Opinions of the United
2006 Decisions States Court of Appeals
for the Third Circuit
1-19-2006
In Re: A&P Diversifi v. Fleet Bank
Precedential or Non-Precedential: Precedential
Docket No. 04-3622
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PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 04-3622
IN RE: A&P DIVERSIFIED TECHNOLOGIES
REALTY, INC.
CATHERINE E. YOUNGMAN, Trustee,
Appellant
v.
FLEET BANK, N.A.
On Appeal from the United States District Court
for the District of New Jersey
(D.C. Civ. No. 04-01711)
Honorable Garrett E. Brown, Jr., District Judge
Argued October 26, 2005
BEFORE: SLOVITER, FISHER,
and GREENBERG, Circuit Judges
(Filed: January 19, 2006)
Joseph M. Cerra (argued)
Forman, Holt & Eliades
218 Route 17 North
Rochelle Park, NJ 07662
Attorneys for Appellant
Tod S. Chasin
Mark S. Lichtenstein (argued)
Buchanan Ingersoll
700 Alexander Park
Suite 300
Princeton, NJ 08540
Attorneys for Appellee
OPINION OF THE COURT
GREENBERG, Circuit Judge.
I. INTRODUCTION
This matter comes on before this court on appeal by a
bankruptcy trustee from a final order of the district court entered
August 31, 2004, affirming two orders of the bankruptcy court.
Following a state foreclosure action and the satisfaction of the
foreclosure judgment, the bankruptcy court granted the mortgagee-
bank’s motion under 11 U.S.C. § 506(b) (“section 506(b)”) to award it
attorneys’ fees and expenses for services its attorneys rendered in the
state and bankruptcy courts relating to the foreclosure. The trustee
argues that the mortgagee-bank is not entitled to fees under section
506(b) because the note and mortgage, which included a provision for
attorneys’ fees and expenses, were extinguished by their merger into
the final judgment of foreclosure. The trustee further argues that a
potential exception to the merger doctrine predicated on the parties’
intent to preserve the mortgagee’s right to seek its attorneys’ fees after
entry and satisfaction of the foreclosure judgment does not apply
because the terms of the mortgage did not evidence that the parties
had any such intent. We agree with the trustee and will reverse the
order of the district court.
II. FACTUAL BACKGROUND AND PROCEDURAL HISTORY
On or around February 13, 1995, the debtor, A&P Diversified
Technologies Realty, Inc., executed a promissory note in favor of
2
Fleet Bank, N.A. (“Fleet”)1 in the amount of $900,000,2 secured by a
mortgage on the debtor’s property. The mortgage provided, in
relevant part:
Agreement to Pay Attorneys’ Fees and Expenses. In the
event that the Mortgagor should default under any of the
provisions of the Note or any other Loan Document and the
Mortgagee shall employ attorneys or incur other costs and
expenses for the collection of payments due or to become due,
the realization upon any Collateral, or for the enforcement or
performance or observance of any Obligation or agreement on
the part of the Mortgagor of any Guarantor under any Loan
Document, whether by litigation or otherwise, the Mortgagor
agrees that it will pay to the Mortgagee, on demand, the
reasonable fee of such attorneys, together with all other costs
and expenses incurred by the Mortgagee, and that all of said
costs and expenses shall be secured by the Mortgage.
J.A. at 232-333 (emphasis added). The mortgage also provided that
“[t]he Mortgagor . . . waives and releases, to the fullest extent it may
lawfully do so, all benefit of any present or future moratorium law or
any other present or future law, regulation or judicial decisions . . .
[which] conflict[ ] with any provision herein or in the other Loan
Documents.” J.A. at 230.
The debtor defaulted, leading Fleet to institute a foreclosure
action in the Superior Court of New Jersey. While the foreclosure
proceedings were pending, the debtor filed a voluntary petition for
relief under Chapter 11 of the Bankruptcy Code in the bankruptcy
court, which automatically stayed the foreclosure, but the bankruptcy
court granted Fleet relief from the stay and allowed it to continue with
the foreclosure. Ultimately, the bankruptcy court converted the
debtor’s case to a Chapter 7 proceeding and appointed Catherine E.
