Smiriglio v. Hudson United Bank

Opinions of the United
2004 Decisions States Court of Appeals
for the Third Circuit
5-11-2004
Smiriglio v. Hudson United Bank
Precedential or Non-Precedential: Non-Precedential
Docket No. 03-3090
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NOT PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 03-3090
JOSEPH R. SMIRIGLIO; DIANE SMIRIGLIO,
Appellants
v.
HUDSON UNITED BANK
ON APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW JERSEY
(Dist. Court No. 02-cv-4976)
District Court Judge: Honorable Robert B. Kugler
Submitted Under Third Circuit LAR 34.1(a)
March 30, 2004
Before: ALITO, FISHER, ALDISERT, Circuit Judges.
(Opinion Filed: May 11, 2004)
OPINION OF THE COURT
PER CURIAM:
Joseph and Diane Smiriglio appeal a final decision of the United States District
Court for the District of New Jersey, affirming a judgment of the Bankruptcy Court. The
Bankruptcy Court included in the amount to be paid within the Smiriglios’ bankruptcy
plan certain attorney’s fees incurred during the bankruptcy proceeding by the Smiriglios’
mortgagee, Hudson United Bank (“HUB”). While the note and guarantee secured by the
Smiriglios’ mortgage explicitly provided for payment of reasonable attorney’s fees
incurred in the enforcement of the same, the Smiriglios contended that the amount
recoverable was limited by New Jersey Court Rule 4:42-9(a)(4), which governs fee
awards in foreclosure actions. Both the Bankruptcy and District Courts found that this
was not a foreclosure action, and so the Rule was inapplicable. We agree with those
opinions and affirm.
Generally speaking, New Jersey courts follow the “American rule,” under which
parties bear their own litigation costs, including attorney’s fees. See New Jersey Court
Rule 4:42-9(a); McKeown-Brand v. Trump Castle Hotel & Casino, 626 A.2d 425, 429
(N.J. 1993). However, a contractual provision for payment of attorney’s fees will
generally be deemed enforceable in New Jersey “under common law principles as a
deliberate bargain between private parties.” Alcoa Edgewater v. Carroll, 210 A.2d 68, 72
(N.J. 1965); Belfer v. Merling, 730 A.2d 434, 443 (N.J. Super. 1999).
New Jersey Court Rule 4:42-9(a)(4) modifies both of these general principles
2
within the narrow context of “action[s] for the foreclosure of a mortgage.” In such cases,
a successful plaintiff is entitled to attorney’s fees by default. However, the amount
recoverable is subject to a cap calculated through a multi-step percentage formula
provided in Rule 4:42-9(a)(4). The Rule goes on to explicitly state that “[i]n no case shall
the fee allowance exceed the limitations of this rule.” In other words, private parties are
not free to override by contract the fee cap imposed by the Rule. Alcoa, 210 A.2d at 71;
Bank of Commerce v. Markakos, 122 A.2d 13 (N.J. 1956).
The Bankruptcy and District Courts found Rule 4:42-9(a)(4) inapplicable in the
Smiriglios’ case, and so enforced the contractual provisions providing for payment of
attorney’s fees in full. 1 The central question on appeal is whether, as the Smiriglios
contend, Rule 4:42-9(a)(4) indeed ought to have been applied here.
HUB claims that Rule 4:42-9(a)(4) is inapplicable on two grounds. First, it asserts
that the Rule has been preempted by federal bankruptcy law, specifically 11 U.S.C.
§ 506(b), which provides, in pertinent part:
To the extent that an allowed secured claim is secured by property the value
of which, after any recovery under subsection (c) of this section, is greater
than the amount of such claim, there shall be allowed to the holder of such
claim, interest on such claim, and any reasonable fees, costs, or charges
provided for under the agreement under which such claim arose.
Id.; see also Kord Enterprises II v. California Commerce Bank, 139 F.3d 684, 689 (9th
1
Application of the Rule and its formula would have resulted in a fee award of
$1,073—several thousand dollars less than that granted by the Bankruptcy Court.
3
Cir. 1998) (“The cases that have interpreted § 506(b) agree that it preempts state law”).
