The following is a case update prepared by Dan Schechter, Professor Emeritus, Loyola Law School, Los Angeles, analyzing a recent decision of interest:
A California appellate court has held that an award of attorney’s fees in favor of the prevailing defendants against a plaintiff borrower had to be added to the loan balance and should not have been entered as a separate award of damages. [Chacker vs. JPMorgan Chase Bank, N.A., 2018 Westlaw 4474732 (Cal. App.).]
FACTS: A homeowner unsuccessfully sued to enjoin foreclosure on her home. As part of the judgment against her, the trial court entered an order requiring her to pay the attorney’s fees incurred by the loan servicer and other prevailing defendants.
REASONING: On appeal, the homeowner argued that the trial court should have added the fee award to the loan amount, rather than entering a separate order to pay the fees. The court agreed, noting that the deed of trust authorized the lender to add its fees to the loan amount and that there was no language “that indicates the trust deed permits a freestanding contractual attorney fees award.” The court noted that although there was no California authority on point, there were out-of-state cases reaching the same result. The prevailing defendants argued that these cases were insufficient. The court replied:
Insofar as the [defendants] would contend even these cases are still insufficient authority, we have one further rejoinder: every legal proposition has at one time or another been without authority; novel questions often arise in the law. Going forward, this opinion will serve as the authority the [defendants] believe is lacking.
The defendants then argued that since the loan had been assigned to another entity, they would be prejudiced by a fee award added to the loan balance, rather than paid directly to them. The court was unsympathetic:
The [defendants’] argument for why they are entitled to seek attorney fees in the first place—despite being non-parties to the contract that serves as the foundation for their fee request—depends on their assertion that they acted as the lender’s agents and stood in the lender’s shoes. They cannot repudiate that position merely because the upshot, required by the terms of the contract on which they rely, is that the fees they seek to recoup are added to the balance of a loan agreement that has since been assigned to another financial institution.
AUTHOR’S COMMENT: In a footnote, the court suggested a contractual workaround for similarly-situated parties:
Although the result we reach is compelled by the terms of the trust deed and persuasive case law, a party in the [defendants’] position, when negotiating with a prospective assignee of a trust deed, can adjust the consideration given for the assignment or other terms of the assignment deal to account for how attorney fees may be recovered when a borrower defaults.
I do not think that this “solution” solves anything. The problem is that whenever the defendants’ fees are simply added to the unsuccessful plaintiff’s loan balance, the fees will be uncollectible. Virtually all foreclosures in California are nonjudicial, thus triggering Code of Civil Procedure §580d. The defaulting borrower is protected from all personal liability following the foreclosure. Adding an extra sum to an already-underwater deal is meaningless. Thus, since the assignee of the loan will never recover those fees, there will never be a time that the assignee will reimburse the assignor for the fees that the assignor incurred.
By contrast, if the court had approved the entry of a money judgment against the borrower for the fees (instead of adding them to the loan balance), the defendants theoretically could have enforced that separate judgment, despite the assignment of the underlying debt. In the real world, the judgment against the defaulting borrower would probably be uncollectible.
These materials were written by Dan Schechter, Professor Emeritus, Loyola Law School, Los Angeles, for his Commercial Finance Newsletter, published weekly on Westlaw. Westlaw holds the copyright on these materials and has permitted the Insolvency Law Committee to reprint them.