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In Re Hatala

295 B.R. 62 (D. N.J. 2003)

FORECLOSURE; BANKRUPTCY—Even in a bankruptcy proceeding, a foreclosing lender is restricted to the attorney’s fee provisions of New Jersey’s court rules, and it can’t enhance them by seeking to enforce more favorable provisions in the related promissory note.

A borrower granted a mortgage on his home. The mortgage agreement provided for reasonable attorney’s fees which were agreed to be fifteen percent of the total amount owed. It also stated that if there was a foreclosure, the bank could recover all expenses of the foreclosure, including reasonable attorney’s fees. The borrower defaulted and then filed for protection under Chapter 13 of the Bankruptcy Code. The bank filed a proof of claim, but the debtor had the case dismissed. The bank then obtained a final judgment of foreclosure. That judgment allowed statutory attorney’s fees, a rather small amount. The borrower again filed for bankruptcy under Chapter 13. The lender filed a proof of claim for attorney’s fees covering pre-petition work, work during the debtor’s first bankruptcy, and work for continuing with the foreclosure after the first bankruptcy had been dismissed. The debtor objected that the attorney’s fees exceeded the amount allowable under New Jersey law. The lender responded with a claim for post-petition attorney’s fees, including for defending its claim for attorney’s fees in the first place.

To cure a default in a Chapter 13 plan, the cure amount must be determined “in accordance with the underlying agreement and applicable nonbankruptcy law.” The bank argued that the note permitted attorney fees of fifteen percent. However, the lender did not sue its borrower on the note. It brought an action to foreclose. Attorney’s fees payable in connection with foreclosures are governed by a New Jersey court rule, and the Court rejected any argument based on the terms of the note. It held that the bank was “only entitled to attorney’s fees to the extent that they are supported by both the mortgage agreement and nonbankruptcy law regarding foreclosures.” It was clear that the agreement provided for attorney’s fees. However, “[s]everal facets of New Jersey law regarding foreclosures and attorney’s fees support the conclusion that [a] mortgagee is not entitled to any additional fees beyond the amount allowed in the foreclosure judgment.” In this case, the Court was unable to look at any decision from the New Jersey Supreme Court, because there were none on point. Therefore, the Bankruptcy Court looked to various lower court decisions. In doing so, it found that New Jersey’s court rules limit “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.” It believed that this was consistent with New Jersey’s policy of “protecting homeowners’ interests and the opportunities to keep their homes.” A formula in the court’s rules sets a maximum amount of attorney’s fees “and is binding regardless of the amount of fees actually incurred by the mortgagee in its attempts to foreclose the subject property.” In the state law context, “once a mortgagee obtains a foreclosure judgment, its rights are limited to satisfaction of the judgment.” If a mortgagor redeems its property, it is only required to pay the attorney’s fees as limited by New Jersey’s court rules. According to the Bankruptcy Court, “[t]here is no reason why the debtor should have to pay more in bankruptcy than outside of it. In fact, such a result would provide a windfall to secured creditors and harm the interests of unsecured creditors… .”

As to the lender’s desire to “collect fees for the work performed in connection with the debtor’s two bankruptcy filings,” the Court held that “once a lender has obtained a judgment and accrues reasonable attorney’s fees, the lender may not thereafter amend the judgment to include additional fees for post-judgment services rendered, unless the underlying agreement explicitly states such fees are allowed. In this case, “the express language of the debtor’s mortgage only permit[ted] the collection of fees in the foreclosure proceeding. Any additional attorney’s fees for the bankruptcy work would be unsupported by the underlying agreement.” Further, the bank did not sue on the note. Therefore, its actions in the related bankruptcy foreclosure procedure had no connection to the note. Lastly, “work done in a bankruptcy proceeding does not amount to post-judgment collection efforts.”

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