However, as the Smiriglios point out in their brief, § 506(b) has itself been
superceded by 11 U.S.C. § 1322(e)—at least in cases (such as this one) involving fees
included in a claim for arrears. That statute provides:
Notwithstanding . . . section[] 506(b) . . . of this title, if it is proposed in a
plan to cure a default, the amount necessary to cure the default, shall be
determined in accordance with the underlying agreement and applicable
nonbankruptcy law.
Id. (emphasis added). While the relationship of § 506(b) and § 1322(e) has not been
extensively considered by the courts, every bankruptcy court to consider the matter
appears to have agreed or assumed that “when a debtor seeks to cure a prepetition
payment default over the life of a Chapter 13 plan . . . the amount of the arrearage must be
‘determined in accordance with the underlying agreement and applicable nonbankruptcy
law,’” as provided under § 1322(e). In re Plant, 288 B.R. 635, 641 (Bankr. D. Mass.
2003) (quoting § 1322(e)); see also In re Hatala, 295 B.R. 62, 69 (Bankr. D.N.J. 2003)
(holding that to apply § 506(b) under similar facts would be to “ignore[] the plain
language of [§ 1322(e)]”); In re Landrum, 267 B.R. 577, 579 (Bankr. S.D. Ohio 2001); In
re Lake, 245 B.R. 282, 284 (Bankr. N.D. Ohio 2000); cf. Plant, 288 B.R. at 242 (stating
that the proposition is not “particularly debatable”).
In other words, HUB is incorrect when it claims that state law is inapplicable in
this context; indeed, it is only by examining state law (including Rule 4:42-9(a)(4)) that
we can determine whether HUB is entitled to fees “in accordance with . . . applicable
4
nonbankruptcy law.” 11 U.S.C. § 1322(e); Hatala, 295 B.R. at 65 (applying Rule 4:42-
9(a)(4) as the “applicable nonbankruptcy law”); Plant, 288 B.R. at 642 (applying
Massachusetts law); Landrum, 267 B.R. at 582 (applying Ohio law).2
HUB’s second argument is that Rule 4:42-9(a)(4) is irrelevant because, under the
plain terms of the Rule itself, it applies only “[i]n an action for the foreclosure of a
mortgage.” Surely HUB is correct when it contends that, as a technical matter, the action
brought in Bankruptcy Court cannot be considered a foreclosure action. Nor has any
foreclosure action ever been filed in connection with this dispute. See Appellee Br. at 11.
In fact, since the Smiriglios have apparently agreed to start making regular payments to
HUB outside the plan, it would seem that HUB no longer desires relief from the
automatic stay in order to pursue a foreclosure proceeding in state court. Thus, HUB’s
argument—that Rule 4:42-9(a)(4) is inapplicable because the present suit is not even
remotely “an action for the foreclosure of a mortgage”—is a strong one.
Nevertheless, we must at least consider the possibility that the New Jersey courts
would read the language of Rule 4:42-9(a)(4) as encompassing, not simply foreclosure
actions, but also actions related to or connected in some way to the foreclosure of a
mortgage. To our knowledge, the New Jersey Supreme Court has yet to squarely address
this issue. We are therefore obliged to try to predict how the New Jersey Supreme Court
2
Note that the Smiriglios do not appear to argue that the attorney fee award is not
“in accordance with the underlying agreement” (that is, the note and guarantee they
signed with HUB). Cf. 11 U.S.C. § 1322(e).
5
would decide the matter were it properly presented to them.
It should first be noted that the mere fact that there has not been an actual
foreclosure in this case is apparently not enough to rule out the possible applicability of
Rule 4:42-9(a)(4). Thus, in Coastal State Bank, 411 A.2d 1172 (N.J. Super. 1980), a
lender had filed an action to foreclose on a mortgage which had been executed to secure a
note (then in default). The lender obtained a final judgment in its favor, including
attorney’s fees as calculated under Rule 4:42-9(a)(4). Thereafter, but prior to the sheriff’s
sale of the mortgaged property, the debtor managed to satisfy the defaulted debt in full.
