­Under New Jersey’s “Entire Controversy Doctrine,” borrowers alleging unfair mortgage lending practices must raise such claims during the foreclosure proceeding itself.

In Napoli v. HSBC Mortgage Services, Inc., the U.S. District Court for the District of New Jersey held that the Entire Controversy Doctrine applied to foreclosure actions, and therefore borrowers were barred from asserting a post-judgment claim against their mortgage lender and its servicer alleging improper lending practices.

The Entire Controversy Doctrine is a New Jersey-specific doctrine of claim preclusion similar to, but broader than, res judicata and collateral estoppel (which prohibit a court from considering claims that could have been raised in a prior action). As the court explained, the Entire Controversy Doctrine “compels the parties, when possible, to bring all claims relevant to the underlying controversy in one legal action.” Thus, parties are barred from raising, in a subsequent proceeding, any claims they knew or should have known about during a prior proceeding. The court specified that, as it applies to foreclosure actions, the Doctrine requires joinder of counterclaims that arise out of the mortgage that is the basis of the foreclosure. Such counterclaims include those relating to “payment and discharge, [and] incorrect computation of the amounts due.”

In Napoli, the borrowers filed a post-judgment motion to stay foreclosure, claiming that the mortgage payoff balance required by the lender was “higher than expected,” and that they needed more time to obtain the higher payoff amount through refinancing. The borrowers subsequently claimed that the payoff balance was miscalculated by the lender, and that this overcharge was wrongful and fraudulent. After the foreclosure was completed, the borrowers later filed a putative class action on behalf of themselves and others who allegedly experienced similar fraudulent business practices.

The court, citing the Entire Controversy Doctrine, refused to address the merits of the borrowers’ claims, holding that “they should have been raised during the foreclosure proceeding.” The court reasoned that not only were the borrowers’ claims germane to the foreclosure proceeding, but the borrowers knew or should have known about the alleged discrepancy in payoff amount based on their prior claim that the payoff amount was higher than expected.

Plaintiffs argued that they lacked an opportunity to bring their claims during foreclosure because final judgment had already been entered when they received the payoff notice, and their claims arose between final judgment and receipt of the notice. But the court rejected their assertion, noting that the foreclosure court retained jurisdiction until at least the time when the borrowers tendered their payoff quote; thus, the borrowers “had a full opportunity to assert their claims during the prior foreclosure action.”

Although New Jersey’s Entire Controversy Doctrine is more strictly applied than res judicata and collateral estoppel, this decision serves as a reminder that, in states with judicial foreclosure processes, the requirement to bring a compulsory counterclaim in the foreclosure action can operate to prevent borrowers from asserting claims arising out of loans as to which a foreclosure has been completed. Lenders and servicers defending such actions should always evaluate the applicability of this defense where a lawsuit arises out of a loan that has been the subject of a judicial foreclosure.