Youngman as the Chapter 7 trustee for the debtor’s estate on May 2,
2001. After the stay was lifted, Fleet obtained a final judgment of
1
National Westminster Bank was the original mortgagee, but on
or about May 1, 1996, it merged with Fleet.
2
On November 30, 1995, the parties reduced the amount of the
mortgage to $500,000.
3
“J.A.” refers to the Joint Appendix prepared by counsel.
3
foreclosure in the amount of $1,118,853.69 which included $7500 in
counsel fees awarded to Fleet in accordance with N.J. Court Rule
4:42-9(a)(4) (“Rule 4:42-9(a)(4)”) as well as substantial taxes and
interest not in dispute here.4 Fleet collected the full amount of the
judgment through the state-court foreclosure process.
The trustee subsequently filed a motion in the bankruptcy
court to expunge Fleet’s claim. Fleet opposed the motion and cross-
moved for attorneys’ fees pursuant to section 506(b). The bankruptcy
court denied the trustee’s motion and granted Fleet’s motion,
awarding attorneys’ fees in the amount of $304,181.45 and expenses
in the amount of $32,772.43. It appears that the court contemplated
that the trustee would pay the fees and expenses from the debtor’s
estate but that this will not be possible as the debtor’s estate is valued
at far less than the fees and expenses awarded. Nevertheless, the
4
Rule 4:42-9(a)(4) provides, with respect to attorney’s fees, that
in an action for the foreclosure of a mortgage,
the allowance shall be calculated as follows: on all sums
adjudged to be paid the plaintiff amounting to $5,000 or less, at
the rate of 3½%, provided, however, that in any action a
minimum fee of $75 shall be allowed; upon the excess over
$5,000 and up to $10,000 at the rate of 1½%; and upon the
excess over $10,000 at the rate of 1%, provided that the
allowance shall not exceed $7,500. If, however, application of
the formula prescribed by this rule results in a sum in excess of
$7,500, the court may award an additional fee not greater than
the amount of such excess on application supported by affidavit
of services. In no case shall the fee allowance exceed the
limitations of this rule.
Fleet may not have been limited to a $7500 fee in the state court
because Rule 4:42-9(a)(4) provides that if the fee calculated under the
rule without regard for the $7500 limitation results in a sum in excess of
that amount “the court may award an additional fee not greater than the
amount of such excess on application supported by affidavit of services.”
Nevertheless as far as we are aware Fleet did not seek an additional fee
in the state court on the basis of this rule and in its brief it does not claim
to have done so. We acknowledge, however, that any additional fees
over the $7500 awarded that it might have obtained under Rule 4:42-
9(a)(4) would have been minuscule compared to the fees the bankruptcy
court awarded.
4
trustee appealed to the district court from the bankruptcy court’s
orders.
The district court affirmed the bankruptcy court’s orders
awarding attorneys’ fees and expenses to Fleet and denying the
trustee’s motion to expunge Fleet’s claim. Although the district court
acknowledged that the merger doctrine, which normally extinguishes
a creditor’s rights under a mortgage once judgment is entered, applied
in this case, it held that “it is clear from the language of the agreement
that the parties intended their rights under the mortgage to be
preserved beyond any judgment, more specifically, the state court
foreclosure judgment.” J.A. at 10. Thus, in the district court’s view,
Fleet’s right to recover fees and expenses was not extinguished by
merger of the mortgage into the judgment. In reaching its result the
court relied on language we already have quoted contained in the
mortgage, which provided that “[t]he Mortgagor . . . waives and
releases, to the fullest extent it may lawfully do so, all benefit of any
present or future moratorium law or any other present or future law,
regulation of judicial decisions[.]” J.A. at 10. The district court also
found that the amount of attorneys’ fees awarded by the bankruptcy
court was reasonable and that the bankruptcy court did not abuse its
discretion in awarding them.