The lender then argued (and the trial court agreed) that since there had been no sale of the
property, the present suit was not a “foreclosure action,” Rule 4:42-9(a)(4) did not apply,
and a larger attorney’s fee award could be made. On appeal, the Superior Court flatly
rejected this argument: “We are satisfied that the proceeding was always ‘an action for
the foreclosure of a mortgage,’ as regulated by R. 4:42-9(a)(4).” Id. at 1174. The
plaintiff had not sued on the notes, but had sought to foreclose on the mortgage; whether
the property had in fact been ultimately foreclosed upon was irrelevant to the question of
how to characterize the action. See also Regency Savings Bank v. Morristown Mews,
833 A.2d 77, 81-82 (N.J. Super. 2003) (quoting from and endorsing Coastal State).
Coastal State is clearly distinguishable from the present case, because it was at
least originally brought as a foreclosure case. The Smiriglios’ case, by contrast,
originated in the Bankruptcy Court and remained there throughout. We find it similarly
6
easy to distinguish Stewart Title Guaranty Company v. Lewis, 788 A.2d 941 (N.J. Super.
2001). In Stewart Title, the court did deny fees incurred in excess of the limits of Rule
4:42-9(a)(4) (including, possibly, some fees incurred in a concurrent bankruptcy
proceeding), but that case undisputedly involved an action for foreclosure, and so there
could be no question (as there is here) that the Rule applied.3
In fact, there is some indication that the New Jersey Supreme Court intends that
the requirement of a “mortgage foreclosure action” be read literally. In Bergen Builders
v. Horizon Developers, 210 A.2d 65 (N.J. 1965), the Court held that Rule 4:42-9(a)(4) “is
by its terms confined to foreclosures and is not applicable in an action on a promissory
note.” Id. at 66. This was true even though the note involved in the case was secured by
a mortgage. Id. at 65. Likewise, in First Morris Bank and Trust v. Roland Offset Service,
813 A.2d 1260 (N.J. Super. 2003), a lender had instituted separate actions to (1) collect
on a defaulted commercial note and (2) foreclose on a mortgage which secured the note.
Id. at 1261. The court granted a default judgment on the note claim, granting the lender a
twenty-percent allowance for attorney’s fees, as provided for under the terms of the note.
On appeal, the Superior Court sustained the award without so much as mentioning Rule
4:42-9(a)(4), notwithstanding (or perhaps because of) the existence of the concurrent
3
The main question presented in Stewart Title had to do with whether the court had
discretion to exceed the attorney’s fee limits set forth by Rule 4:42-9(a)(4) in a case
where the excess fees had been incurred due to the improper “machinations” of the
debtor. Id. at 941. The court ruled that it did not have such discretion. Id.
7
foreclosure suit. 4
More generally, New Jersey courts have endorsed a literal reading of other aspects
of the “mortgage foreclosure action” requirement. Thus, in a foreclosure suit against a
delinquent condominium unit holder, the Superior Court held that Rule 4:42-9(a)(4) did
not apply to limit attorney’s fees because what was sought to be foreclosed was
(technically speaking) a lien and not a mortgage. Island House Condominium
Association v. Feldman, 585 A.2d 982 (N.J. Super. 1990). This provides additional
(albeit attenuated) support for the proposition that the New Jersey Supreme Court intends
that the Rule apply only in a particular and narrow set of cases, as defined by the plain
language of the Rule.
The Smiriglios advance one final argument in favor of their proposed construction
of Rule 4:42-9(a)(4). The claim is that a proper interpretation of the Rule would take into
consideration the expressed intent of the New Jersey legislature that “homeowners should
be given every opportunity to pay their home mortgages, and thus keep their homes . . . .”
N.J.S.A. § 2A:50-54; Appellant Br. at 13. The Smiriglios further cite Luciani v. Wallack,
746 A.2d 1097, 1100-01: “[T]he legislature has created an elaborate scheme of
procedural protections for homeowners . . . [including] a prohibition on lenders imposing
on a debtor any charge, fee or penalty as a condition to curing a default.” Id.; see also
4
The opinion gives no details regarding the ultimate outcome of the foreclosure
suit.
8
N.J.S.A. § 2A:50-57. What the Smiriglios fail to indicate is why this expression of
legislative intent should be in any way determinative in connection with a state court rule,
which the New Jersey Supreme Court has the power to freely interpret (or change or
abolish) as it sees fit. See State v. Leonardis, 375 A.2d 607, 615 (N.J. 1977)
(“[A]uthority to engage in rule-making also includes the power to interpret and enforce
court rules.”). 5 Accordingly, we believe it unlikely that the New Jersey Supreme Court
would characterize this bankruptcy proceeding as a “foreclosure action” for the purposes
of Rule 4:42-9(a)(4).
