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Alland v. Consumers Credit Corp.

decided: March 28, 1973.


Moore, Hays and Mansfield, Circuit Judges.

Author: Moore

MOORE, Circuit Judge:

Sonia Alland, a citizen of New York, appeals from that part of a final judgment of the United States District Court for the Southern District of New York dismissing on the merits Claim 3 of her complaint, by which she sought to recover $6,066 as reasonable attorney's fees for costs incurred in suing upon two promissory notes. The district court granted the relief sought on Claims 1 and 2 of the complaint and awarded Mrs. Alland, pursuant to the confession of judgment contained in the notes, $18,200 plus interest, which represented the amount owed by the appellee. Neither party appeals from the judgment as to the first two claims; Mrs. Alland appeals only the dismissal of her Claim 3.


The district court, whose opinion is reported at 54 F.R.D. 252 (S.D.N.Y.1971), found the following facts. The appellee Consumers Credit Corporation ("the finance company"), an Ohio corporation with principal place of business in Cleveland, was organized in 1951 with money provided by Mrs. Alland's father, Louis Feldman. The stock of the new corporation was divided among his three children: appellant Sonia Alland, he brother Raymond Feldman, and Alex Shepard (or his wife, Helen Feldman Shepard, appellant's sister). Alex Shepard has been president, chief executive officer, and general manager of the finance company since its inception. On November 1, 1966, appellant and her husband, Alexander Alland, Jr., sold all their stock in the finance company to the company. Alex Shepard, in his capacity as president, executed two promissory notes as part of the sale agreement. Note 1 was payable to appellant, in the amount of $42,000, and Note 2 was payable to her husband, in the amount of $2,000. Both notes provided for payment of principal in installments on stated dates, and both contained an acceleration provision to become operative thirty days after notice of default.*fn1

The appellee finance company defaulted on payments due on both notes on November 1, 1970. Notice of default was mailed to appellee on December 9, 1970, and again on January 27, 1971. Acting on behalf of the company, Alex Shepard refused to make payment of the balance owing on either note. Appellant retained counsel in her effort to collect on the notes. Counsel contacted Shepard by telephone on March 2, 1971, for the purpose of informing him that appellant would not commence legal action if appellee made full payment of the amounts owing by March 5, 1971. Shepard indicated his awareness of the default, but he informed counsel that he had decided not to pay until compelled to do so.

Appellant moved ex parte for a judgment by confession in the Southern District of New York on March 27, 1971. In Claim 1 of her complaint appellant sought recovery of the balance owing on Note 1, $17,304 ($16,800 principal plus $504 interest); in Claim 2 she sought recovery of the balance owing on Note 2, $896 ($800 principal plus $96 interest).*fn2 Claim 3 of the complaint, seeking $6,066 attorney's fees as "costs of suit" in recovering on the notes, was based on the following language which appeared in both notes:

If any installment of this note, or interest thereon, be not paid within thirty (30) days after written notice that it is overdue, then the entire unpaid balance hereof shall at once become due and payable at the option of the holder hereof, and the undersigned hereby authorizes any attorney at law to appear in any Court of Record in the United States, after the above obligation becomes due as aforesaid, and waive the issuing and service of process and confess a judgment against the undersigned in favor of the holder hereof for the amount then appearing due, together with costs of suit, and thereupon to release all errors and waive all right of appeal. (emphasis added)

The district court, finding that the sale agreement was "a product of armslength bargaining between the parties," 54 F.R.D. at 254; that "the corporate promissor was completely familiar with the language of promissory notes and with the legal consequences thereof," id. at 255; that "both promissory notes were either drafted by defendant's own attorneys or carefully reviewed by them before being executed by its president, signing officer and sole shareholder, Alex Shepard," id. ; and that "Shepard stated that he was aware that he was in default, but had decided not to pay the notes until forced to do so," id., entered judgment in favor of appellant on Claims 1 and 2. Id. at 256. As to Claim 3, however, the district court dismissed, ruling that:

Plaintiff's claim for $6,066 attorney's fees, however, is denied. "Costs of suit" reasonably refers to mere filing fees rather than attorney's fees. 54 F.R.D. at 256.

