Contract vs. Legal Rate of Interest? A Recent Appellate Decision Reviews Which Rate May Be Applicable After the Entry of Final Judgement
New Jersey Foreclosing Commercial Lenders May Now Be Able to Collect Post-Judgement Interest at the Contract Rate
By Vincent DiMaiolo, Jr., Esq. and Ashleigh Marin, Esq.
Foreclosing commercial lenders in New Jersey may now be able to collect post-judgment interest at the contract rate set forth in their Note and Mortgage, instead of at the Court’s post-judgment rate or legal rate, under certain circumstances. In the recent unpublished opinion entitled Avatar Capital Finance, LLC v. Nassau Marina Holdings, LLC, et al. (Docket No. A-0423, Decided May 12, 2022), the Superior Court of New Jersey, Appellate Division, reviewed whether the contract rate of interest could be collected post judgment once the mortgage terms merged into an entered foreclosure judgment.
Typically, a mortgagee is only entitled to collect the contract rate of interest prior to the entry of final judgment, and then, once that judgment is entered, interest thereafter runs at the legal rate as set forth under New Jersey Court Rules “except as otherwise ordered by the court and except as may be otherwise provided by law.” Shadow Lawn Savings & Loan Ass’n v. Palmarozza 190 N.J. Super. 314, 318 (App. Div. 1983) (quoting R. 4:42-11(a)).
There are four factors, originally set forth by the Appellate Division in Interchange State Bank v. Rinaldi, 303 N.J. Super. 239 (App. Div. 1997), that a court must consider when deciding whether to impose post-judgment interest at the contract rate instead or the Court’s post-judgment rate. These four factors are: (1) a commercial foreclosure; (2) there is a disparity between the contract and legal interest rates; (3) the creditor has a pre-judgment debt secured by sufficient collateral to pay the entire amount due; and (4) there is some prejudicial delay.
First, the foreclosure action must be a commercial foreclosure action. A lender cannot seek this relief in a residential mortgage foreclosure. Second, there must be a difference between the contract interest rate and the Court’s post-judgment interest rate. As of 2022, the legal rate of interest is currently set at 2.25%. Many commercial lenders will likely be able to satisfy this prong as commercial loan interest rates tend to be notably higher than this amount, and more so if their contract provides for default interest. Third, the creditor has a pre-judgment debt secured by sufficient collateral to pay the entire amount due. The court will evaluate whether there is equity in the property which exceeds the judgment amount. If the property value is less than the amount due, this remedy will not be available to the lender, and judgment amount will only accumulate interest at the legal rate of interest from the date of the entry of judgment. Finally, the court will review whether there is some prejudicial delay in enforcing the judgment. A judgment debtor should not receive the benefit of a lower interest rate when the judgment debtor delays the post-judgment enforcement process. The Court, when reviewing this fourth factor will also consider the efforts made by the Plaintiff to advance the post-judgment process.
When evaluating these factors, the court must balance the equities to determine whether it would be equitable to allow interest to run at the contract rate to avoid prejudice to the judgment creditor which is caused by post-judgment delays in satisfying the judgment. The Appellate Court found that “in its assessment of the equities, the trial court must “review the actions taken by each party in their respective attempts to obtain a timely satisfaction of the judgment or, if applicable, forestall such satisfaction” (citing R. Jennings Manufacturing Co, Inc. v. Northern Electric Supply Co., Inc., 286 N.J. Super. 413, 418 (App. Div. 1985).
Given this opinion, it is evident that, in most cases, the courts will normally allow interest on amounts adjudicated at the legal rate of interest based upon the merger of the mortgage contract into a final judgment of foreclosure, however, this opinion does open the door, upon the proper showings, to allow contract interest to be assessed post-judgment on the amounts set forth in said judgment.
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 This interest rate is set by the Court and varies annually. For the calendar year of 2022, the post-judgment interest rate is currently set at 2.25%. See R.4:42-11 and publisher’s note thereto.