NOT FOR PUBLICATION WITHOUT THE
APPROVAL OF THE APPELLATE DIVISION
This opinion shall not "constitute precedent or be binding upon any court ." Although it is posted on the
internet, this opinion is binding only on the parties in the case and its use in other cases is limited. R. 1:36-3.
SUPERIOR COURT OF NEW JERSEY
APPELLATE DIVISION
DOCKET NO. A-5171-18
A-0911-19
RUTGERS, THE STATE
UNIVERSITY OF NEW JERSEY,
Plaintiff-Appellant,
v.
TEON D. RUSSELL,
Defendant-Respondent.
_____________________________
RUTGERS, THE STATE
UNIVERSITY OF NEW JERSEY,
Plaintiff-Appellant,
v.
MICHAEL J. MOONEY,
Defendant-Respondent.
_____________________________
Submitted May 3, 2021 – Decided June 29, 2021
Before Judges Currier and DeAlmeida.
On appeal from the Superior Court of New Jersey, Law
Division, Camden County, Docket Nos. DC-003227-19
and DC-005799-19.
Gordin & Berger, PC attorneys for appellant (Daniel A.
Berger on the brief).
Respondents have not filed a brief.
PER CURIAM
In these one-sided, consolidated appeals, plaintiff Rutgers, the State
University of New Jersey (Rutgers), appeals from the provisions of two orders
of the Special Civil Part awarding it a smaller amount of collection costs on
defaulted student loans than it sought in its complaints. We vacate the
provisions of the orders under appeal, and remand for entry of orders awarding
Rutgers the full collection costs sought in its complaints.
I.
The following facts are derived from the record. Defendants Teon D.
Russell and Michael J. Mooney were students at Rutgers when the university
lent them money through the Federal Perkins Loan Program (Loan Program) to
assist in meeting the costs of their postsecondary education. Rutgers lent
Russell $6500 and Mooney $2000.
The defendants each signed a promissory note memorializing their
obligation to repay the loans. The promissory notes state that they are to be
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interpreted consistent with the federal statute creating the Loan Program, Title
IV-E of the Higher Education Act of 1965 (HEA), 20 U.S.C.A. § 1087aa to -ii,
and the regulations promulgated thereunder.
The notes provide that if the borrower fails to make a payment when due,
the lender may declare the loan in default, accelerate the loan, and "demand
immediate payment of the entire unpaid balance of the loan, including principal,
interest, late charges, and collection costs." The borrowers also promised that
if they failed to make any payment when due they would "pay all reasonable
collection costs, including attorney['s] fees, court costs, and other" fees.
Teon D. Russell
Russell made no payments on his promissory note. Rutgers accelerated
the note and, on March 28, 2019, filed a complaint against Russell in the Special
Civil Part, alleging breach of contract. Rutgers sought a judgment in the amount
of $10,547.24 as follows:
Principal $ 6,500.00
Interest (to date of filing) $ 1,001.96
Late Fees $ 32.50
Collection Costs $ 3,012.78
Total $10,547.24
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Russell filed an answer admitting that he owed "this debt" and stating that
he "agreed to pay the plaintiff in monthly installments." Rutgers subsequently
moved for judgment on the pleadings. Russell did not oppose the motion.
On June 5, 2019, the trial court sua sponte scheduled a proof hearing as to
Rutgers's request for collection costs. Rutgers subsequently filed a certification
of Rashod Jones, its Business Manager of Operations, explaining how it
calculated the collection costs sought in the complaint. Jones certified that
Rutgers has a contingency fee arrangement with a law firm to assist with the
collection of delinquent Loan Program accounts.
Jones explained that the contingency fee is 28.5% of all amounts
collected, including fees on fees. In order to make the Loan Program whole, as
intended by federal regulations, Rutgers charges borrowers a rate of 40% of all
amounts recovered for collection costs. This rate allows Rutgers to both pay the
contingency fee and collect the full amount the borrower owes on the defaulted
promissory note.
