Court Opinion

ID: 4699460
Source: CourtListenerOpinion
Date Created: 2021-06-29 14:08:58.104046+00
Date Added: 2024-06-11T08:06:03.136457
License: Public Domain

NOT FOR PUBLICATION WITHOUT THE
                               APPROVAL OF THE APPELLATE DIVISION
        This opinion shall not "constitute precedent or be binding upon any court ." Although it is posted on the
     internet, this opinion is binding only on the parties in the case and its use in other cases is limited. R. 1:36-3.

                                                        SUPERIOR COURT OF NEW JERSEY
                                                        APPELLATE DIVISION
                                                        DOCKET NO. A-5171-18
                                                                   A-0911-19

RUTGERS, THE STATE
UNIVERSITY OF NEW JERSEY,

          Plaintiff-Appellant,

v.

TEON D. RUSSELL,

     Defendant-Respondent.
_____________________________

RUTGERS, THE STATE
UNIVERSITY OF NEW JERSEY,

          Plaintiff-Appellant,

v.

MICHAEL J. MOONEY,

     Defendant-Respondent.
_____________________________

                   Submitted May 3, 2021 – Decided June 29, 2021

                   Before Judges Currier and DeAlmeida.
            On appeal from the Superior Court of New Jersey, Law
            Division, Camden County, Docket Nos. DC-003227-19
            and DC-005799-19.

            Gordin & Berger, PC attorneys for appellant (Daniel A.
            Berger on the brief).

            Respondents have not filed a brief.

PER CURIAM

      In these one-sided, consolidated appeals, plaintiff Rutgers, the State

University of New Jersey (Rutgers), appeals from the provisions of two orders

of the Special Civil Part awarding it a smaller amount of collection costs on

defaulted student loans than it sought in its complaints.     We vacate the

provisions of the orders under appeal, and remand for entry of orders awarding

Rutgers the full collection costs sought in its complaints.

                                        I.

      The following facts are derived from the record. Defendants Teon D.

Russell and Michael J. Mooney were students at Rutgers when the university

lent them money through the Federal Perkins Loan Program (Loan Program) to

assist in meeting the costs of their postsecondary education.    Rutgers lent

Russell $6500 and Mooney $2000.

      The defendants each signed a promissory note memorializing their

obligation to repay the loans. The promissory notes state that they are to be

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interpreted consistent with the federal statute creating the Loan Program, Title

IV-E of the Higher Education Act of 1965 (HEA), 20 U.S.C.A. § 1087aa to -ii,

and the regulations promulgated thereunder.

      The notes provide that if the borrower fails to make a payment when due,

the lender may declare the loan in default, accelerate the loan, and "demand

immediate payment of the entire unpaid balance of the loan, including principal,

interest, late charges, and collection costs." The borrowers also promised that

if they failed to make any payment when due they would "pay all reasonable

collection costs, including attorney['s] fees, court costs, and other" fees.

      Teon D. Russell

      Russell made no payments on his promissory note. Rutgers accelerated

the note and, on March 28, 2019, filed a complaint against Russell in the Special

Civil Part, alleging breach of contract. Rutgers sought a judgment in the amount

of $10,547.24 as follows:

                   Principal                       $ 6,500.00
                   Interest (to date of filing)    $ 1,001.96
                   Late Fees                       $    32.50
                   Collection Costs                $ 3,012.78
                   Total                           $10,547.24

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      Russell filed an answer admitting that he owed "this debt" and stating that

he "agreed to pay the plaintiff in monthly installments." Rutgers subsequently

moved for judgment on the pleadings. Russell did not oppose the motion.

      On June 5, 2019, the trial court sua sponte scheduled a proof hearing as to

Rutgers's request for collection costs. Rutgers subsequently filed a certification

of Rashod Jones, its Business Manager of Operations, explaining how it

calculated the collection costs sought in the complaint. Jones certified that

Rutgers has a contingency fee arrangement with a law firm to assist with the

collection of delinquent Loan Program accounts.

      Jones explained that the contingency fee is 28.5% of all amounts

collected, including fees on fees. In order to make the Loan Program whole, as

intended by federal regulations, Rutgers charges borrowers a rate of 40% of all

amounts recovered for collection costs. This rate allows Rutgers to both pay the

contingency fee and collect the full amount the borrower owes on the defaulted

promissory note.

