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Ryker v. Current

338 B.R. 642 (D. N.J. 2006)

FORECLOSURE; BANKRUPTCY; ATTORNEYS FEES — In a federal court located in New Jersey, only bankruptcy law is applicable in determining reasonable attorneys fees recoverable from a mortgagor under a canceled mortgage sale; state law is inapplicable.

A mortgagor defaulted under its mortgage and the mortgagee obtained a foreclosure judgment. They then entered into a forbearance agreement under which the mortgagee agreed to stay the foreclosure sale if the mortgagor satisfied the debt. The forbearance agreement provided that the mortgagor would pay the mortgagee’s attorneys’ fees through “completion of the matter.” When the mortgagor defaulted under the forbearance agreement, the mortgagee initiated a foreclosure sale. In response, the mortgagor filed a Chapter 13 bankruptcy petition. The matter was litigated, appealed, remanded, and re-litigated. As a result of the protracted litigation, the mortgagee incurred significant attorney’s fees. It submitted a proof of a claim for attorneys’ fees.

The mortgagor claimed the issue of attorneys’ fees had to be settled using New Jersey law which limits the amount of attorneys’ fees recoverable from a mortgagor and which would make the mortgagee’s fee request unreasonable. On the other hand, where a bankruptcy plan proposes to cure a default, the amount necessary to cure the default is determined by any underlying agreement and non-bankruptcy law. In this case, the mortgagor’s plan did not propose to cure a pre-petition default, but was designed to satisfy the mortgagee’s claim. The District Court ruled that, in this case, it was proper to use bankruptcy law and not New Jersey mortgage foreclosure law to determine the amount of attorneys’ fees. For attorneys’ fees to be part of an allowed secured claim, a creditor must be oversecured (the value of the asset securing the debt must be greater than the amount of the debt) and the charges must be: (1) provided for in the agreement under which such claims arose; and (2) reasonable.

Here, the mortgagor claimed the forbearance agreement imposed an obligation to pay the mortgagee’s attorneys’ fees only if the mortgagor satisfied all of its obligations under the forbearance agreement and the foreclosure sale was cancelled. The District Court disagreed, finding that under the forbearance agreement the mortgagor’s obligation to pay attorneys’ fees was a condition to the mortgagee’s agreement to stay the foreclosure sale. Thus, under the agreement, the obligation to pay attorneys’ fees was not conditioned on cancellation of the foreclosure sale. The mortgagor also claimed that the Bankruptcy Court erred by using federal law as a basis to rule on the amount of attorneys’ fees. Although there is a split among the jurisdictions, the District Court rejected the mortgagee’s argument that attorneys’ fees must be reasonable under both state and bankruptcy law and held that only bankruptcy law was applicable.

The mortgagor also argued that the mortgagee acted unreasonably in litigating this matter and therefore its attorneys’ fees were unreasonable. In addition, it asserted that the Bankruptcy Court failed to consider all the factors in deciding the reasonableness of the mortgagee’s fee request. The mortgagor also claimed that its bankruptcy plan provided for full payment of the mortgagee’s claim and therefore the mortgagee acted unreasonably in litigating this matter.

Reasonableness of a fee request has the following two elements: (1) the itemized fees themselves must be reasonable; and (2) the creditor’s actions must be reasonable. In determining if a creditor’s actions are reasonable, a court must consider “whether the creditor took the kind of reasonable actions similarly situated creditors would have taken, and whether such actions and fees were outside the range so as to be deemed unreasonable.” The District Court found that all of the mortgagee’s litigation expenses were incurred in either defending or responding to claims made by the mortgagor. In effect, the mortgagee was only responding to its mortgagor’s actions. Therefore, the actions of the mortgagee were found to be reasonable, and the Bankruptcy Court did not err in so ruling.

Reasonable attorneys’ fees are treated as a secured claim and unreasonable attorneys’ fees are treated as an unsecured claim. Here, however, the mortgagor tried to distinguish this case by arguing that the mortgagee’s attorneys’ fees in this case were incurred as a result of post-petition litigation. The District Court found that while the attorneys’ fees must be paid post-petition, the obligation to pay the attorneys’ fees arose when the mortgagor signed the forbearance agreement. Thus, the attorneys’ fees were properly considered pre-petition fees.

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