An attorney from the law firm with which Rutgers has the contingency fee
arrangement also submitted a certification. He certified that in addition to the
legal services performed to obtain the judgment, the firm can reasonably expect
to spend at least forty-eight hours performing legal services if the judgment is
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entered in full and Russell were to satisfy it over ten years with equal monthly
payments at the judgment interest rate. The attorney explained that the expected
future legal services would include receiving and processing payments, creating
monthly statements acknowledging receipt of payment and reminding of the
next due date, maintaining accurate accounting records for various escrow
accounts, and making monthly remittances.
On June 20, 2019, the trial court entered an order granting Rutgers's
motion for judgment on the pleadings in the full amount of principal, interest,
and late fees sought in the complaint. With respect to collection costs, the trial
court, in a written statement of reasons, found the $3,035.45 sought by Rutgers
was not required by federal regulations implementing the Loan Program. 1 The
court concluded that a federal regulation placed a cap on collection costs of 40%
of the amount of the judgment, but did not require that percentage. The court,
therefore, decided it would determine reasonable collection costs without
applying the 40% formula.
The court rejected counsel's representation that the firm spent
approximately six hours on the matter, finding that securing a judgment against
1
The amount of collection costs exceeds the amount alleged in the complaint
because interest accrued after the filing of the complaint. The increase in
interest resulted in an increase in the collection costs sought by Rutgers.
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5
Russell, who admitted his liability, should not have entailed a significant amount
of legal services. The court concluded that "only an award based on time spen[t]
drafting the complaint and the motion for judgment on the pleadings is
warranted."
The court refused to consider time spent opening the file, sending or
receiving correspondence from Rutgers, and communicating with Russell. In
addition, the court was "unwilling to count the time spent on this proof hearing,"
including drafting responses to the court's inquiry, travelling to the courthouse,
waiting for the hearing, and appearing before the court. The court also refused
to consider the expectation of future legal services to collect on the judgment.
The court awarded Rutgers $750 in collection costs, although it provided
no explanation of how it reached that figure. It appears the court accept ed
counsel's representation that the firm spent approximately one to one-and-one-
half hours drafting the complaint and one to one-and-one-half hours drafting the
motion, but made no precise finding with respect to the number of hours it found
reasonable or a reasonable hourly rate.
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As a result of its findings, the court entered an order awarding Rutgers
$8,338.62 ($6500 + $1,056.12 + $32.50 + $750 = $8,338.62). 2
Michael J. Mooney
Mooney made no payments on his promissory note. Rutgers accelerated
the note and, on June 5, 2019, filed a complaint against Mooney in the Special
Civil Part, alleging breach of contract. Rutgers sought a judgment in the amount
of $4,175.93 as follows:
Principal $2,000.00
Interest (to date of filing) $ 924.81
Late Fees $ 58.00
Collection Costs $1,193.12
Total $4,175.93
Collection costs were calculated using the same formula applied to Russell.
On July 16, 2019, the court clerk entered default against Mooney. Rutgers
later moved for entry of default judgment. The trial court set a proof hearing.
On September 26, 2019, the trial court entered an order awarding Rutgers
the full amount of principal, interest, and late fees sought in the complaint. 3 In
a written statement of reasons, the trial court incorporated the statement of
reasons it issued in the Russell matter.
2
The court struck from the form of order an award of court costs of $7.60.
3
The award included interest accrued after the filing of the complaint.
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In addition, the court rejected Rutgers's argument that the requested
method of calculating collection costs was reasonable because borrowers in the
Loan Program have a number of avenues, including applying for deferral,
forbearance, consolidation, and rehabilitation, through which they can avoid
litigation and collection costs. The court was not persuaded by the argument
that because Mooney did not take advantage of those options and forced Rutgers
to pursue a judicial remedy, it was reasonable for him to be assessed collection
costs at the 40% rate.
The court determined the amount of collection costs by reference to its
award of $750 in collection costs in the Russell matter. In that matter, the court
found $750 to be reasonable because Rutgers filed a complaint and a motion for
judgment on the pleadings. Because no motion was necessary in the Mooney
matter, the court found that half of the amount awarded in Russell, $375, would
be reasonable collection costs. The court awarded Rutgers $3,382.80 ($2000 +
$949.80 + $58 + $375 = $3,382.80).
Rutgers appealed the June 20, 2019 order in the Russell matter and the
September 26, 2019 order in the Mooney matter. We consolidated the appeals.