III. JURISDICTION AND STANDARD OF REVIEW
The district court had jurisdiction under 28 U.S.C. § 158(a) as
the bankruptcy court orders were final and appealable. See In re
Walsh Trucking Co., 838 F.2d 698, 701 (3d Cir. 1988) (“We believe
that the considerations that led this court to adopt the more flexible
standards of finality in reviewing bankruptcy proceedings are equally
applicable in the context of appeals of orders of the bankruptcy court
to the district court.”). Our determination in this regard comports
with those of other courts of appeals in similar circumstances. See,
e.g., In re Smith, 317 F.3d 918, 923 (9th Cir. 2002) (court of appeals
has jurisdiction under 28 U.S.C. § 158(d) and 28 U.S.C. § 1291 on an
appeal from a district order affirming a bankruptcy court’s award of
attorneys’ fees); In re Wade, 991 F.2d 402, 406 (7th Cir. 1993)
(“Several types of bankruptcy orders are final and appealable, for
example, orders allowing or denying claims[.]”); In re Baudoin, 981
F.2d 736, 742 (5th Cir. 1993) (holding “that an order allowing a proof
of claim is, likewise, a final judgment”).
5
We have jurisdiction under 28 U.S.C. § 158(d), and 28 U.S.C.
§ 1291. Inasmuch as the district court sits as an appellate court in
bankruptcy cases, our review of the district court’s order is plenary.
In re Visual Indus., Inc., 57 F.3d 321, 324 (3d Cir. 1995).
IV. DISCUSSION
In general, New Jersey courts are said to follow the “American
rule,” under which parties bear their own litigation costs, including
attorneys’ fees. See McKeown-Brand v. Trump Castle Hotel &
Casino, 626 A.2d 425, 429 (N.J. 1993). Rule 4:42-9(a)(4) provides,
however, that, in actions for the foreclosure of a mortgage, the
prevailing plaintiff is entitled to attorneys’ fees. Although Rule 4:42-
9(a)(4) limits the amount of recoverable attorneys’ fees through a
multi-step percentage formula, the Bankruptcy Code will, if
applicable, preempt this rule, see In re Kord Enters. II, 139 F.3d 684,
689 (9th Cir. 1998), as it provides:
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 or State statute
under which such claim arose.
11 U.S.C. § 506(b).
Notwithstanding section 506(b), the trustee asserts that “Fleet
possessed no entitlement to counsel fees under section 506(b) because
the note and mortgage on which it relied for its section 506(b) claim
had been extinguished by merger into the final judgment of
foreclosure.” Appellant’s Br. at 16. In response and in urging us to
affirm the award of attorneys’ fees and expenses, Fleet argues that the
loan documents “clearly evidence[ ] the parties’ intent for the
exception to the merger doctrine to apply.” Appellee’s Br. at 19.
Like the district court, Fleet emphasizes the fact that the debtor
waived and released the benefit of all laws, regulations, and judicial
decisions.
We agree with the trustee for the following reasons. Under the
6
merger doctrine, a contract is deemed to merge with the judgment,
thereby depriving a plaintiff from being able to assert claims based on
the terms and provisions of the contractual instrument. In re Roach,
824 F.2d 1370, 1377 (3d Cir. 1987) (“In New Jersey, as in many
states, the mortgage is merged into the final judgment of foreclosure
and the mortgage contract is extinguished.”)5; see also In re Olick, 221
B.R. 146, 152 (Bankr. E.D. Pa. 1998).
In In re Stendardo we recognized an exception to the merger
doctrine and held that obligations under a mortgage are merged into a
foreclosure judgment unless “the mortgage clearly evidences [an]
intent to preserve the effectiveness of that provision post-judgment.”
991 F.2d 1089, 1094 (3d Cir. 1993). Nevertheless, in that case we
held that the exception to the merger doctrine did not apply with
respect to post-judgment taxes and insurance premiums because the
mortgage required the debtor to pay these expenses only while the
mortgage was in effect as we did not find any language “in the
[m]ortgage at issue [in that case] that indicate[s] the parties’ intent to
preserve the Debtors’ obligation to pay the relevant taxes and
premiums beyond the date of the Judgment.” Id. at 1095.
