New Jersey court says mortgagor may not fail to pursue a defense and then sue lender alleging fraud by foreclosure

The Superior Court of New Jersey upheld a decision of a lower court granting judgment for a mortgagee in a civil action alleging that the mortgagee engaged in fraud by obtaining a foreclosure judgment when there was allegedly a loan modification in place. The appellate court held that because the mortgagor attempted to litigation issues that were germane to the foreclosure in two separate actions the civil action was barred by the “entire controversy doctrine”.

The mortgagee in Adelman v. BSI Financial Services, Inc., No. A-3197-15T2 (N.J. Super. Ct. App. Div. Jan. 31, 2018) brought a foreclosure to which the mortgagor offered no defense. After default was entered, the mortgagor began submitting financial documents seeking a loan modification. The mortgagee requested an initial payment with the stipulation that if a loan modification is not approved, the initial payment would be returned. Mortgagor made the initial payment, but the modification was not approved. The mortgagee did not return the initial payment, however.

Several months after the mortgagor contended the loan modification agreement was finalized, the mortgagee obtained a final foreclosure judgment. He did not object to the judgment, nor did he seek to vacate it. Instead, many months later, the mortgagor filed a civil action for damages. Almost a year later, the property was sold at a sheriff’s sale. Nine months later, the mortgagee moved for possession of the property in the foreclosure action. The mortgagor opposed the motion for possession, belatedly arguing that the existence of the 2010 loan modification cured the default. The motion for possession was granted and mortgagor filed an appeal.

Meanwhile, the mortgagor’s estate (he died in the meantime) amended the 2011 complaint in in the civil action, asserting claims for breach of contract, violation of the Consumer Fraud Act (“CFA”), and intentional infliction of emotional distress. On mortgagee’s motion, the court dismissed the suit concluding that the executrix was not a party to the underlying mortgage agreement. It then granted summary judgment on the remaining claims based on the “entire controversy doctrine”, res judicata and collateral estoppel. The court’s decision was upheld on appeal.
Rule 4:30A provides that the “[n]on-joinder of claims required to be joined by the entire controversy doctrine shall result in the preclusion of the omitted claims to the extent required by the entire controversy doctrine, except as otherwise provided by [Rule] 4:64–5 (foreclosure actions)…”. Rule 4:64–5 explains that, absent judicial approval, “non-germane” claims cannot be brought as counterclaims in the foreclosure action, and thus they must be exempt from preclusion under the entire controversy doctrine.

The mortgagor’s claim that a loan modification had been implemented is a fundamental defense to the mortgagee’s right to foreclose. The mortgagor alleged that the mortgagee pursued a final foreclosure judgment in spite of there being an alleged modification of the mortgage during the pendency of the foreclosure case. Mortgagor could have pursued the appeal of the denial of this germane claim in the foreclosure rather than raising the same issue in other litigation. But he chose not to raise the defense at the time final judgment was entered. Because the loan modification issue should have been fully and timely litigated during the previous foreclosure proceedings, the entire controversy doctrine, res judicata, and collateral estoppel prevent plaintiff from raising the issue in an independent lawsuit.

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