Rutgers argues the trial court erred when it failed to follow federal
regulations which preempt state law and establish the legal framework for
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determining reasonable collection costs in a breach of contract action relating to
a promissory note issued under the Loan Program.4
II.
Federal regulations require lending institutions in the Loan Program to
engage in a "series of more intensive efforts, including litigation . . . to recover
amounts owed from defaulted borrowers who do not respond satisfactorily to
the demands routinely made as part of the institution's billing procedures." 34
C.F.R. § 674.45 (a). Where a borrower does not respond to a final demand letter,
a lending institution must either use its own personnel or engage a collection
firm to collect the amount due. 34 C.F.R. § 674.45 (a)(2)(i) and (ii).
If twelve months of collection activity by a collection firm does not
succeed in bringing a delinquent loan into regular payment status, the lending
institution must make a second effort at collection or initiate litigation to collect
the amount due. 34 C.F.R. § 674.45 (c)(1)(i) and (ii). The lending institution
"shall assess against the borrower all reasonable costs incurred by the institution
with regard to a loan obligation," 34 C.F.R. § 674.45 (e)(1), and
shall determine the amount of collection costs that shall
be charged to the borrower . . . based on either . . .
4
Rutgers also argues that the trial court erred by not enforcing the terms of the
promissory notes and misapplied principles of equity. Because we resolve the
appeals based on the federal regulations we need not address those arguments.
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[a]ctual costs incurred . . . with regard to the individual
borrower's loan; or . . . [a]verage costs incurred for
similar actions taken to collect loans in similar stages
of delinquency.
[34 C.F.R. § 674.45 (e)(2)(i) and (ii).]
"[R]easonable collection costs charged to the borrower may not exceed
. . . [f]or collection efforts resulting from litigation, 40 percent of the amount of
principal, interest, and late charges collected plus court costs." 34 C.F.R. §
674.45 (e)(3)(iii). "The [Federal Perkins Loan] Fund must be reimbursed for
collection costs initially charged to the Fund and subsequently paid by the
borrower." 34 C.F.R. § 674.45 (e)(4).
Importantly, the federal regulation provides that "[t]he provisions of this
section preempt any State law, including State statutes, regulations, or rules, that
would conflict with or hinder satisfaction of the requirements or frustrate the
purpose of this section." 34 C.F.R. § 674.45 (g).
Having carefully reviewed the record, we conclude that the federal Loan
Fund regulations preempt the trial court's award of collection costs to Rutgers
based on what it considered to be, in essence, a reasonable attorney's fee for
services provided to obtain the orders under review. Federal regulations
authorize Rutgers to collect delinquent Loan Fund promissory notes through
litigation and to retain a collection firm to assist in that endeavor. In addition,
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the regulations require the delinquent borrower to pay Rutgers's collection costs,
which necessarily include the fees Rutgers pays to its collection firm. Collection
costs, if charged to the Fund, must be reimbursed to the Fund once recovered
from the borrower.
After routine collection efforts fail and a lending institution resorts to
litigation to collect a delinquent loan, the regulations cap reasonable collection
costs at 40% of the principal, interest, late fees, and court costs awarded in a
judgment. When the 40% collection costs rate is applied, a 28.5% contingency
fee permits Rutgers to both pay its collection firm for its services and recover
the full amount due on a delinquent loan. This fulfills the evident intention of
the federal regulations to preserve the Fund and its ability to make loans in the
future.
The trial court frustrated the purpose of the federal regulations when it, in
effect, shifted to Rutgers, and ultimately the Fund, the 28.5% contingency fee
that must be paid to the collection firm on the full amount awarded to the
university in these matters. The challenged provisions of the order are,
therefore, preempted by the federal regulations. The trial court was bound by
the regulation's endorsement of the 40% formula as reasonable and, by
implication, the 28.5% contingency fee paid by Rutgers.
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The provisions of the orders under appeal awarding Rutgers collection
costs against Russell and Mooney are vacated. The matters are remanded for
entry of orders awarding Rutgers collection costs against each defendant in an
amount equal to 40% of the total amount of principal, interest, and late fees
awarded to Rutgers against that defendant.
Vacated and remanded for proceedings in accordance with this opinion.
We do not retain jurisdiction.
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