DD 8-15-07

MORTGAGES FORECLOSURE PROCEDURE COLLATERAL ESTOPPEL:  Even though a foreclosing mortgagee may already have obtained a judgment for collection of the note, it may still seek to recover additional fees and charges in a subsequent foreclosure action provided those fees and charges do not arise out of the same circumstances as were litigated in the collection action.  First Union National Bank v. Penn Salem Marina, Inc., 190 N.J. 342, 921 A.2d 417 (2007) May 10, 2007:

Mortgagors on a commercial loan defaulted and, as a result, the mortgagee sued on the note and also initiated foreclosure proceedings.  The note was partially secured by a first mortgage.  The note also laid out the terms under which the mortgagee could recover the debt in the event of a default. 

In the action on the note, the mortgagee sought the principal due at the time of default, plus late charges, insurance, escrowed taxes, and interest accrued from the time of default through the date of judgment.  The mortgagor failed to respond, and the mortgagee was awarded the amount it sought along with attorneys' fees on its claim against the promissory note. 

Although both the suit on the note and the foreclosure suit were filed about the same day, they were heard in different divisions.  The foreclosure action, in the equity division,  ultimately proceeded to judgment about a year and a half after the judgment in the suit on the note in the law division.  In the foreclosure action, the lower court in the foreclosure proceedings awarded, over the objection of the mortgagors, an amount that was nearly two hundred thousand dollars more than what had been awarded by the lower court that had heard the note collection matter.  The foreclosure award included the same unpaid principal as owned at the time of the default on the loan, but included a larger amount of interest and taxes because they had accrued over a longer period of time.  The mortgagees also sought a prepayment penalty and default interest, items that had not been part of their earlier claim. 

The mortgagors appealed the foreclosure decision, arguing that the foreclosure award should not have exceeded the amount of the decision that enforced the note.  Applying issue preclusion priniciples of collateral estoppel, The Appellate Division affirmed the lower court's decision and had found that the foreclosure ruling was not precluded by the ruling on the note enforcement.  The Appellate Division also found that principles disallowing a matter that has been resolved from being re-litigated did not apply because legal actions and remedies to enforce the terms of a note were different than legal actions and remedies for adjudicating a foreclosure.  The mortgagors appealed the Appellate Division's decision.

Before the New Jersey Supreme Court, the mortgagors argued that the amount awarded to the mortgagee in the note enforcement action fixed the amount to be awarded in the foreclosure proceedings.  First, the Court noted that the relief sought in the foreclosure was more extensive than the relief sought in the enforcement of the note, but that the underlying claim for relief was largely the same.  It concluded that the lender was limited to the recovery already granted as to matters that had in fact been litigated in the earlier action.  For instance, in the earlier action, the court had established a certain figure for per diem interest.  The foreclosure court, studying the same documents, came up with a different conclusion.  But the Supreme Court held that the foreclosure court was precluded from reexamining that issue, and rolled back the per diem interest to that determined by the original court in the suit on the note.  That issue had been resolved, albeit by default judgment.

.  But the Court held that a foreclosure action adjudicated following the adjudication of note enforcement is bound by the first decision only as to damages that are similar to those claimed in the second action.  Damages of a different type,  not sought in the first proceeding, could still be  awarded in a subsequent adjudication.  In the case at hand, the mortgagee had not asked for a prepayment penalty or default in interest in its claim for relief in the law court action on the note., and they were not essential to recovery of the amounts that the trial court in that action did award.   So the mortgagee was free to raise these issues in the foreclosure action.

Further the Court held that issue preclusion does not bar a lender from recovering monies in excess of the first judgment where further charges are later accrued such as for interest, costs, and attorneys' fees.

The Court reversed the Appellate Division's decision that the foreclosure action was not precluded at all by the note enforcement action, and held that the foreclosure was precluded only as to those issues that were the same in both proceedings.

Note: The court does not mention in any detail the question of late charges.  The mortgagee had included an item for late charge in the first proceeding, but there was a much large item for late charges in the foreclosure award.  The court notes in a footnote that the appeals court had lowered the amount, but still it does not appear to have lowered the amount back to what had been in the first award.  So far as the editor understands the case, there should be no additional award for late charges, as a late charge can only be imposed once, and the amount of that charge had been resolved in the suit on the note.  The editor is concerned that the court doesnt explain the apparent discrepancy in the two claims on this score, but it does indicate that on remand the principles it dictates may result in further changes.

Comment: Of course, the question of procedure for judicial recovery on notes secured by mortgages varies dramatically from one jurisdiction to another.  Some courts would permit only one lawsuit to run at a time.  It may be that some courts would require that all actions that reasonably could be included in a suit between the parties on basically the same facts should be included or be forever barred.  In is interesting that New Jersey, apparently because a foreclosure suit is for different relief in a different court, takes such a generous view toward the mortgagee on the question of issue preclusion.