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Regency Savings Bank, F.S.B. v. Morristown Mews

October 21, 2003

REGENCY SAVINGS BANK, F.S.B., PLAINTIFF-RESPONDENT/ CROSS-APPELLANT,
v.
MORRISTOWN MEWS, L.P., UNITED STATES LAND RESOURCES, L.P., RANDOLPH MILEED REALTY HOLDINGS, L.P., LAWRENCE S. BERGER, MORRISTOWN MEWS GP, L.L.C., RANDOLPH MILEED GP, L.L.C., AND UNITED STATES REALTY RESOURCES INC., DEFENDANTS-APPELLANTS.



On appeal from Superior Court of New Jersey, Law Division, Morris County, Docket No. L-1053-01.

Before Judges Conley, Carchman and Wecker.

The opinion of the court was delivered by: Conley, P.J.A.D.

NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION

Submitted October 1, 2003

The attorney fee dispute before us arises in the context of efforts by a lender to collect on defaulted notes secured by mortgages. More particularly, the dispute is generated by the lender's efforts to be fully compensated for its counsel fees incurred in its collection efforts. Those efforts included two separate foreclosure actions which ultimately resulted in payment of principal and interest with releases of the debt. In each foreclosure action, too, the lender received counsel fees pursuant to R. 4:42-9(a)(4).

These fees, however, were less than could have been obtained under collection fee provisions in the notes.*fn1 The notes were in the amounts of $780,000 (Randolph Mileed note) and $4,250,000 (Morristown Mews note). The foreclosure final judgments were in the amounts of $709,272.02 and $5,305,695.82. Counsel fees of $7,242.72 and $7,500 were awarded. The lender sought fees of $43,256.20 and $57,889.69, respectively, under the fee provisions in the notes and, before entry of final judgments in the foreclosure actions, filed a deficiency action seeking full recompense of its collection fees. It was partially successful, obtaining a judgment for an additional $42,903.50 on the Morristown Mews note and $23,448.07 in fees incurred in the deficiency action. The borrower appeals these additional awards, contending that the lender is entitled only to the fees awarded in the foreclosure actions. The lender appeals the denial of additional fees on the Randolph Mileed note and seeks an increase in the Morristown Mews note fees to $53,256.20. We affirm in part and reverse in part.

The basic query underlying the parties' dispute is whether a lender, secured by a mortgage on a note, who pursues foreclosure and receives payment of principal and interest and counsel fees, albeit limited to fees authorized under R. 4:42-9(a)(4), may augment those fees by way of a deficiency action on a fee-shifting provision in the note. While relatively easily stated, the query is not so easily resolved.

Some general principles are extant. First, jurisprudentially New Jersey continues to adhere to the view that"the sound administration of justice is best advanced by having the parties bear the burden of their own counsel fees except in those few circumstances designated by R. 4:42-9." Hatch v. T & L Assocs., 319 N.J. Super. 644, 647 (App. Div. 1999). However, and second, contractual fee-shifting agreements in the lender/borrower context are generally enforceable. Alcoa Edgewater No. 1 Fed. Credit Union v. Carroll, 44 N.J. 442 (1965) (Alcoa). See First Morris Bank & Trust v. Roland Offset Serv., Inc., 357 N.J. Super. 68, 72-73 (App. Div.), certif. denied, 176 N.J. 429 (2003). On the other hand, and third, fee-shifting in the context of a foreclosure proceeding is governed by R. 4:42-9(a)(4) and limited to the formula set forth in that rule. Coastal State Bank v. Colonial Wood Prods., Inc., 172 N.J. Super. 320 (App. Div. 1980).

The question to be resolved is whether the Alcoa principle survives an R. 4:42-9(a)(4) fee award such that additional fees may be recovered by a lender in the form of a deficiency proceeding. The motion judge below resolved the query thusly:

Plaintiff argues that if mortgagees are not allowed to collect reasonable attorney fees for all services rendered in the foreclosure action as well as the action on the note, mortgagees will first prosecute an action on the note rather than proceed against the property. This argument is specious. In... Bergen Builders [Inc. v. Horizon Developers, Inc., 44 N.J. 435 (1965)]..., an action on a promissory note secured by a mortgage, the Supreme Court observed that if the action was a foreclosure action, under then R. 4:55-7(c)"the judgment could not have included any provision for legal fees beyond those explicitly set forth in the cited rule." 44 N.J. at 438. The Court acknowledged that the rule by its terms was confined to foreclosure actions and was not applicable in an action on a promissory note. Id. The Court went on to say:

Nevertheless it would appear just that [the rule] receive consideration on the issue of reasonableness where the plaintiff's note is secured by a mortgage and foreclosure could readily have been pursued. Assuming, as has been represented by the defendants, that the mortgage security was at all times wholly adequate and that the plaintiff could have been fully satisfied in foreclosure, inquiry should be made by the trial court as to why that course was not chosen and whether it would now be equitable to burden the defendants with legal fees beyond those which would have been included in a foreclosure proceeding judgment. [Id.]

Here, of course, the foreclosure proceedings were instituted, the mortgage security was at all times wholly adequate, this action on the note was instituted after the foreclosure proceedings, judgments were secured in the foreclosure proceedings, and the sale of the properties satisfied the amounts determined by the Chancery Courts to be due, including counsel fees pursuant to R. 4:42-9(a)(4).

This issue must be decided in light of the recommendation of The Civil Practice Committee, in which the Supreme Court concurred, that the holding in Farmers & Merchants [Nat. Bank of Bridgeton] v. Cotler, 225 N.J. Super. 160 (Ch. Div. 1988) be rejected and that the holding in Levine v. Levine, 210 N.J. Super. 585 (Law Div. 1986) be included in an amendment to the rule. Pressler, Current N.J. Court Rules, Comment R. 4:42-9[2.4] (Gann). The court in Farmers held that a fee in excess of $7,500 could be allowed on an appropriate affidavit of services without regard to the amount adjudicated in the mortgagee's favor. The Levine court, on the other hand, held that although an award in excess of $7,500 was permitted on an appropriate affidavit of services, the court's discretion to award such an additional sum was limited to the amount determined by the percentage formula in the rule. The rule was thereafter amended to permit an award in excess of $7,500 so long as it did not exceed the percentage formula.

Here, the legal fees in the foreclosure of Randolph Mileed's property was limited by the percentage formula to $7,242.72. In the other action against Morristown Mews, the dollar limit of $7,500 was awarded and the Chancery judge ordered that $51,869.10 be escrowed to cover plaintiff's attorney fees and collection costs pending a settlement or final judgment in this collection action. The amount due plaintiff from Morristown Mews was adjudged to be $5,025,350.22 net of the $7,500 attorney fee. Under the current version of R. 4:42-9(a)(4) and the Levine case, reasonable counsel fees could be allowed not to exceed 3.5% of the first $5,000, 1.5% of the excess over $5,000 up to $10,000, and 1% of ...


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