It is always helpful when a court lets you know up front what its decision is all about. This was the case in Adelman v. BSI Financial Services, Inc., where the Appellate Division began its decision as follows: "A defendant in a foreclosure case may not fail to diligently pursue a germane defense and then pursue a civil case against the lender alleging fraud by foreclosure." Definitely not burying the lede (or is it burying the "lead"?).
In Adelman, plaintiff was the executrix of the estate of her deceased husband, Norman. Before they were married, Norman entered into a loan with his lender that was secured by a mortgage on his home. Three years later, the loan went into default, and six months after that, the lender filed a foreclosure complaint. Norman offered no defense to the complaint, and default was entered. Three months after that, he began discussing the possibility of a loan modification with the lender. However, Norman's chances for a successful modification ended when he could not make the first payment under the proposed modification and when a title search revealed five other liens on the property.
Months later, final judgment of foreclosure was entered. Norman did not object to the entry of final judgment. One year after that, the property was sold at sheriff's sale, and nine months after the sale, the lender filed a motion to remove Norman from the property. Only then, for the first time, did Norman argue, in a motion to stay his removal from the property, that the foreclosure was improper because the loan modification cured the default. The court denied this motion. Plaintiff appealed but then withdrew the appeal. Ultimately, shortly after Norman passed, and more than five years after the loan went into default, plaintiff vacated the property.
While all of this was going on in foreclosure, however, Norman filed a separate lawsuit against the bank for money damages, asserting claims for breach of contract and violations of the Consumer Fraud Act in connection with the loan modification. The lender moved to dismiss the lawsuit, and the trial court granted the motion. Plaintiff appealed and the Appellate Division affirmed.
In its decision, the Appellate Division offered a helpful lesson on a number of overlapping issues that often arise in foreclosure litigation. The Appellate Division first discussed the entire controversy doctrine, a somewhat unique aspect of New Jersey law, which normally requires that all claims between all parties, arising out of the same set of facts, be brought in a single action. The purposes of this doctrine are threefold: "(1) the need for complete and final disposition through the avoidance of piecemeal decisions; (2) fairness to parties to the action and those with a material interest in the action; and (3) efficiency and the avoidance of waste and the reduction of delay."
The entire controversy doctrine is limited, however, in foreclosure lawsuits, where "claims for foreclosure . . . shall not be joined with non-germane claims against the mortgagor or other persons liable on the debt." The only germane issues in a foreclosure lawsuit are the validity of the mortgage, the existence of a default under that mortgage, and standing to foreclose. Anything unrelated to these elements is non-germane and cannot be brought as a claim or counterclaim in a foreclosure lawsuit. As the Appellate Division explained: "For example, because a claim for unpaid rent is non-germane to a foreclosure action, it cannot be joined in that same foreclosure action; a later suit for rent would not be barred by the entire controversy doctrine."
This comes up frequently in residential foreclosure lawsuits, where defendant homeowners often assert counterclaims for money damages that are non-germane to the foreclosure lawsuit, and are nearly always dismissed. But in Adelman, the opposite was true. There, Plaintiff brought a germane claim in the foreclosure — alleging that the loan modification cured the underlying default — but then abandoned this claim on appeal, only to later try to bring the same claim against defendant in a separate action. The Appellate Division affirmed the trial court's decision that this claim was barred by the entire controversy doctrine. It held that "the issue of the enforceability of the [ ] loan modification agreement [was] at the heart of plaintiff's claim and was directly related to the foreclosure action and should have been raised as part of that litigation." Because it should have been "fully and timely litigated during the previous foreclosure proceedings," it could not be brought later as a separate action, and was properly dismissed.