For reversal -- Chief Justice Weintraub, and Justices Jacobs, Francis, Proctor, Hall, Schettino and Haneman. For affirmance -- None. The opinion of the court was delivered by Jacobs, J.
The Bergen County District Court held that the provision for the payment of an attorney's fee in the promissory note executed by the defendant was unenforceable. The plaintiff appealed to the Appellate Division and we certified before argument there.
The plaintiff, a credit union, is a United States corporation chartered under 12 U.S.C.A. § 1751 et seq. All of its members are employees of the Aluminum Company of America or members of the households of such employees. On July 3, 1963 the defendant, a member of the plaintiff, borrowed $600 and signed a promissory note agreeing to repay the borrowed sum in monthly installments. The note provided that in the event of any default the balance would become immediately payable, and that if payment was not made at maturity the borrower would pay the costs of collection, and an attorney's fee "in an amount equal to twenty per cent (20%) of the principal and interest" due on the note, but in no event less than ten dollars.
The defendant failed to make any payment on the note and the plaintiff filed a complaint in two counts claiming payment of the principal sum of $600, interest in the sum of $30, and an attorney's fee in the sum of $126. The defendant filed an answer in which he admitted borrowing the sum of $600 as alleged in the first count, but denied any obligation
for an attorney's fee. With respect to the second count the defendant neither admitted nor denied the execution of the promissory note, leaving the plaintiff to its proof. The plaintiff served a demand for admissions and then a motion to strike the answer as sham. Argument on the motion was heard on May 1, 1964; prior thereto the parties had stipulated that there was no issue as to the borrowing of the $600, the delivery of the note, or the interest due, thus leaving as the only issue to be determined by the court, the validity of the provision for a 20% attorney's fee. The trial court found this provision to be invalid under Bank of Commerce v. Markakos, 22 N.J. 428 (1956), where this Court held that, in view of the terms of R.R. 4:55-7(c), a judgment of foreclosure could not properly include any provision for legal fees beyond those explicitly set forth in the cited rule.
Most of the courts throughout the country have taken the position that provisions in promissory notes for the payment of attorneys' fees for services actually rendered in collection are not against public policy so long as the amounts are reasonable. See Citizens Nat. Bank of Orange, Va. v. Waugh, 78 F.2d 325 (4 Cir. 1935); Manchester Gardens v. Great West. Life Assur. Co., 92 U.S. App. D.C. 320, 205 F.2d 872, 876 (D.C. Cir. 1953); Leventhal v. Krinsky, 325 Mass. 336, 90 N.E. 2 d 545 (1950); Foulke v. Hatfield Fair Grounds Bazaar, Inc., 196 Pa. Super. 155, 173 A. 2 d 703 (1961); 5 Williston, Contracts § 786 (3 d ed. 1961); 17 Am. Jur. 2 d, Contracts § 164 (1964); Annot., 17 A.L.R. 2 d 288 (1951). See also Cohen v. Fair Lawn Dairies, Inc., 86 N.J. Super. 206, 213-224 (App. Div.), aff'd, 44 N.J. 450 (1965). The contention that the provisions will improperly encourage litigation has been generally rejected and countered by the suggestion that they may well spur the debtors to make their payments before any litigation. See Commercial Investment Trust v. Eskew, 126 Misc. 114, 212 N.Y.S. 718, 721 (1925). And the contention that they may serve as a cloak for usurious transactions has generally been rejected in opinions which point out that they come into play only on
default and provide only reimbursement not profit, and that enforcement may be readily denied in any special instance where oppression or circumvention of the usury statute appears. See Community Credit Union v. Connors, 141 Conn. 301, 105 A. 2 d 772 (1954); Owens v. Conelly, 77 Ariz. 349, 272 P. 2 d 345 (1954).
In our own State the validity of such provisions in promissory notes was unquestioned, at least prior to the adoption of our court rules in 1948. Thus in Textileather Corp. v. American, &c., Ins. Co., 110 N.J.L. 483, 488 (E. & A. 1933), the Court of Errors and Appeals noted that in actions at law the successful party could not visit the expense of the litigation upon the defeated party "except as the defeated party is bound by his contract"; and in Nash Refrigeration Co., Inc. v. Consolidated Appliance Co., 12 N.J. Misc. 795, 174 A. 892 (Sup. Ct. 1934), the former Supreme Court, without discussion, upheld a judgment for principal and interest, plus a 15% attorney's fee as provided in the promissory note executed by the defendant. In R.S. 7:2-2, which was part of the Uniform Negotiable Instruments Act, our Legislature provided that a promissory note containing a provision for an attorney's fee shall be deemed to contain a promise "for payment of a sum certain" for purposes of negotiability. This may perhaps be taken as implied legislative recognition of the validity of such provision. See Leventhal v. Krinsky, supra, 90 N.E. 2 d, at p. 547; Florence Oil & Refining Co. v. Hiawatha Oil, Gas & R. Co., 55 Colo. 378, 135 P. 454, 456 (1913); N.J.S. 12A:3-106(1)(e). See also Mackintosh v. Gibbs, 81 N.J.L. 577, 581 (E. & A. 1911).
The upholding of these contractual provisions for attorney's fees apparently had not led to abuses and when our new judicial structure was created in 1947 and implemented by our court rules in 1948, the subject received no independent consideration. What did receive independent consideration was the equity counsel fee practice which had been accompanied by abuses and had produced calls for its abolition. See State v. Otis Elevator Co., 12 N.J. 1, 26-27 (1953) (dissenting
opinion); Veto Messages of Hon. Alfred E. Driscoll, Governor of New Jersey (1950), p. 76; cf. John Westervelt's Sons v. Regency, Inc., 3 N.J. 472, 477 (1950). The Court of Chancery had discretionary power to allow counsel fees in such amounts as appeared to it to be reasonable. See United Security Life Ins. Co. v. Smith, 51 N.J. Eq. 635 (E. & A. 1893); McMullin v. Doughty, 68 N.J. Eq. 776 (E. & A. 1905); R.S. 2:29-131; R.S. 2:29-132. Except in foreclosure proceedings, maximums had not been prescribed (Kocher's, Chancery Practice 73-74 (1913)), there had been occasions where excessive allowances had been made to favored members of the bar, and occasions where prospective litigants with presumably just causes had been discouraged from instituting actions in equity because of the threat of such allowances. With this history specially in mind, Rule 3:54-7 -- now R.R. 4:55-7 -- was adopted to prohibit "the judicial allowance of counsel fees except in a few specially designated situations." State v. Otis Elevator Co., supra, 12 N.J., at p. 27. These situations were (1) matrimonial actions, (2) funds in court, (3) mortgage foreclosure actions, (4) actions for the probate of wills, and (5) actions to foreclose tax certificates. It seems clear that while the rule made general reference to judicial allowances for legal services it was not addressed to contractual provisions in ...