      An attorney from the law firm with which Rutgers has the contingency fee

arrangement also submitted a certification. He certified that in addition to the

legal services performed to obtain the judgment, the firm can reasonably expect

to spend at least forty-eight hours performing legal services if the judgment is

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entered in full and Russell were to satisfy it over ten years with equal monthly

payments at the judgment interest rate. The attorney explained that the expected

future legal services would include receiving and processing payments, creating

monthly statements acknowledging receipt of payment and reminding of the

next due date, maintaining accurate accounting records for various escrow

accounts, and making monthly remittances.

      On June 20, 2019, the trial court entered an order granting Rutgers's

motion for judgment on the pleadings in the full amount of principal, interest,

and late fees sought in the complaint. With respect to collection costs, the trial

court, in a written statement of reasons, found the $3,035.45 sought by Rutgers

was not required by federal regulations implementing the Loan Program. 1 The

court concluded that a federal regulation placed a cap on collection costs of 40%

of the amount of the judgment, but did not require that percentage. The court,

therefore, decided it would determine reasonable collection costs without

applying the 40% formula.

      The court rejected counsel's representation that the firm spent

approximately six hours on the matter, finding that securing a judgment against

1
  The amount of collection costs exceeds the amount alleged in the complaint
because interest accrued after the filing of the complaint. The increase in
interest resulted in an increase in the collection costs sought by Rutgers.
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Russell, who admitted his liability, should not have entailed a significant amount

of legal services. The court concluded that "only an award based on time spen[t]

drafting the complaint and the motion for judgment on the pleadings is

warranted."

      The court refused to consider time spent opening the file, sending or

receiving correspondence from Rutgers, and communicating with Russell. In

addition, the court was "unwilling to count the time spent on this proof hearing,"

including drafting responses to the court's inquiry, travelling to the courthouse,

waiting for the hearing, and appearing before the court. The court also refused

to consider the expectation of future legal services to collect on the judgment.

      The court awarded Rutgers $750 in collection costs, although it provided

no explanation of how it reached that figure. It appears the court accept ed

counsel's representation that the firm spent approximately one to one-and-one-

half hours drafting the complaint and one to one-and-one-half hours drafting the

motion, but made no precise finding with respect to the number of hours it found

reasonable or a reasonable hourly rate.

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        As a result of its findings, the court entered an order awarding Rutgers

$8,338.62 ($6500 + $1,056.12 + $32.50 + $750 = $8,338.62). 2

        Michael J. Mooney

        Mooney made no payments on his promissory note. Rutgers accelerated

the note and, on June 5, 2019, filed a complaint against Mooney in the Special

Civil Part, alleging breach of contract. Rutgers sought a judgment in the amount

of $4,175.93 as follows:

                    Principal                      $2,000.00
                    Interest (to date of filing)   $ 924.81
                    Late Fees                      $ 58.00
                    Collection Costs               $1,193.12
                    Total                          $4,175.93

Collection costs were calculated using the same formula applied to Russell.

        On July 16, 2019, the court clerk entered default against Mooney. Rutgers

later moved for entry of default judgment. The trial court set a proof hearing.

        On September 26, 2019, the trial court entered an order awarding Rutgers

the full amount of principal, interest, and late fees sought in the complaint. 3 In

a written statement of reasons, the trial court incorporated the statement of

reasons it issued in the Russell matter.

2
    The court struck from the form of order an award of court costs of $7.60.
3
    The award included interest accrued after the filing of the complaint.
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      In addition, the court rejected Rutgers's argument that the requested

method of calculating collection costs was reasonable because borrowers in the

Loan Program have a number of avenues, including applying for deferral,

forbearance, consolidation, and rehabilitation, through which they can avoid

litigation and collection costs. The court was not persuaded by the argument

that because Mooney did not take advantage of those options and forced Rutgers

to pursue a judicial remedy, it was reasonable for him to be assessed collection

costs at the 40% rate.

      The court determined the amount of collection costs by reference to its

award of $750 in collection costs in the Russell matter. In that matter, the court

found $750 to be reasonable because Rutgers filed a complaint and a motion for

judgment on the pleadings. Because no motion was necessary in the Mooney

matter, the court found that half of the amount awarded in Russell, $375, would

be reasonable collection costs. The court awarded Rutgers $3,382.80 ($2000 +

$949.80 + $58 + $375 = $3,382.80).

