By Ed Levin
In SunTrust Bank v. Goldman (decided on September 30, 2011), the Maryland Court of Special Appeals held that the prevailing party in an action on a defaulted line of credit could collect only $3,094.00 in legal fees – not the $60,206.00 to which it claimed to be entitled under the loan documents. The Court based its decision on three principles: (i) provisions in contracts providing for payment of attorneys’ fees are indemnity clauses, (ii) attorneys’ fees must be reasonable, and (iii) future fees will be allowed to be included in the award only if evidence is presented that with certainty they will be incurred.
On June 30, 2009, SunTrust Bank sued Frank and Lisa Goldman in Baltimore County for the outstanding principal balance under a line of credit ($401,373.31), interest ($14,259.31), and attorneys’ fees in the amount of $60,206.00 (15% of the principal balance). On March 12, 2010, the court entered a default judgment against the Goldmans for the principal balance and interest but deferred a decision on the bank’s claim for attorneys’ fees.
The equity line agreement at issue provided that upon default the Goldmans would pay SunTrust’s “costs of collection, including court costs and fifteen percent (15%) of the principal plus accrued interest as attorneys’ fees or reasonable attorneys’ fees as allowed by law . . . .” The Circuit Court for Baltimore County awarded SunTrust attorneys’ fees in the amount of only $3,094.00.
The Court of Special Appeals explained that contractual language regarding a borrower’s obligation to pay a lender’s attorneys’ fees is an indemnity agreement, so that a lender may not recover a greater amount from the borrower than the lender is obligated to pay its counsel. In the subject case, SunTrust did not present evidence of any special fee agreement that it had with its lawyer. Therefore the bank could collect only its actual attorneys’ fees, presumably determined based on the number of hours spent by the bank’s lawyer at the normal hourly rate charged for the lawyer’s services.
In a number of opinions the Court of Appeals has required that attorneys’ fees must be reasonable. Judge James Eyler, writing for the Court of Special Appeals in SunTrust Bank v. Goldman, followed the recent cases requiring reasonable fees. As the basis for this, he cited Rule 1.5(a) of the Maryland Lawyers’ Rules of Professional Conduct, which provides that “[a] lawyer shall not make an agreement for, charge, or collect an unreasonable fee . . . .” The Court held that even when the contract itself does not include a requirement of reasonableness, where attorneys’ fees of one party are to be indemnified by the losing party, the fees must be reasonable. Judge Eyler noted that “a contractual provision providing for a fee determined by a percentage is not per se unenforceable, but it must be reasonable and must reflect the actual billing arrangement.”
The bank argued that it should be entitled to the legal fees that it would incur in connection with the collection of the debt after the filing of the complaint and the entry of a judgment against the debtors. The Court of Special Appeals agreed with this in concept. Additionally, the bank contended that it should be entitled to have a judgment entered in its favor for 15% of the outstanding principal balance to cover its future legal fees, and that it would credit the Goldmans for any portion of the judgment for legal fees that it did not pay its counsel. The Court did not go along with that. The Court of Special Appeals acknowledged that SunTrust would not be able to claim attorneys’ fees at a later time because “the entry of a final judgment on a contract case extinguishes any contract–based right to further attorneys’ fees” unless there was an exception to this general rule. The Court found no statutory exemption in Maryland, but it suggested that lenders might avoid having their claims for indemnification of attorneys’ fees merge into judgments if the parties clearly state in their contracts that they intend that there should be no such merger.
The Court found that the language in the equity line agreement in the SunTrust case contained only “general collection language” and was not sufficiently clear to exempt the bank’s judgment from the merger doctrine. The Court held that a trial court should permit a lender to present evidence of fees that will "with certainty" be incurred in addition to those actually incurred at that time.” (Emphasis added.) In the case before it, the Court of Special Appeals said there was no evidence of fees that would be incurred in the future or of an agreement to pay attorneys’ fees other than on an hourly basis. Therefore, the appellate court found that the trial court had not abused its discretion in awarding to the bank only fees based on its lawyer’s hourly rate and the time spent as of the date of the judgment.
