In a decision approved for publication, New Jersey’s Appellate Division recently affirmed that a defendant in a foreclosure action was barred from pursuing a separate action against the lender for fraud by foreclosure under New Jersey’s entire controversy doctrine as well as the principles of res judicata and collateral estoppel. See Adelman v. BSI Fin. Servs., Inc., 2018 WL 636756 (N.J. Super. Ct. App. Div. Jan. 31, 2018). In the case, the defendant lender made a loan to the borrower in 2006, and secured the note with a mortgage on the borrower’s home. The borrower married plaintiff eighteen months later. In 2009, the borrower defaulted on the loan and the lender commenced a foreclosure action against the borrower and plaintiff. They did not contest the foreclosure action, but the borrower began discussing a loan modification with the lender in 2010. On December 14, 2010, a final judgment of foreclosure was entered. The borrower did not object or seek to vacate the final judgment. Instead on June 30, 2011, he and plaintiff filed this action in the Law Division in which they argued that the borrower and the lender had entered into a modification agreement in 2010 that the lender then breached. The property nonetheless was sold at a sheriff’s sale in 2012 and, when the lender filed a motion for possession of the property in 2013, the borrower and plaintiff raised this modification argument in opposition. The court nonetheless granted the lender’s motion for possession, and plaintiff and the borrower filed an appeal in the foreclosure action. After the borrower died in 2014, plaintiff withdrew the foreclosure appeal and vacated the home. In 2015, plaintiff amended the complaint in the Law Division action to add claims for breach of contract and violation of the Consumer Fraud Act, among others. The trial court dismissed these claims because plaintiff was not a party to the loan documents at issue, and later granted summary judgment on the remaining claims based on the entire controversy doctrine, res judicata and collateral estoppel. This appeal followed.

The Appellate Division affirmed the trial court’s decision. Under Rule 4:64-5, only germane counterclaims may be raised in foreclosure actions without leave of court, and the failure to raise them can result in the germane claims being barred under the entire controversy doctrine. Here, the Court held that the allegation that the parties had entered into a loan modification that cured the default was a “fundamental defense” to the lender’s right to foreclose that was required to be brought in the foreclosure action. Indeed, plaintiff and the borrower raised this defense in the foreclosure action, albeit belatedly, but did not pursue the appeal on that argument after the trial court rejected it. The Court further held that, even if the issue was not fully litigated in the foreclosure action, that was only because plaintiff failed to timely raise it and then later abandoned it. Thus, “[b]ecause 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.” This is a significant victory for lenders who are often ensnared in fights over their good faith in negotiating and consummating loan modifications.