I inadvertantly added several other cases when I posted this yesterday, and I'm just cleaning things up. Sorry for the repeat. Pat
Daily Development for Wednesday, March 22, 2006
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
MORTGAGES; FORECLOSURE; RES JUDICATA: A judicial mortgage foreclosure is a quasi in rem proceeding, and in New Jersey an action in personam on the note cannot be joined with such action. Consequently, a prior judgment on the note establishing a claim for a certain indebtedness is not res judicata limiting the size of the claim in a subsequent mortgage foreclosure action.
First Union National Bank v. Penn Salem Marina, Inc., 2006 WL 349511 (2/17/06)
Borrower executed a note and mortgage representing and securing a commercial debt of $750,000. The mortgage gave the mortgagee the right to foreclose, sue on the note, or do both, simultaneously or serially.
The mortgagee first brought suit on the note and obtained a default judgment for $845,775. During the pendency of the action on the note, mortgagee brought an independent action to foreclose the mortgage.
Almost a year after the judgment in the action on the note, the mortgagee moved for entry of final judgment in the foreclosure action. Its claim, including claims for additional accrued interest, advances for taxes, insurance and property preservation, and prepayment premium, all as permitted under the note, amounted to $1,043,085. Most of the additional items had not been mentioned in the action on the note.
The debtor entered a letter to the Foreclosure Division contending that the foreclosure claim was incorrect, due to the fact that the final judgment on the note in the earlier action was res judicata and conclusively established the mortgagee’s claim (presumably except for accruing interest on the judgment) at $845, 775.
For unexplained reasons, the Foreclosure Division did not treat this letter as establishing a “contested case” and the court issued a final judgment in foreclosure.
On appeal: held: Affirmed. Neither collateral estoppel nor rRes Judicata preclude a mortgagee from seeking a different amount in a mortgage foreclosure action than it did in a prior action on the note.
The court ruled that the special nature of the mortgage foreclosure as an action quasi in rem explained why the two actions may be brought separately. A mortgage foreclosure in New Jersey operates only to provide for collection of the debt out of the property. A creditor can collect the amount due only from the land subject to the mortgage lien. The court noted that, while the underlying obligation may become unenforceable by reason of the expiration of the statute of limitations, or a bankruptcy, a mortgagee may nevertheless enforce the mortgage through a foreclosure action.
The foreclosure suit does not preclude a creditor from seeking a deficiency against the debtor’s other assets, apparently through a separate action. At least with respect to commercial property, the creditor can bring that action either before or after the mortgage foreclosure. In fact, New Jersey court rules prohibit the action for the debt to be joined with the mortgage foreclosure. Foreclosure and collection on the note are considered two entirely distinct processes, although of course satisfaction of all or part of the underlying debt in one action certainly would limit the amount collectible in the other. The court stated:
“Simply put, the actions reflect different claims with different issues. Fairness to defendants does not require the process to end after the first lawsuit, which is a primary justification for the application of either res judicata or collateral estoppel.”
The court also concluded that the failure of the mortgagee to seek ancillary claims such as damage to the property or the prepayment premium n the suit on the note did not constitute a waiver of those claims, because there was “anti waiver” language in the boiler plate in the instruments.
Comment: The outcome seems crystal clear, and the authority, one assumes, impeccable. But the rationale is almost non-existent. To say that the foreclosure action collects the debt one way and the action on the note collects it another way is not to state a reason that the court in the first action shouldn’t finally adjudicate the debt claim. What inhibits either the foreclosure court or the note collection court from finally adjudicating the note claim for both collection purposes? Is it that, legally, both actions can run simultaneously? Whatever the reason, it seems so obvious to the court that there is no preclusion through res judicata or collateral estoppel that there is no reason for explanation. Hmmmm.
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