One additional matter must be addressed. The New Jersey Supreme Court noted in
Bergen Builders that even in cases where the Rule would not technically apply, the limits
on attorney’s fees set forth in the Rule might bear upon the question of whether an
attorney’s fee award was “reasonable,” in an appropriate case.6 Accordingly, while the
lender in Bergen Builders had undeniably opted to sue on the note rather than pursue the
mortgage foreclosure remedy, the Court questioned “why [the mortgage foreclosure]
5
Perhaps the Smiriglios’ argument is that N.J.S.A. § 2A:50-57, which limits
attorney’s fees available in connection with the cure of a default on a residential
mortgage, is itself an “applicable nonbankruptcy law” under 11 U.S.C. § 1322(e). That
argument, however, also fails, since § 2A:50-57 by its own terms applies only to the
curing of a default “under [that] section.” To the extent the Smiriglios are seeking to cure
their default on their mortgage with HUB, they are doing so under federal bankruptcy
law, not § 2A:50-57.
6
“[A]ny fee arrangement is subject to judicial review as to its reasonableness.”
Belfer v. Merling, 730 A.2d 434, 443 (N.J. Super. 1999), citing Cohen v. Fair Lawn
Dairies, Inc., 210 A.2d 73 (N.J. 1965).
9
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.” Bergen Builders, 210 A.2d at 66. The Supreme Court remanded the case for
further consideration of the reasonableness question.
The Bergen Builders decision did not elaborate extensively on when it would or
would not be “equitable” to allow for fees in excess of the limits of Rule 4:42-9(a)(4) in
non-foreclosure cases. The most important consideration, as suggested by later caselaw
following Bergen Builders, appears to be whether a lender is deliberately trying to engage
in procedural manipulations to do an end-run around Rule 4:42-9(a)(4). Thus, in Regency
Savings, a lender, after successfully pursuing two foreclosure actions which resulted in
the full recovery of principal and interest on the associated notes, instituted a deficiency
action in state court seeking full recompense of its “collection fees,” including attorney’s
fees in excess of what had been allowed in the foreclosure suits. The court opined that
the lender was trying to avail itself of “the proverbial entrance through the back door
when entrance through the front door is impermissible.” Regency Savings, 833 A.2d at
82. Relying on Bergen Builders, the court denied the petition for additional fees.
Indeed, one court seems to have suggested that a lender who sues on a promissory
note rather than opting for an alternate and adequate foreclosure remedy will be presumed
motivated by improper designs unless an affirmative showing is made to the contrary.
Hatch v. T&L Associates, 726 A.2d 308 (N.J. Super. 1999) (denying claim for additional
10
fees where the lender had “given no explanation, as we believe Bergen Builders required
him to do, as to why the foreclosure course was not followed [instead].” Id. at 310. But
see Regency Savings, 833 A.2d at 82 (distinguishing First Morris on the grounds that
“certainly it does not appear that the deficiency action on the note [in that case] was
brought primarily to obtain greater counsel fees.”). 7
In any event, it is clear enough that HUB has not engaged in any improper attempts
to maneuver its way around the strictures of Rule 4:42-9(a)(4). It is the Smiriglios, and
not HUB, that initiated the proceedings in the Bankruptcy Court to begin with. Moreover,
HUB is not trying (as did the Regency Savings lenders) to obtain fees incurred (but not
awarded) in a foreclosure proceeding by requesting them in a different proceeding. The
fees it claims were incurred solely in connection with the defense of the “cram down”
motion in the Bankruptcy Court. HUB has engaged in no “back door” maneuver here; it
simply desires to collect on the attorney’s fees due to it according to the terms of the notes
the Smiriglios executed.
We find that the attorney’s fee award granted by the Bankruptcy Court was entirely
consistent with “applicable [state] law.” 11 U.S.C. § 1322(e). Accordingly, we affirm.
7
Note that in certain cases, New Jersey statute explicitly provides that a lender is
required to pursue a mortgage remedy before suing on a note secured by that mortgage.
See N.J.S.A § 2A:50-2. This provision does not apply, however, in cases (such as this
one) “[w]here the debt secured is for business or commercial purposes . . . .” See
N.J.S.A. § 2A:50-2.3.
11