Accordingly, we concluded that the creditor was not entitled to
reimbursement for payment of the expenses because the debtors’
obligation under the mortgage to pay property taxes and insurance
5
In Roach, we held that a debtor’s right to cure was extinguished
at the time of the foreclosure judgment, which occurs in advance of the
actual foreclosure sale. 824 F.2d at 1378. However, Congress
subsequently enacted 11 U.S.C. § 1322(c)(1), which provides, in
relevant part:
Notwithstanding subsection (b)(2) and applicable nonbankruptcy
law–
(1) a default with respect to, or that gave rise to, a lien on the
debtor's principal residence may be cured under paragraph (3) or
(5) of subsection (b) until such residence is sold at a foreclosure
sale that is conducted in accordance with applicable
nonbankruptcy law[.]
Congress considered Roach to be “in conflict with the fundamental
bankruptcy principle allowing the debtor a fresh start through
bankruptcy.” H.R. Rep. No. 103-835, at 52 (1994), reprinted in 1994
U.S.C.C.A.N. 3340, 3361. The enactment of section 322(c)(1) does not
alter our holding in this case as we cite Roach only to explain the merger
doctrine and its general applicability in New Jersey.
7
premiums ended when the mortgage merged into the judgment. Id. at
1095-96; see also In re Schwartz, 77 B.R. 177, 180 (Bankr. S.D. Ohio
1987) (“Once the [state] court entered its final judgment, any right
which [the creditor] may have had to attorneys’ fees under the note
was extinguished.”); In re Schlecht, 36 B.R. 236, 241 (Bankr. D.
Alaska 1983) (“[T]he bank’s note containing the provision for
attorney’s fees has merged with its Alaska Superior Court judgment.
There is no longer an agreement pursuant to which attorney’s fees can
be awarded under § 506(b).”); cf. In re Olick, 221 B.R. at 151
(allowing creditor to recover attorneys’ fees post-judgment when
foreclosure judgment was a confessed judgment, which did not
constitute a final judgment).
Although we decided Stendardo applying Pennsylvania law,
we predict that the Supreme Court of New Jersey would find the
exception to the merger doctrine, as we explained it in Stendardo,
similarly applicable in New Jersey. See In re Winogora, 209 B.R.
632, 636 n.1 (Bankr. D.N.J. 1997) (“Although Stendardo was based
on Pennsylvania law, it cited Roach for the proposition that under the
law of both states [Pennsylvania and New Jersey] a mortgage merges
into a foreclosure judgment. Because the merger doctrine was the
basis for Stendardo’s holding that mortgage provisions for taxes and
insurance no longer exist after judgment, Stendardo is binding in
chapter 13 cases involving New Jersey real property as well.”)
(citation omitted).6
In this case we find that the lending agreements including the
mortgage merged into the final judgment of foreclosure, which
ordinarily precludes the recovery of attorneys’ fees. Under the
merger doctrine, the mortgage and its concomitant attorneys’ fees
provision ceased to exist when the judgment was entered. Therefore,
when Fleet moved for attorneys’ fees pursuant to section 506(b)
6
We note that in In re Loehwing, 320 B.R. 281, 290 (Bankr.
D.N.J. 2005), the bankruptcy court rejected the trustee’s reliance on
Stendardo for the proposition that post-merger payments of sheriff’s
foreclosure fees were improper, reasoning, in part, that “Stendardo dealt
with Pennsylvania law.” Id. The court, however, did not predict
expressly that New Jersey courts would not adhere to Stendardo. Id.
Moreover, the court primarily based its holding not on the inapplicability
of Stendardo, but its findings that “[s]ection 506(b) is irrelevant to the
legal analysis of this case, and the Sheriff’s fees are included in the
amount necessary to satisfy the foreclosure judgment.” Id.
8
before the bankruptcy court, it was no longer the beneficiary of an
agreement under which a claim for attorneys’ fees arose, which
supplies the foundation for a section 506(b) award.
Nevertheless, applying the methodology we set forth in
Stenardo, we must examine the mortgage to determine whether Fleet
is entitled to attorneys’ fees and expenses under the exception to the
merger doctrine. See Stendardo, 991 F.2d at 1094. Like the loan
documents in Stendardo, the mortgage here does not clearly evidence
an intent to preserve the effectiveness of the attorneys’ fees and
expenses provision following the entry of the foreclosure judgment.
