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Victory for homeowners in the Maryland Court of Special Appeals

On September 30, 2011, the Maryland Court of Special Appeals issued a published decision affirming that a bank could not collect windfall attorneys’ fees from homeowners who had defaulted on a home equity loan. The court’s opinion agreed with an amicus brief that the Public Justice Center filed in the case, SunTrust Bank v. Frank J. Goldman, et. al. The decision is a victory for homeowners who are already struggling to keep up with payments in these economic times. Here’s the backstory:

When a local couple defaulted on a residential mortgage loan, the court awarded SunTrust Bank a default judgment of over $400,000. The underlying loan agreement also provided that the couple would also be liable for attorneys’ fees totaling 15% of the principal balance on the loan—in this case, $60,206—or “reasonable attorney’s fees as allowed by law.” SunTrust had only incurred $3,258.30 in attorneys’ fees, however, which is the amount the lower court awarded. SunTrust appealed the decision, arguing that (1) the contractual amount provides for fees that will be incurred post-judgment, which would otherwise be impossible to recover, and (2) it would be obligated to return any unused portion of its attorneys’ fees award to the couple. If the court had sided with the bank’s argument, homeowners unable to continue paying off home loans could have been pushed further into debt crisis because creditors would have been given a green light to add 15% in attorneys’ fees to the underlying loan amount in a judgment against the homeowner, regardless of the size of the principle debt or the amount of attorney’s fees actually expended. 
With an eye toward preventing such situations, especially for low-income homeowners, the Public Justice Center, Civil Justice, and the Maryland Consumer Rights Coalition filed a friend-of-the-court brief in SunTrust Bank v. Frank J. Goldman, et. al., on July 1, 2011. PJC Skadden Fellow Jonathan Harris drafted the brief and argued the case before the Maryland Court of Special Appeals on September 8, 2011. 
In a case where the debtors have not participated in the case or the appeal, the amicus brief responded to ensure that the Court had balanced legal arguments before it, asserting that the lower court did not abuse its discretion in awarding SunTrust the amount SunTrust’s attorney had actually billed to it.  The brief argued that granting SunTrust’s fee request for 15% of the principal debt was grossly disproportionate to the minimal amount of fees actually incurred, would constitute a windfall for SunTrust, would violate the Maryland Lawyers’ Rules of Professional Conduct requiring attorneys’ fees to be reasonable, and would allow the monetary interests of debt collectors to trump the integrity of the bar and the rights of consumers. The brief argued that awarding SunTrust money for speculative future collection costs would be unreasonable, given that the bank had incurred only about 5% of the fees it claimed, and that there appears to be no way for the debtors to recover any unused portion of the fees after they are reduced to judgment.  
The Court’s opinion, written by Judge James Eyler, affirmed that granting an attorneys’ fee request when the requested fees had not actually been incurred by the petitioner would be unreasonable under the Maryland Lawyers’ Rules of Professional Conduct, given that contractual attorneys’ fee provisions are contracts of indemnification for costs incurred. The Court also stated that there is no procedure to allow debtors like the Goldmans to recover unused attorneys’ fees as SunTrust argued, and that Maryland’s merger doctrine requires that contractual attorneys’ fees merge into the judgment and are extinguished, as they are part of the damages and are not collateral to the underlying litigation. 
The Court left open the possibility that parties could explicitly contract to allow for post-judgment collection cost shifting but made clear that such future costs would have to be proven “with certainty,” neither of which SunTrust did in this case.   The court’s decision is a victory for homeowners who are already struggling to keep up with payments in these economic times.

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