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Regency Savings Bank, FSB v. Lackawanna Associates

A-1273-01T2 (N.J. Super. App. Div. 2003) (Unpublished)

MORTGAGES; FORECLOSURE—A second mortgagee is entitled to recover its attorneys fees and other reasonable charges when it participates in an action by a first mortgagee to foreclose the first mortgage.

Following the settlement of a foreclosure action with respect to a first mortgage, a Chancery judge awarded a second mortgagee the unpaid principal balance of the loan and transferred the case to the Law Division for the purpose of resolving the remaining disputes regarding penalties, late fees, and attorney’s fees. The second mortgagee requested a two percent delinquency charge, a six percent late charge, and reimbursement of its legal fees and expenses in defending the foreclosure action brought by the first mortgagee. The lower court judge refused to award the delinquency fee, late charges or attorney’s fees, and the second mortgagee appealed. The Appellate Division reversed. With respect to the late fees, the Court found that late fees are presumed reasonable, especially when a borrower and lender are sophisticated commercial parties. A judge’s role in determining the validity of late fees is to determine if the charge was reasonable. In this case, the lower court judge did not compare the amount of the charges against the principal owed. Using that analysis, the late charges and default fees would have been reasonable. Instead, the lower court weighed the profitability of the transaction, and, having concluded that the mortgagee made a reasonable profit, refused to tack on late fees and default fees. The Appellate Division rejected the lower court’s reasoning, finding that under the proper analysis, the late fees and default fees were not excessive and therefore were enforceable. With respect to the legal fees, the Court noted that provisions requiring a borrower to reimburse its lender for legal fees are presumed valid because they are intended to make the lender whole. The contract provided for the borrower to reimburse the second mortgagee for all costs and legal fees incurred in the event of default. The second mortgagee was required to participate in the foreclosure action to protect its interest and was therefore entitled to reimbursement of its legal fees.

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