See id. The fact that the debtor generally waived certain present or
future laws for its benefit does not clearly indicate that the debtor’s
obligation to pay attorneys’ fees continued post-judgment.7 Indeed,
the waiver does not address this point at all. Thus, we are satisfied
that the broad waiver language in the mortgage does not suffice to
avoid the merger doctrine, and the exception to the merger doctrine
therefore does not apply.8
We also disagree with Fleet’s assertion that New Jersey’s
limitation on attorneys’ fees in Rule 4:42-9(a)(4) somehow renders
the merger doctrine inapplicable and allows creditors to recover
attorneys’ fees post-judgment. In this regard Fleet contends that cases
from other jurisdictions which hold “that a secured party cannot
receive a section 506(b) award after its mortgage is satisfied are
inappropriate and emanate from jurisdictions outside New Jersey
where unlike New Jersey, a party may seek all of its legal fees and
costs in the context of a state court foreclosure action.” Appellee’s
7
The trustee argues that even if there was express language in the
lending agreements that authorized an award of attorneys’ fees post-
judgment, “this recognized exception to the merger doctrine only
authorizes the continued collection of counsel fees between the time the
final judgment of foreclosure is entered and the time the judgment is
satisfied.” Appellant’s Br. at 13. We need not address whether the
exception to the merger doctrine applies after a judgment has been
satisfied in full because we are determining that the exception is
inapplicable.
8
The trustee alternatively argues that the amount of attorneys’
fees and expenses awarded to Fleet was manifestly unreasonable. We
need not reach this issue inasmuch as we find that Fleet is not entitled to
any attorneys’ fees or expenses under section 506(b).
9
Br. at 19. Rule 4:42-9(a)(4) does not render the merger doctrine
inapplicable; nor does it allow a mortgage agreement to survive a
judgment of foreclosure. Indeed, it does not even address these
matters. Rather, it limits the award of attorneys’ fees allowable under
state law as it provides, after setting forth the allowable fees, that “[i]n
no case shall the fee allowance exceed the limitations of this rule.”
The Supreme Court of New Jersey has made it clear that the parties to
a mortgage cannot by contract override the limitations of the rule.
Alcoa Edgewater No. 1 Fed. Credit Union v. Carroll, 210 A.2d 68, 71
(N.J. 1965).
In reaching our result we emphasize the following. While it is
true that the debtor agreed to pay Fleet’s “reasonable” attorneys’ fees
in a foreclosure action and arguably waived the benefit of certain laws
limiting the amount of fees Fleet could recover, certainly in the
absence of a bankruptcy proceeding these provisions would not have
rendered the limitations of Rule 4:42-9(a)(4) ineffective. Id.
Furthermore, we point out that inasmuch as mortgagees ordinarily
prepare the mortgage documents, if such provisions superceded Rule
4:42-9(a)(4) in foreclosure actions, the rule soon would become
meaningless.
The question, then, is whether section 506(b) should require a
different result in a bankruptcy context. We do not see why it should
in the absence of clear language in the loan documents preserving the
claim for attorneys’ fees after a foreclosure judgment. In this regard
we observe that the debtor’s waiver in the mortgage of the “benefit”
of certain laws hardly can assist Fleet with respect to section 506(b) as
that section in allowing a creditor to obtain attorneys’ fees in excess of
those it otherwise could recover surely is not a law enacted for the
benefit of a mortgagor. Thus, Fleet, is limited to recovering its
“reasonable” attorneys’ fees, which were determined through the
application of the state court rule in the state court proceedings, as the
mortgage or other documents simply do not provide that the provision
for reasonable fees in the mortgage renders inapplicable the ordinary
application of the merger doctrine.
V. CONCLUSION
For the foregoing reasons, we will reverse the order of the
district court entered August 31, 2004, and will remand the case to the
10
district court to enter an order reversing the orders of the bankruptcy
court to the end that Fleet’s claim for fees and expenses under section
506(b) will be expunged and denied.
11