DEVRY UNIVERSITY (CHICAGO) v. PATRICK CAMBRIA

 

NOT FOR PUBLICATION WITHOUT THE

APPROVAL OF THE APPELLATE DIVISION

SUPERIOR COURT OF NEW JERSEY

APPELLATE DIVISION

DOCKET NO. A-1150-05T51150-05T5

DEVRY UNIVERSITY (CHICAGO),

Plaintiff-Appellant,

v.

PATRICK CAMBRIA,

Defendant-Respondent.

_______________________________________

 

Argued October 5, 2006 - Decided November 20, 2006

Before Judges Wefing, Parker and Yannotti.

On appeal from the Superior Court of New Jersey, Law Division, Monmouth County, Docket No. DC-007435-05.

Carl E. Zapffe argued the cause for appellant (Goldman & Warshaw, attorneys; Mr. Zapffe, on the brief).

Respondent Patrick Cambria has not filed a brief.

PER CURIAM

Plaintiff DeVry University appeals from a final judgment of default filed on August 11, 2005, against defendant Patrick Cambria and an order filed on September 30, 2005, denying its motion to amend the judgment. We reverse.

Plaintiff brought this action in the Special Civil Part of the Law Division seeking a judgment for amounts due under a student loan made pursuant to the Federal Perkins Loan Program, which is governed by Title IV-E of the Higher Education Act of 1965, as amended, (the HEA), 20 U.S.C.A. 1087aa to -ii. The loan at issue here was in the amount of $1,500 with an interest rate of 5%.

The loan agreement provides that if the borrower fails to make a scheduled payment when due, the lender may declare the loan in default and "accelerate [the] loan (demand immediate payment of the entire unpaid balance of the loan, including principal, interest, late charges, and collection costs)." The agreement additionally states that the borrower promises to pay the principal of the loan, plus interest and other fees that may become due, as well as "all reasonable collection costs, including attorney['s] fees and other charges, necessary for the collection of any amount not paid when due."

Defendant did not answer the complaint and default was entered against him. Plaintiff then filed an application for a final judgment by default in the amount of $2,573.22, which represented the principal amount due of $1,180, pre-judgment interest in the amount of $285.17, late charges of $80.82, and attorney's fees in the amount of $1,027.23. Plaintiff also sought post-judgment interest at the contract rate. On August 11, 2005, the judge entered a judgment for plaintiff in the amount of $1,940.77, plus costs.

Plaintiff moved on or about September 7, 2005, to amend the final judgment. In its motion, plaintiff argued that the judge erred by denying recovery for the full amount of its attorney's fees. Plaintiff also argued that the judge erred by refusing to award post-judgment interest at the contract rate. The judge entered an order on September 30, 2005, denying plaintiff's motion. Plaintiff filed a notice of appeal dated November 3, 2005.

Thereafter, the judge filed an amplification of the reasons for his decision. The judge said that he had reduced the claim for attorney's fees to $394.78 "in light of the fact that no appearances were required and the amount in controversy was small." The judge stated that a review of the reasonableness of attorney's fees is a matter within the court's discretion. The judge determined the reasonableness of the fees by considering the factors enumerated in RPC 1.5(a) and found that a reduction in the amount sought was warranted by RPC 1.5(a)(1) (time, labor, and skill required), and RPC 1.5(a)(4) (the amount involved and results obtained). The judge also explained that he awarded plaintiff post-judgment interest at the rate in R. 4:42-11 rather than the contract rate because, although R. 6:6-3(a) permits pre-judgment interest at the contract rate, R. 4:42-11 "contains no such option" for post-judgment interest.

Plaintiff first argues that the trial judge was compelled by federal law to award it the full amount of the fees it requested. Plaintiff contends that under the HEA and regulations promulgated by the Secretary of Education, a state court is pre-empted from applying any standard under state law for determining the reasonableness of the fees and must award plaintiff the full amount of the attorney's fees it has incurred for the collection of amounts due under the loan.

We are convinced, however, that resolution of this issue is not required for disposition of the appeal. In our view, regardless of whether the award of attorney's fees in the amount requested is required by federal law, the judge erred by reducing plaintiff's claim.

According to plaintiff's counsel, the attorney's fees sought in this matter were calculated pursuant to a formula that may be used by the Secretary when determining the costs to be imposed generally upon delinquent debtors. 34 C.F.R. 30.60(c). Institutions that participate in the Federal Perkins Loan Program are permitted to use this formula when determining the amount of collection fees to be assessed to borrowers who have defaulted under their loans. 64 Fed. Reg. 58,298, 58,305 (Oct. 28, 1999). We are satisfied that a fee arrived at with the formula employed by the Secretary is presumptively reasonable. Furthermore, a reduction in fees determined by using that formula is not warranted in this case. We recognize that the amount of plaintiff's claim is relatively small. However, a fee in the amount of $1,027.23 is not unreasonable in the circumstances because counsel was required to draft the complaint, certification of proof and summons; arrange for service; and take all steps necessary to obtain the judgment.