The Court’s finding that clauses requiring one party to pay another’s legal fees are indemnification agreements is based on solid precedent. The Court’s statement that attorneys’ fees must be reasonable is in line with other recent Maryland cases. However, it is the payment of fees to attorneys that must be reasonable, not the amount of a judgment in favor of a lender that needs to be limited. The troubling point from SunTrust v. Goldman is the Court’s requirement that lenders must establish “with certainty” attorneys’ fees that will be incurred in the future. This appears to be too high a burden because at the time a judgment is entered there are numerous unknowns that will factor into the actual costs of debt collection. Instead, the Court could have required that lenders reasonably estimate future legal fees, or it could have permitted a judgment in the amount set forth in the loan documents with a caveat that collection will be limited to actual and reasonable legal fees.
1. In light of SunTrust v. Goldman, lenders should review their loan documents to ensure they contain language that will enable the lenders to be indemnified for legal fees that they incur in collection activities after any judgments they obtain. Language similar to the following may be useful for this purpose:
Borrower shall pay to Lender all costs and expenses (including reasonable attorneys’ fees) of Lender in connection with this Note and the collection of all sums evidenced by it. The parties understand and agree that if Borrower defaults Lender may incur costs of collection, including attorneys’ fees, after the date of any judgment that Lender may obtain. Borrower agrees to pay all of such costs and fees. Borrower further agrees that Borrower’s obligation to pay such costs and fees, and Lender’s claim for such costs and fees which are incurred by Lender after the date of any judgment obtained by Lender, shall survive the entry of, and shall not be merged into, any such judgment.
2. The problem of merger into judgments of contractual rights of a party to be reimbursed for its attorneys’ fees may be applicable to situations other than loans. It may apply in any situation in which one party (the “losing party”) agrees to pay the legal fees of another party (the “prevailing party”) because a significant portion of the legal fees (those relating to the collection of the legal fees for which a judgment is obtained) may be incurred after a judgment is obtained. If a prevailing party desires to be able to recoup its attorneys’ fees incurred in collecting the sums to which it is entitled, it may be advantageous for the agreement that provides for such rights to include anti-merger language, perhaps similar to the following:
If either party to this agreement brings an action to enforce the terms hereof or to declare rights hereunder, the prevailing party in any such action shall be entitled to recover from the losing party its reasonable attorneys’ fees and costs in connection with obtaining a judgment [or favorable settlement], as well as the reasonable attorneys’ fees and costs in connection with the collection thereof. The parties understand and agree that if the losing party does not promptly pay the amount of any such judgment [or settlement], the prevailing party may incur costs of collection, including attorneys’ fees, after the date of any judgment that the prevailing party may obtain against the losing party. The losing party agrees to pay all of such costs and fees. The losing party further agrees that the losing party’s obligation to pay such costs and fees, and the prevailing party’s claim for such costs and fees which are incurred by the prevailing party after the date of any judgment obtained by the prevailing party, shall survive the entry of, and shall not be merged into, any such judgment.
3. Commercial lenders often include clauses in their loan documents authorizing the entry of judgments by confession against their non-consumer borrowers in the event of default. The Court of Special Appeals noted in SunTrust v. Goldman that Maryland Rule 2-611 was amended in 2010, and now judges are required to review, both legally and factually, each complaint for confession of judgment before a judgment may be entered. Confession of judgment clauses typically contain a provision for attorneys’ fees, frequently in the amount of 15% of the debt at the time. In order to provide the reviewing judge with the basis to permit an award of attorneys’ fees of 15% of the debt, it will be appropriate for an affidavit filed with the complaint for confession of judgment to describe in sufficient detail the legal services performed to the date of filing the complaint, as well as the legal services that the lender will expect to incur in connection with the collection of the judgment. If a lender is able to collect its full debt and its reasonable attorneys’ fees, it will not be able to collect any more from a borrower, even if the judgment is for a greater amount.
Ed Levin is with the Baltimore firm of Gordon, Feinblatt, Rothman, Hoffberger & Hollander, LLC