The narrow issue we must determine on appeal, then, is whether the district court erred in ruling that "costs of suit" as used in the parties' contractual agreement refers only to court filing fees, to the exclusion of attorney's fees. Resolution of this question depends, we think, on ascertaining the intent of the parties in their use of those words in the agreement.


We note that there is no question of subject matter jurisdiction here; federal court jurisdiction exists by reason of diversity of citizenship. 28 U.S.C. ยง 1332. And since in the promissory notes the appellee finance company, in case it defaulted, "authorize[d] any attorney at law to appear in any Court of Record in the United States * * * and waive the issuing and service of process and confess a judgment against [the finance company]," appellee consented in advance to in personam jurisdiction in federal district court. See Atlas Credit Corp. v. Ezrine, 25 N.Y.2d 219, 227, 303 N.Y.S.2d 382, 250 N.E.2d 474, 479 (1969). Neither party contests the district court's ruling that appellee's "consent to the jurisdiction of this Court as expressed in the two promissory notes was intelligently given." 54 F.R.D. at 254. See National Equipment Rental, Ltd. v. Szukhent, 375 U.S. 311, 316, 84 S. Ct. 411, 11 L. Ed. 2d 354 (1964); Bowles v. J. J. Schmitt & Co., Inc., 170 F.2d 617, 622 (2d Cir. 1948). And although the district court correctly ruled that the entry of a confessed judgment "is a matter of procedure where the federal rules govern" for purposes of Erie,*fn3 see Bowles, supra, 170 F.2d at 620, questions regarding the interpretation to be given language in the confession of judgment are governed, as are other written agreements, by substantive state law. The general rule is that a federal court will apply the law of the forum state, including that state's choice of law rules. Klaxon v. Stentor Elec. Mfg. Co., Inc., 313 U.S. 487, 496, 61 S. Ct. 1020, 85 L. Ed. 1477 (1941); Patch v. Stanley Works (Stanley Chemical Co. Div.), 448 F.2d 483, 487 (2d Cir. 1971); Pryor v. Swarner, 445 F.2d 1272, 1274 (2d Cir. 1971). Under New York choice of law principles, the substantive law of New York is here concededly applicable. See Auten v. Auten, 308 N.Y. 155, 124 N.E.2d 99 (1954); Babcock v. Jackson, 12 N.Y.2d 473, 240 N.Y.S.2d 743, 191 N.E.2d 279 (1963).

Careful research in the New York authorities indicates that no New York court has yet construed the phrase "costs of suit" within the context of a contractual agreement between private parties. Appellee finance company has cited numerous cases that have construed the term "costs", or "expenses", to support its argument that the generally understood legal meaning attached to those words excludes attorney's fees. See, e.g., Matter of Poersch, 28 A.D.2d 1040, 283 N.Y.S.2d 926, 928 (App.Div., 3d Dep't 1967); Pelella v. Pelella, 13 Misc.2d 260, 265, 176 N.Y.S.2d 862, 867 (Sup.Ct., Kings Co. 1958), aff'd, 9 A.D.2d 897, 195 N.Y.S.2d 599 (App.Div., 2d Dep't 1959); Royal Discount Corp. v. Luxor Motor Sales Corp., 9 Misc.2d 307, 308, 170 N.Y.S.2d 382, 383 (App.T., 1st Dep't 1957); Mutual Life Ins. Co. v. Kroehle, 29 Misc. 481, 483, 61 N.Y.S. 944, 945 (Sup.Ct., N.Y. Co. 1899); Caperna v. Williams-Bauer Corp., 185 Misc. 687, 688, 57 N.Y.S.2d 254, 255 (City Ct., N.Y. Co.), aff'd, 186 Misc. 27, 58 N.Y.S.2d 876 (App.T., 1st Dep't 1945). We find these cases to be of little help, however, for we deal in this appeal not with the more commonly used term "costs", which does indeed carry the technical meaning urged by appellee (i.e., mere court fees),*fn4 nor with a statute by which a legislative body ...

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