Appeal from the United States District Court for the Eastern District of Pennsylvania. D.C. Civil No. 91-1839.
Before: Cowen, Nygaard, and Seitz, Circuit Judges.
In this diversity action controlled by Pennsylvania law, defendants appeal the judgment of the district court to the extent that it allows certain late charges and attorneys' fees against them in an action for the collection of the accelerated balance of a note. The district court had jurisdiction under 28 U.S.C. § 1332(a)(1). We have jurisdiction under 28 U.S.C. § 1291.
I. FACTUAL AND PROCEDURAL BACKGROUND
Plaintiff, Security Mutual Life Insurance Company of New York ("Security Mutual"), lent Contemporary Real Estate Associates, a Pennsylvania general partnership, and the individual general partners (collectively "defendants") $425,000.00 under a ten year mortgage and accompanying promissory note payable in monthly installments with an interest rate of 12.25% per annum. The note provided, inter alia, for: (1) payment of a late charge equivalent to 10% of each monthly installment for monthly payments not received by Security Mutual within the first ten days of the month in which payment was due; (2) acceleration of the outstanding balance upon any action by defendants deemed to be an event of default under the note; and (3) reasonable attorneys' fees and expenses incurred in any effort to collect on the note.
Defendants failed to make timely monthly payments under the note beginning on August 1, 1990. On March 20, 1991, Security Mutual filed this action seeking payment of the entire balance due on the principal of the note, plus interest, late charges, costs of collection and attorneys' fees. Thereafter, Security Mutual moved for summary judgment on its claim. Defendants conceded that the required payments due under the note had not been made but alleged that Security Mutual had not formally declared a default. The district court rejected this argument and granted summary judgment on March 11, 1992. Defendants tacitly concede on appeal that the filing of the complaint accelerated the debt.
The judgment of the district court included an award of late charges for the period from August 1, 1990, through March 11, 1992, totalling $13,368.20. Defendants contest the judgment insofar as it includes late charges for the period after March 20, 1991, the date this complaint was filed. They assert that this amount, $8,689.33, cannot be included as an element of damages because the filing of the complaint terminated any obligation on their part to make further monthly payments. Thus, they say, there could be no further late charges. In their view, the Pennsylvania Supreme Court would so decide. We have plenary jurisdiction to resolve that issue.
II. IMPOSITION OF LATE CHARGES
As we have said, Pennsylvania substantive law controls the Disposition of the late charge issue presented here.
Whether or not late charges can be imposed on a debtor for a failure to make monthly payments after a note has been accelerated is a question which appears not to have been answered by the Pennsylvania Supreme Court or any other Pennsylvania court. Consequently, we must predict how the Pennsylvania Supreme Court would resolve the question. Rabatin v. Columbus Lines, Inc., 790 F.2d 22, 24 (3d Cir. 1986). We look elsewhere to see if the issue has been addressed.
While few courts have discussed this specific question, those reaching it have answered that late charges cannot be imposed after a lender has accelerated payment of a note. See
In re Tavern Motor Inn, Inc., 69 Bankr. 138 (D. Vt. 1987) (late charges cannot be imposed for failure to make monthly payments after lender accelerates principal debt) (applying Vermont law); Crest Sav. & Loan Ass'n v. Mason, 243 N.J. Super. 646, 581 A.2d 120 (N.J. Super. Ct. Ch. Div. 1990) (same) (applying New Jersey law); Lenio Reis v. Decker, ...