|
Equities Dictate Against Strict Application of Merger Doctrine Where It Would Serve to "Handcuff" Bank
by Elizabeth K. Holdren
In the recent New Jersey Bankruptcy
Court case, In re: Price, the Honorable
Michael B. Kaplan, United States
Bankruptcy Judge found that equities
dictated against a strict application of
the merger doctrine. In Price, the
bank, represented by Hill Wallack LLP,
had obtained a foreclosure judgment
and scheduled a sheriff’s sale prior
to the debtor filing a Chapter 13
Bankruptcy Petition. As a result of the
bankruptcy filing, the bank’s foreclosure
action was automatically
stayed. Over a period of approximately
three (3) years during the course of the
bankruptcy case, the bank made a total
of eight (8) applications for relief from
the automatic stay to allow it to return
to the foreclosure action to proceed
with its sheriff’s sale, as a result of the
debtors’ repeated defaults. Each of the
bank’s applications was denied and the
bank was assured that it would be paid
in full upon the sale of the debtor’s real
estate. Eventually, the bankruptcy
trustee obtained an order allowing him
to sell the property, the property was
sold, and the bank was paid in full.
However, the trustee later filed an
adversary complaint against the bank
seeking the recovery of certain fees and
costs included in the payoff figure,
including attorney’s fees and costs.
Equitable Exception to
Merger Doctrine
The trustee argued that under the
case In Re: A&P Diversified Technologies
Realty, Inc., the note and mortgage
merged into the foreclosure judgment,
and therefore the bank was limited to
the attorney’s fees which were included
in the foreclosure judgment. In the
A&P case, the note and mortgage
included a provision that the borrower
was responsible to reimburse the bank
for the attorney’s fees and costs it
incurred in collection of the debt and
protecting its rights under the loan
documents. The court determined
that the bank did not maintain that
benefit after it obtained a final
judgment in foreclosure, and the
judgment was satisfied through a sale
in the foreclosure process. However, in
that case, the mortgagee was granted
relief from the automatic stay allowing
it to proceed with its foreclosure action
and obtain a judgment in that action
including all allowed attorneys fees
and costs.
In contrast, in the Price case, the
bank repeatedly applied to the court
for relief from the automatic stay to
proceed with the foreclosure action.
Each of the bank’s applications was
opposed by the debtors and/or the
trustee and was denied by the court.
Thus, the bank in the Price case was
unable to return to the foreclosure
action and obtain the entry of an order
for additional fees and costs in that
action. The Court found it to be
“patently inequitable that a lender
should be limited to the rights under a
foreclosure judgment, yet be thwarted
in its efforts to include all outlays in the
judgment itself.” The trustee was “able
to stave off [the bank’s] efforts to
complete the foreclosure until he had
secured a sale of the real estate.” Then
the trustee sought to deny the bank the
recovery of certain amounts including
its attorney’s fees and costs. The court
found the unfairness to be obvious and
an equitable remedy to be warranted.
Further, it found that a strict application
of the “merger doctrine” as
enunciated in the A&P case would
serve to “handcuff and punish” the
bank and similarly situated lenders
whose “lone crime” was to obtain a
foreclosure judgment prior to the
mortgagor’s bankruptcy filing. Thus,
the Court determined that it would
review the bank’s attorneys fees and
costs and determine itself whether they
were reasonable.
Exception Based Upon Loan
Document Terms
It should be noted that the Third
Circuit previously found, in a case
applying Pennsylvania law, that there
was an exception to the merger
doctrine where the mortgage clearly
evidences an intent to preserve the
effectiveness of the provision allowing
attorney’s fees and costs even after the
entry of the foreclosure judgment.
While the Court in A&P found that
this same exception would apply under
New Jersey law, it did not find that the
language in the loan documents clearly
evidenced any such intent.
Bank’s Tools to Recover the
Highest Amount Possible
In light of these recent decisions, it
is clear that the ability of mortgagees to
recover their attorney’s fees and costs
and perhaps taxes and other out-ofpocket
expenses, may depend upon
the language contained in their loan
documents, and upon the particular
circumstances of the foreclosure and
bankruptcy case. Therefore, lenders
should review their loan documents
and consult their attorneys to revise the
language of their documents to assure
that they “clearly evidence” the parties’
intent that such clauses survive the
entry and satisfaction of judgment.
Even if the loan documents do not
contain such language, equity may
dictate the award of certain fees and
costs, including attorney’s fees and
costs, if the facts of the case support
such an award.
Elizabeth K. Holdren is an associate
of Hill Wallack LLP where she is a member
of the Creditors’ Rights/Bankruptcy
Practice Group.
|
