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 or
Anthony Lombardo at alombardo@riker.com.