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Precedential or Non-Precedential: Non-Precedential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                                                NOT PRECEDENTIAL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, 

, 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, 

, 72

(N.J. 1965); Belfer v. Merling, 

, 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. 

;

Bank of Commerce v. Markakos, 

(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, 

, 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.

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, 

, 641 (Bankr. D. Mass.

2003) (quoting § 1322(e)); see also In re Hatala, 

, 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, 

, 579 (Bankr. S.D. Ohio 2001); In

re Lake, 

, 284 (Bankr. N.D. Ohio 2000); cf. 

(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); 

(applying Rule 4:42-

9(a)(4) as the “applicable nonbankruptcy law”); 

(applying

Massachusetts law); 

(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, 

(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).” 

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,

, 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, 

(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, 

(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.” 

This was true even though the note involved in the case was secured by

a mortgage. 

Likewise, in First Morris Bank and Trust v. Roland Offset Service,

(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.

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. 

The court ruled that it did not have such discretion. 

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, 

(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,

, 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, 

, 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, 

, 443 (N.J. Super. 1999), citing Cohen v. Fair Lawn
Dairies, Inc., 

(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 

. 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 

. 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, 

(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].” 

But

see Regency 

(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