      Rutgers appealed the June 20, 2019 order in the Russell matter and the

September 26, 2019 order in the Mooney matter. We consolidated the appeals.

      Rutgers argues the trial court erred when it failed to follow federal

regulations which preempt state law and establish the legal framework for

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determining reasonable collection costs in a breach of contract action relating to

a promissory note issued under the Loan Program.4

                                         II.

      Federal regulations require lending institutions in the Loan Program to

engage in a "series of more intensive efforts, including litigation . . . to recover

amounts owed from defaulted borrowers who do not respond satisfactorily to

the demands routinely made as part of the institution's billing procedures." 34

C.F.R. § 674.45 (a). Where a borrower does not respond to a final demand letter,

a lending institution must either use its own personnel or engage a collection

firm to collect the amount due. 34 C.F.R. § 674.45 (a)(2)(i) and (ii).

      If twelve months of collection activity by a collection firm does not

succeed in bringing a delinquent loan into regular payment status, the lending

institution must make a second effort at collection or initiate litigation to collect

the amount due. 34 C.F.R. § 674.45 (c)(1)(i) and (ii). The lending institution

"shall assess against the borrower all reasonable costs incurred by the institution

with regard to a loan obligation," 34 C.F.R. § 674.45 (e)(1), and

             shall determine the amount of collection costs that shall
             be charged to the borrower . . . based on either . . .

4
  Rutgers also argues that the trial court erred by not enforcing the terms of the
promissory notes and misapplied principles of equity. Because we resolve the
appeals based on the federal regulations we need not address those arguments.
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             [a]ctual costs incurred . . . with regard to the individual
             borrower's loan; or . . . [a]verage costs incurred for
             similar actions taken to collect loans in similar stages
             of delinquency.

             [34 C.F.R. § 674.45 (e)(2)(i) and (ii).]

      "[R]easonable collection costs charged to the borrower may not exceed

. . . [f]or collection efforts resulting from litigation, 40 percent of the amount of

principal, interest, and late charges collected plus court costs." 34 C.F.R. §

674.45 (e)(3)(iii). "The [Federal Perkins Loan] Fund must be reimbursed for

collection costs initially charged to the Fund and subsequently paid by the

borrower." 34 C.F.R. § 674.45 (e)(4).

      Importantly, the federal regulation provides that "[t]he provisions of this

section preempt any State law, including State statutes, regulations, or rules, that

would conflict with or hinder satisfaction of the requirements or frustrate the

purpose of this section." 34 C.F.R. § 674.45 (g).

      Having carefully reviewed the record, we conclude that the federal Loan

Fund regulations preempt the trial court's award of collection costs to Rutgers

based on what it considered to be, in essence, a reasonable attorney's fee for

services provided to obtain the orders under review.           Federal regulations

authorize Rutgers to collect delinquent Loan Fund promissory notes through

litigation and to retain a collection firm to assist in that endeavor. In addition,

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the regulations require the delinquent borrower to pay Rutgers's collection costs,

which necessarily include the fees Rutgers pays to its collection firm. Collection

costs, if charged to the Fund, must be reimbursed to the Fund once recovered

from the borrower.

      After routine collection efforts fail and a lending institution resorts to

litigation to collect a delinquent loan, the regulations cap reasonable collection

costs at 40% of the principal, interest, late fees, and court costs awarded in a

judgment. When the 40% collection costs rate is applied, a 28.5% contingency

fee permits Rutgers to both pay its collection firm for its services and recover

the full amount due on a delinquent loan. This fulfills the evident intention of

the federal regulations to preserve the Fund and its ability to make loans in the

future.

      The trial court frustrated the purpose of the federal regulations when it, in

effect, shifted to Rutgers, and ultimately the Fund, the 28.5% contingency fee

that must be paid to the collection firm on the full amount awarded to the

university in these matters.     The challenged provisions of the order are,

therefore, preempted by the federal regulations. The trial court was bound by

the regulation's endorsement of the 40% formula as reasonable and, by

implication, the 28.5% contingency fee paid by Rutgers.

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      The provisions of the orders under appeal awarding Rutgers collection

costs against Russell and Mooney are vacated. The matters are remanded for

entry of orders awarding Rutgers collection costs against each defendant in an

amount equal to 40% of the total amount of principal, interest, and late fees

awarded to Rutgers against that defendant.

      Vacated and remanded for proceedings in accordance with this opinion.

We do not retain jurisdiction.

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