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Makris v. Amboy Bank

2008 WL 4692339 (U.S. Dist. Ct. D. N.J. 2008) (Unpublished)

MORTGAGES; GUARANTIES — Where a third party guarantees a borrower’s mortgage note, but the borrower, neither in its own mortgage documents nor in the third party’s guaranty, has agreed to reimburse the lender for its litigation costs to enforce the guaranty, the borrower is not liable for such costs.

A lender agreed to provide financing for the purchase of a home. Its borrower executed a note under which the borrower was responsible for all costs and expenses relating to the note’s enforcement. There were two modifications to the original note, neither of which altered the provision regarding attorneys’ fees. A third modification was made after the borrower defaulted on her payments. It provided that the borrower could keep her home if she furnished additional security or credit enhancement. She furnished her employer’s guaranty under which her employer would be liable in the event of her default. The borrower did not sign the guaranty and was not named as a party to that agreement. Specifically, the guaranty did not include any language making the borrower liable for attorneys’ fees arising out of actions to enforce the guaranty. The third modification did not alter the note’s original provision regarding fees and expenses. Two years after the default that led to the guaranty agreement, the borrower fell behind on her payments. The lender incurred large legal fees seeking payment from the guarantor. The lender also commenced foreclosure proceedings. The borrower then filed for bankruptcy protection.

The lender eventually sought payment from the borrower for all attorneys’ fees incurred it in pursuing its rights under her employer’s guaranty. The borrower moved to dismiss the claim, alleging that she was not obligated under the terms of the note to pay fees for the guaranty litigation. The Bankruptcy Court denied the borrower relief on other grounds and awarded attorneys’ fees.

On appeal, the United State District Court reversed the bankruptcy court’s ruling, by holding that when determining a party’s rights and duties under an agreement, a contract cannot bind a nonparty. It ruled that because the borrower was not a party to the guaranty agreement, she was not required to reimburse the lender for litigation costs incurred to enforce the guaranty. Further, the note and its subsequent modifications limited the borrower’s liability for attorneys’ fees to the costs of enforcing the note and modifications. The Court remarked that as the party responsible for drafting the language of the third modification, the lender could have easily including a provision incorporating the guaranty and requiring the borrower to bear any cost of litigation against the guarantor.

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