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In re A&P Diversified Technologies Realty

January 19, 2006

IN RE: A&P DIVERSIFIED TECHNOLOGIES REALTY, INC.
CATHERINE E. YOUNGMAN, TRUSTEE, APPELLANT
v.
FLEET BANK, N.A.



On Appeal from the United States District Court for the District of New Jersey (D.C. Civ. No. 04-01711) Honorable Garrett E. Brown, Jr., District Judge.

The opinion of the court was delivered by: Greenberg, Circuit Judge.

PRECEDENTIAL

Argued October 26, 2005

BEFORE: SLOVITER, FISHER, and GREENBERG, Circuit Judges.

OPINION OF THE COURT

I. INTRODUCTION

This matter comes on before this court on appeal by a bankruptcy trustee from a final order of the district court entered August 31, 2004, affirming two orders of the bankruptcy court. Following a state foreclosure action and the satisfaction of the foreclosure judgment, the bankruptcy court granted the mortgageebank's motion under 11 U.S.C. § 506(b) ("section 506(b)") to award it attorneys' fees and expenses for services its attorneys rendered in the state and bankruptcy courts relating to the foreclosure. The trustee argues that the mortgagee-bank is not entitled to fees under section 506(b) because the note and mortgage, which included a provision for attorneys' fees and expenses, were extinguished by their merger into the final judgment of foreclosure. The trustee further argues that a potential exception to the merger doctrine predicated on the parties' intent to preserve the mortgagee's right to seek its attorneys' fees after entry and satisfaction of the foreclosure judgment does not apply because the terms of the mortgage did not evidence that the parties had any such intent. We agree with the trustee and will reverse the order of the district court.

II. FACTUAL BACKGROUND AND PROCEDURAL HISTORY

On or around February 13, 1995, the debtor, A&P Diversified Technologies Realty, Inc., executed a promissory note in favor of Fleet Bank, N.A. ("Fleet")*fn1 in the amount of $900,000,*fn2 secured by a mortgage on the debtor's property. The mortgage provided, in relevant part:

Agreement to Pay Attorneys' Fees and Expenses. In the event that the Mortgagor should default under any of the provisions of the Note or any other Loan Document and the Mortgagee shall employ attorneys or incur other costs and expenses for the collection of payments due or to become due, the realization upon any Collateral, or for the enforcement or performance or observance of any Obligation or agreement on the part of the Mortgagor of any Guarantor under any Loan Document, whether by litigation or otherwise, the Mortgagor agrees that it will pay to the Mortgagee, on demand, the reasonable fee of such attorneys, together with all other costs and expenses incurred by the Mortgagee, and that all of said costs and expenses shall be secured by the Mortgage.

J.A. at 232-33*fn3 (emphasis added). The mortgage also provided that "[t]he Mortgagor . . . waives and releases, to the fullest extent it may lawfully do so, all benefit of any present or future moratorium law or any other present or future law, regulation or judicial decisions . . . [which] conflict[ ] with any provision herein or in the other Loan Documents." J.A. at 230.

The debtor defaulted, leading Fleet to institute a foreclosure action in the Superior Court of New Jersey. While the foreclosure proceedings were pending, the debtor filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code in the bankruptcy court, which automatically stayed the foreclosure, but the bankruptcy court granted Fleet relief from the stay and allowed it to continue with the foreclosure. Ultimately, the bankruptcy court converted the debtor's case to a Chapter 7 proceeding and appointed Catherine E. Youngman as the Chapter 7 trustee for the debtor's estate on May 2, 2001. After the stay was lifted, Fleet obtained a final judgment of foreclosure in the amount of $1,118,853.69 which included $7500 in counsel fees awarded to Fleet in accordance with N.J. Court Rule 4:42-9(a)(4) ("Rule 4:42-9(a)(4)") as well as substantial taxes and interest not in dispute here.*fn4 Fleet collected the full amount of the judgment through the state-court foreclosure process.

The trustee subsequently filed a motion in the bankruptcy court to expunge Fleet's claim. Fleet opposed the motion and cross-moved for attorneys' fees pursuant to section 506(b). The bankruptcy court denied the trustee's motion and granted Fleet's motion, awarding attorneys' fees in the amount of $304,181.45 and expenses in the amount of $32,772.43. It appears that the court contemplated that the trustee would pay the fees and expenses from the debtor's estate but that this will not be possible as the debtor's estate is valued at far less than the fees and expenses awarded. Nevertheless, the trustee appealed to the district court from the bankruptcy court's orders.

The district court affirmed the bankruptcy court's orders awarding attorneys' fees and expenses to Fleet and denying the trustee's motion to expunge Fleet's claim. Although the district court acknowledged that the merger doctrine, which normally extinguishes a creditor's rights under a mortgage once judgment is entered, applied in this case, it held that "it is clear from the language of the agreement that the parties intended their rights under the mortgage to be preserved beyond any judgment, more specifically, the state court foreclosure judgment." J.A. at 10. Thus, in the district court's view, Fleet's right to recover fees and expenses was not extinguished by merger of the mortgage into the judgment. In reaching its result the court relied on language we already have quoted contained in the mortgage, which provided that "[t]he Mortgagor . . . waives and releases, to the fullest extent it may lawfully do so, all benefit of any present or future moratorium law or any other present ...


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