January 1, 1900

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.