On appeal from Superior Court of New Jersey, Chancery Division, Bergen County, F-12290-00.
Before Judges Wefing, Wecker and Fuentes.
The opinion of the court was delivered by: Wefing, J.A.D.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
This is a mortgage foreclosure action in which defendants appeal from certain aspects of a Final Judgment of Foreclosure entered on January 15, 2002. After reviewing the record in light of the contentions advanced on appeal, we affirm but remand for entry of a corrected judgment.
On July 28, 1999 defendants executed a promissory note to plaintiff for the sum of $3,145,000. The note carried an interest rate of eight percent and called for equal monthly payments of $23,076.90 for a period of five years, at which point the balance was due in full. To secure their obligation, defendants granted plaintiff mortgages on three parcels of commercial property, one in Carlstadt, in Bergen County, one in Brick, in Ocean County and one in Phillipsburg, in Warren County.
Less than a year later, defendants fell behind in their payments. Plaintiff filed a complaint in foreclosure in July 2000 and venued the matter with the Chancery Division in Bergen County. In November 2000, plaintiff was granted partial summary judgment and the matter was forwarded to the Office of Foreclosure, where plaintiff sought entry of final judgment. Defendants disputed the amounts due under the note and mortgages and the matter was returned to the Chancery Division for a hearing. Following that hearing, the Chancery Division concluded that the amounts sought, totaling in excess of $200,000, were reasonable and were due and owing. A Final Judgment of Foreclosure was entered thereafter, from which defendants have appealed.
The matters in dispute fall into four categories: late fees, default interest, prepayment fees and attorneys fees. The July 28 note provided for all four items. Defendants contend that the amounts allowed in each category are unreasonable and unwarranted. For the reasons stated in this opinion, we disagree.
Paragraph 5 of the July 28, 1999 note provides as follows: 5. If any installment under this Note shall not be received by Holder on the date due, Holder may at its option impose a late charge of six percent (6%) of the overdue amount. Considering all of the circumstances on the date of this Note, such late charge represents a fair and reasonable estimate of the costs that will be sustained by Holder due to the failure of Borrower to make a timely payment. The parties further agree that proof of actual damages would be costly or inconvenient. Such late charge shall be paid without prejudice to the right of Holder to collect any other amounts due or to declare a default under this Note or the other Loan Documents or to exercise any other rights and remedies of Holder. If the late charge provided for herein exceeds the maximum late charge provided by applicable law, such late charge shall be automatically reduced to the maximum late charge permitted by applicable law.
Defendants contend this paragraph is invalid, under the settled principle stated in Westmount Country Club v. Kameny, 82 N.J. Super. 200, 205 (App. Div. 1964), that"[p]arties to a contract may not fix a penalty for its breach.... such a contract is unlawful."
Our analysis of the question presented must perforce begin with the Supreme Court's recent opinion in MetLife v. Washington Avenue Associates, L.P., 159 N.J. 484 (1999). That also was a foreclosure action involving commercial property. The Note in question in that case called for the debtor to pay a late fee of five percent of any delinquent payments. The debtor challenged that as unreasonable. The Supreme Court, however, disagreed.
The Court noted that liquidated damages clauses in a commercial context between sophisticated parties are presumptively reasonable. Id. at 496. The Court held that the burden of establishing a particular clause as unreasonable rests upon the party challenging it as such. Ibid. No one factor is determinative whether a clause is reasonable; rather, a reviewing court must look at the totality of the circumstances. Id. at 495. In conducting its review, the Court deemed it appropriate to look to what is permitted by statute and what constitutes common practice within the industry. Id. at 497. After completing that survey, the Court concluded that late fees based upon a percentage of the delinquent installment are generally allowed and that five percent was not an unusually large or unreasonable fee in commercial transactions. The Court noted that defendants had presented no evidence to overcome the presumption of reasonableness or to suggest fraud, duress or unconscionability on the part of the lender. The Court thus concluded the five percent late charge was reasonable. Id. at 500.
Here, defendants argue that plaintiff did not present any evidence that the late fees charged were related to any actual or anticipated damages to plaintiff flowing from late payment. The argument misapprehends MetLife, however. The burden of proof rested squarely on defendants, who presented no evidence at all on the question of the reasonableness of the late fees. We recognize that the late fee in question here is six percent, as opposed to the five percent deemed reasonable in MetLife. In light of the defendants' total failure of proof, however, we have no basis to conclude that an increase of one percentage point is sufficient to overcome the presumption of reasonableness and, thus, affirm the decision of the Chancery Division judge that six percent was reasonable in the context of this case.
There is an additional aspect to defendants' challenge to the award of late fees. They cite Crest Savings & Loan Ass'n v. Mason, 243 N.J. Super. 646, 649 (Ch. Div. 1990), for the proposition that a lender cannot collect late charges"for non-payments of installments claimed to be due after the filing of the complaint." We have no quarrel with the principle, but it is inapplicable. This complaint was filed in July 2000 and we have no indication in this record of any late fees charged for any period after that date.
Paragraph 6 of the note provides ...