Plaintiff next contends that the judge erred by failing to award it post-judgment interest at the 5% contract rate. Plaintiff argues that it is entitled to post-judgment interest at the contract rate as a matter of federal law, or alternatively, under general equitable principles.

We note initially that the HEA mandates that the rate of interest on a Federal Perkins Loan must be 5% per annum. 20 U.S.C.A. 1087dd(c)(1)(D). The Secretary's regulations also provide that the rate of interest on the loan must be 5% per annum. 34 C.F.R. 674.31(b)(1)(i). Plaintiff is entitled to interest on the "unpaid balance" of the loan. 20 U.S.C.A. 1087dd(c)(1)(D); 34 C.F.R. 674.31(b)(1)(i). However, neither the HEA nor the Secretary's regulations expressly address the rate of interest that should be awarded on a judgment arising from an action brought on the loan.

Indeed, when a contract debt is converted to a judgment, the "judgment extinguishes the original cause of action and makes available a new cause of action on the judgment, which constitutes a higher form of security." R. Jennings Mfg. v. Northern Elec. Supply Co., 286 N.J. Super. 413, 417 (App. Div. 1995) (citing Caterpillar Tractor Co. v. Int'l Harvester Co., 120 F.2d 82, 87 n.4 (3d Cir. 1941)). As a result, different interest rates are applied to contract claims before and after judgment. Ibid. See also Mid-Jersey Nat'l Bank v. Fidelity- Mortgage Investors, 518 F.2d 640 (3d Cir. 1975) (applying contract rate of interest up to the time of judgment and rate specified in court rules thereafter).

Consequently, there is considerable doubt as to whether federal law requires the imposition of the contract rate of interest after the claim has been converted to a judgment. In any event, resolution of this issue is not required for disposition of the appeal because we are convinced that under general principles applicable to the award of post-judgment interest, the judge erred by awarding interest at the rates specified in R. 4:42-11(a)(ii).

Ordinarily, a party that is awarded a monetary judgment on a contract claim is entitled to interest at the rates prescribed by R. 4:42-11(a)(ii) unless there are "particular equitable reasons" for imposing the contract rate. R. Jennings Mfg., supra, 286 N.J. Super. at 418. Plaintiff argues that such "equitable reasons" are present in this case. Plaintiff asserts that unless the contract rate of interest is awarded on its judgment, defendant will be rewarded for defaulting on the loan and allowing the matter to proceed to judgment.

The loan agreement states that interest is due on the entire "unpaid balance" upon default. Before the judgment was entered, interest accrued at a rate of 5% on the entire "unpaid balance." However, according to the terms of the judgment entered here, post-judgment interest accrued in 2005 at a rate of 1%, and in 2006 is accruing at a rate of 2%. As a consequence of the entry of the judgment, defendant is benefiting from a substantial reduction in the interest rate on the "unpaid balance."

We considered a similar issue in N.J. Higher Educ. Assistance Auth. v. Martin, 265 N.J. Super. 564 (App. Div. 1993). In that case, Martin defaulted on a student loan. After the default, the Higher Education Assistance Authority (HEAA) purchased the loan from the issuing bank. The HEAA brought suit against Martin. He did not answer the complaint and the HEAA sought a default judgment that included the full amount of interest due under the loan. The Law Division awarded only the interest that had accumulated before the HEAA purchased the loan. Id. at 566.

We reversed the judgment and held that the trial court's action was unsupported by the applicable statutes and regulations. Id. at 568. We noted that the intent of the federal student loan program "is for students to repay principal and interest." Ibid. We stated:

By relieving Martin of this obligation, the Law Division placed him in a better position than a student who has faithfully abided by the terms of the note and has repaid principal and interest. Had Martin satisfied his contractual obligation, he would have repaid the full $5,391.34 in interest. Under the Law Division's holding, Martin could ignore his responsibility without fear of legal action. The court's decision provides an incentive for a student to default on his loan and, if permitted to stand, would detrimentally affect the viability of the federal program.

[Ibid.]

The consequence of the Law Division's action in this case is similar. The judgment entered here places defendant in a better position than other borrowers who have defaulted but have not had judgments entered against them. The judgment provides no incentive for any defaulting borrower to resolve a claim before litigation is commenced. In these circumstances, awarding interest at the rate prescribed in R. 4:42-11(a)(ii) rather than the contract rate may "detrimentally affect the viability" of the Federal Perkins Loan Program. We are therefore of the view that interest at the contract rate should have been awarded on the judgment.

However, post-judgment interest should accrue only on the liability for unpaid principal, late charges and attorneys' fees, and not on the pre-judgment interest. An award of "interest on interest" would be inequitable because it would give plaintiff a benefit that it is not entitled to under the loan agreement. Therefore, the judgment should provide for post-judgment interest at the contract rate on the unpaid principal, late charges, and attorney's fees only.

Reversed and remanded for entry of a corrected judgment.

 

Pursuant to R. 4:42-11(a)(ii), the rate for judgments in the Special Civil Part was 1% in 2005 and is 2% for 2006. See Pressler, Current N.J. Court Rules, publisher's note to R. 4:42-11(a)(ii) (2007).

(continued)

(continued)

9

A-1150-05T5

November 20, 2006