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

363 N.J. Super. 363, 833 A.2d 77 (App. Div. 2003)

MORTGAGES; FORECLOSURE; ATTORNEYS FEES—When a mortgagee forecloses on property, its recoverable attorneys fees are limited by court rule and it cannot collect higher fees in a deficiency action on the note even though the note’s provisions may be more generous.

A mortgage lender sought to be fully compensated for its counsel fees incurred in its collection efforts on two defaulted notes. Each of the related foreclosure actions “resulted in payment of principal and interest with releases of the debt.” The lender also received counsel fees, but, because of a court rule, they “were substantially less than could have been obtained under collection fee provisions in the notes.” In the deficiency action that followed, it received an award for substantial, additional attorneys’ fees. The borrower appealed those additional awards, “contending that the lender [was] entitled only to the fees awarded in the foreclosure actions.”

The Court first took note that except in a few circumstances, parties in New Jersey bear the burden of their own counsel fees. However, “contractual fee-shifting agreements in the lender/borrower context are generally enforceable.” On the other hand, “fee-shifting in the context of a foreclosure proceeding is governed by [the Court Rules] and limited to the formula set forth in [the Court Rules].”

The lender argued that “if mortgagees are not allowed to collect reasonable attorneys’ fees for all services rendered in a foreclosure action as well as the action on the note, mortgagees will first prosecute an action on a note rather than proceed against the property.” The Court rejected that argument as “specious.” It pointed to a 1965 New Jersey Supreme Court case holding that legal fees were limited to that permitted by the applicable Court Rule in actions on a promissory note within a foreclosure action. However, the Supreme Court went on to say: “Nevertheless it would appear just that [the rule] received consideration on the issue of reasonableness where the plaintiff’s note is secured by the mortgage and foreclosure could easily 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.”

In the case at hand, the mortgage security was at all times wholly adequate. The suit on the note was instituted after the foreclosure proceedings and after sale of the property satisfied the judgment. As a consequence, the Court looked to a recommendation made more than ten years earlier by The Civil Practice Committee to the Supreme Court that a court’s discretion to award any additional sums should be limited to the amount determined by the percentage formula in the applicable Court Rule. Consequently, the Court concluded that not only is the applicable Court Rule relevant “to the issue of what fees are reasonable in an action on a note when foreclosure is not pursued, but [the] rule is [also] determinative when the foreclosure is pursued and award made thereunder.” Accordingly, “where fee-shifting could have occurred in the context of a foreclosure proceeding which fully satisfies the principal and interest owed, counsel fees under the secured note’s fee-shifting provision sought in a deficiency action can be reasonably limited thereby. Similarly, where a foreclosure action in fact has been pursued and counsel fees awarded under [the applicable Court Rule, the Court has previously] held that the rule limits counsel fees, despite a more a generous contractual provision.”

The effect of the Court’s ruling was that with respect to one of two secured notes, “[s]ince the foreclosure judge had awarded the maximum fee allowable on [that] note, the motion judge [properly] denied lender’s motion for additional fees as to that note.” However, with respect to a second note and mortgage, “the foreclosure judge had not allowed the maximum fee under the rule,” and therefore it was appropriate to grant an additional award of counsel fees in the deficiency action, but the initial award, when added to the award granted by the foreclosure judge, could not exceed the maximum permitted by the applicable Court Rule.

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