Issue Preclusion In Foreclosure Litigation

A promissory note was issued by the defendants to First Union in return for a commercial loan ensured by a mortgage upon a marina. The marina was owned by one maker and operated by the other. In January 2003, defendants defaulted and First Union sued on the Note in the Law Division. Judgment by default was entered in July 2003 for a money judgment of $845,779.

Meanwhile, in February 2003 First Union brought a mortgage foreclosure action in the Chancery Division against the marina. A foreclosure judgment was awarded to the bank in January 2005, assessing the lien at $1,042,111 for the same Note at issue in the Law Division action. The Appellate Division affirmed the amount of the foreclosure judgment, holding that neither res judicata, collateral estoppel nor issue preclusion barred entry of the foreclosure judgment in this significantly higher amount.

The obligation of a Note and of a mortgage are separate and carry different remedies. A Note evidences the underlying monetary obligation. Suit on the Note in the Law Division is in personam and requests a money judgment. A mortgage does not create an independent obligation; it is a voluntary conveyance that places a lien upon specific property to secure the obligation of the Note. A mortgage without a Note is a nullity.

Foreclosure is solely in rem; it affects rights only to the encumbered parcel and does not result in a personal judgment against the makers. Any deficiency must be carried out by a separate Law Division action.

Actions on the Note and the mortgage have traditionally been conducted separately. The mortgage lien does not merge into a subsequent money judgment on the note. Each are separate, independent remedies involving different interests and potentially different parties. The entire controversy doctrine (R. 4: 30A) requires that all disputes between the contending parties be raised in one proceeding to conserve judicial resources, to preclude inconsistent results, and to prevent harassment. But R. 4: 46-5 removes deficiency actions from the entire controversy rule, and prohibits trying foreclosure actions together with the deficiency suit.

The Appellate Division determined that neither the purposes of res judicata or collateral estoppel would be served by barring re-litigation of the amount of principal, interest, and advances under the mortgage in the foreclosure litigation. With strong reliance upon the historical distinctions between foreclosure and deficiency actions, the Appellate Division concluded that "the actions reflected different claims with different issues. Fairness to defendants does not require the process to end after the first lawsuit."

The New Jersey Supreme Court, per Justice Wallace, reversed. The Court held that the debt affixed in a foreclosure proceedings was res judicata as to the amount sought under the Note in a later proceeding. Because N.J.S.A. 20A:50-2 generally requires "foreclosure first" (subject to the exception of N.J.S.A. 20A:50-2.3, generally commercial transactions,) no prior New Jersey case had considered the preclusive effects when judgment was entered on the Note first.

Res judicata bars re-litigation of a cause of action reduced to final judgment between the same parties or those in privity. Collateral estoppel may bar a different cause of action if its determination was necessary to the outcome of the first case. To avoid confusion: "The term claim preclusion replaces res judicata; the term issue preclusion replaces collateral estoppel."

Rather than focus on the long history of foreclosure cases, Justice Wallace instead reviewed the major modern New Jersey cases concerning issue preclusion (collateral estoppel) in a variety of contexts, and the general rules that have developed. Hennessey v. Winslow Township, 183 N.J. 593 (2005), concerned the preclusive affects of administrative proceedings on subsequent litigation. Hennessey codifies five factors to be considered when analyzing whether preclusion needs to be applied:

1) identity of issues

2) actual litigation in the prior proceeding

3) entry of final judgment on the merits

4) whether the adjudication of the issue was essential to the final judgment

5) identity of or privity of the party against whom the bar is asserted with the party in the prior proceeding

Relying upon an administrative law case rather than the narrower foreclosure procedure cases cited by the Appellate Division, the Supreme Court concluded that all five Hennesey elements were met. The new, higher First Union judgment was vacated. Lender beware.

This article is for informational purposes only and does not constitute legal advice. For your specific situation, consult an attorney licensed in your jurisdiction.

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