgage. Wachovia is only entitled to attorney's fees to the extent that they are supported by both the mortgage agreement and nonbankruptcy law regarding foreclosures.

As noted above, the mortgage agreement between debtor and Wachovia provided that the debtor would pay Wachovia's reasonable attorney's fees in a foreclosure proceeding. The first requirement for allowing the foreclosure fees is, therefore, met. As to the second requirement, state law qualifies as applicable nonbankruptcy law when interpreting the provisions of the Bankruptcy Code. In re Yuhas, 104 F.3d 612, 614 n. 1 (3d Cir.1997). Several facets of New Jersey law regarding foreclosures and attorney's fees support the conclusion that the mortgagee is not entitled to any additional fees beyond the amount allowed in the foreclosure judgment.

When a federal tribunal must apply state law, the decisions of the respective state's highest court are binding. State Farm Mut. Auto. Ins. Co. v. Coviello, 233 F.3d 710, 713 (3d Cir.2000). However, where the state's highest court has not rendered a decision on a particular point of law, the federal tribunal must examine the decisions of lower courts, if any. West v. Am. Tel. & Tel. Co., 311 U.S. 223, 237, 61 S.Ct. 179, 85 L.Ed. 139 (1940). Such decision are not to be disregarded unless the court is convinced by other persuasive data that the highest court of the state would decide otherwise. Id. In the instant case, the New Jersey Supreme Court has not rendered a decision on point, and so the court must look to the decisions rendered by the various lower courts.

In general, New Jersey follows the American Rule on attorney's fees, i.e., it "adhere[s] to the view that the sound administration of justice is best advanced by having the parties bear the burden of their own counsel fees." Hatch v. T & L Assocs., 319 N.J.Super. 644, 726 A.2d 308, 309 (App.Div.1999). The only exceptions to that rule are (1) where parties to a contract have included a fee shifting provision in their agreement¹ and the fees are deemed reasonable by the court, Alcoa Edgewater No. 1 Fed. Credit Union v. Carroll, 44 N.J. 442, 210 A.2d 68, 72 (1965), and (2) those carved out in New Jersey Court Rule 4:42-9. The purpose of the court rule, which allows the prevailing plaintiff in a foreclosure to collect attorney's fees up to a certain limited amount, is to "encourage[] the making of mortgage loans and permit New Jersey borrowers to compete more effectively for mortgage funds ... because lenders know they will recover all or a part of their attorney's fees if forced to foreclose a mortgage." Collective Federal Savings & Loan v. Toland, 207 N.J.Super. 157, 504 A.2d 59, 62 (App.Div.1985). Notably, however, the rule limits the amount of counsel fees that the lender may collect, regardless of how much the lender actually spends on attorney services in the foreclosure action. This is consistent with the development of New Jersey's policy of protecting homeowners' interests and the opportunities to keep their homes, which culminated in the Fair Foreclosure Act.

The New Jersey Fair Foreclosure Act, ("FFA" or "the Act"), N.J. Stat. Ann. §§ 2A:50-53 to 50-68 (West 2000), governs foreclosure proceedings in New Jersey. The Act reflects New Jersey's policy of giving homeowners every opportunity to pay their home mortgages and keep their homes. Luciani v. Hill Wallack, 329 N.J.Super. 170, 746 A.2d 1097, 1100 (Ch.Div.1999). The legislature codified this policy in the Act.

2A:50-54. Legislative findings and declaration

The...