New Jersey Appellate Division Holds Entire Controversy Doctrine Does Not Bar Foreclosure Complaint Filed After Federal Action on Insurance Proceeds

In a decision approved for publication, New Jersey’s Appellate Division recently held that New Jersey’s entire controversy doctrine did not prohibit a lender from bringing a foreclosure complaint after the homeowners’ federal lawsuit against its insurance companies and the lender was dismissed.  See Carrington Mortg. Servs., LLC v. Moore, 2020 WL 3067503 (N.J. Super. Ct. App. Div. June 10, 2020).  The defendant homeowners purchased their home in 2010 and executed a mortgage to a lender, which eventually was assigned to plaintiff.  In 2012, the home was damaged by Superstorm Sandy.  In 2015, the homeowners defaulted on their mortgage, and brought a federal lawsuit against their flood insurance and homeowners’ insurance providers, as well as their lender.  In the federal lawsuit, the homeowners sought payment from their insurance companies under their policies.  The complaint also sought a ruling that the homeowners were no longer responsible for their mortgage payments, that the homeowners should be reimbursed for some of their prior payments, and that the lender could “instead only get recovery from whatever insurance proceeds were payable.”  The federal court dismissed the action against the lender and insurers.  In 2018, the plaintiff lender brought this foreclosure action.  The homeowners defaulted, and the lender obtained a final judgment of foreclosure and purchased the property at the Sheriff’s sale.  The homeowners then brought this motion to vacate the final judgment, arguing that the entire controversy doctrine barred this action, and that the lender’s predecessor was required to bring a foreclosure counterclaim in the federal court action rather than instituting this new action in state court.  The trial court denied the motion and the homeowners appealed.

The Court affirmed the decision.  New Jersey’s entire controversy doctrine “generally requires parties to an action to raise all transactionally related claims in that same action” and “disfavors successive suits regarding the same controversy.”  However “[t]he doctrine should not be applied ‘where to do so would be unfair in the totality of the circumstances and would not promote any of its objectives, namely, the promotion of conclusive determinations, party fairness, and judicial economy and efficiency.’”  In this case, the Court found that the doctrine did not apply.  First, the Court stated that it had “substantial doubts that the federal court would have exercised jurisdiction over a mortgage foreclosure claim by the bank if it had chosen to plead it as a counterclaim” because the homeowners “did not bring their lawsuit under diversity jurisdiction and there is no federal question of law implicated by the . . . claim against Bank of America based on the mortgage contract.”  Second, the Court found that even if there were jurisdiction in the federal court, “[i]t would make little practical sense to force the bank to bring its foreclosure claims in that other forum.”  The Court held that the federal complaint was essentially an insurance dispute that lacked a “sufficient transactional nexus” to the foreclosure, and that the “federal complaint itself does not appear to suggest that there is a transactional relationship between a potential foreclosure and the insurance claims.”  Finally, the Court found that there were policy considerations that weighed against the homeowners’ motion.  The homeowners’ argument “could pose significant problems for homeowners. A requirement that a mortgage holder has a duty to involve itself in every insurance dispute between a homeowner and insurance company, or otherwise risk losing the right to foreclose on the mortgage, would upset the well-established and firmly held rights of mortgage holders to pursue foreclosure.”

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com, Michael Crowley at mcrowley@riker.com, or Anthony Lombardo at alombardo@riker.com.