A & P Diversified Technology Realty, Inc. vs. Fleet Bank, N.A.
On January 19, 2006, the United States Court of Appeals for the Third Circuit ruled that a mortgagee who obtained final judgment in a mortgage foreclosure action was not entitled to recover post-judgment attorney fees in a Chapter 7 bankruptcy case. A & P Diversified Technology Realty, Inc. vs. Fleet Bank, N.A., Civil Action No. 04-3622 (3rd Cir. Jan.19, 2006).
Merger Doctrine: The Third Circuit affirmed the District Court which held that upon the entry of a final judgment in mortgage foreclosure, the mortgage agreement and all of its terms, including the covenant requiring the borrower to pay legal fees, merges into the final judgment under the merger doctrine. The court concluded that:
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) 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.
A & P Diversified, at p. 8-9.
Exception to Rule: As with most rules, there is an exception. If a mortgage clearly evidences an intent to preserve the effectiveness of particular provisions post-judgment, those particular provisions will survive the entry of judgment. In the case before the Third Circuit, the court found that the mortgage did not contain an express provision providing that the debtor’s obligation to pay the mortgagee’s attorneys fees and expenses would survive post-judgment. As a result, the exception did not apply.
Conclusion: This situation arises often since many borrowers file for bankruptcy protection on the eve of a sheriff sale (which is post-judgment). It is advisable for secured creditors to immediately review their loan documents to determine whether they contain a provision that expressly provides that the right to recover attorney fees, expenses, advances, or other essential covenants survive the entry of a judgment in order to avoid the harsh result that was confronted by the mortgagee in A & P Diversified. If the necessary language is missing, amending your loan documents may be in order. Also, secured creditors should consider adding provisions to modification and forbearance agreements to amend the underlying loan documents and specifically provide that the parties intend to have the essential contractual provisions survive post-judgment.