(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for
the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please
note that, in the interests of brevity, portions of any opinion may not have been summarized).
MORTGAGELINQ CORPORATION, ET AL. V. COMMONWEALTH LAND TITLE INSURANCE
COMPANY, ET AL. (A-104-94)
(NOTE: This is a companion case to Circle Chevrolet V. Giordano, Halleran & Ciesla, Mystic Isle
Development Corp. v. Perskie & Nehmad and DiTrolio v. Antiles, also decided today.)
Argued March 27, 1995 -- Decided August 1, 1995
O'HERN, J., writing for a majority of the Court.
The issue on appeal is whether the entire controversy doctrine has an extraterritorial effect. Thus,
are New Jersey courts obliged to entertain claims against parties that could have been joined with
substantially similar claims pursued by the same plaintiffs against other parties in another jurisdiction?
This case arises from a massive fraud committed on Mortgagelinq Corporation (Mortgagelinq), a
mortgage lender, and the Federal Home Loan Mortgage Corporation (Freddie Mac), assignee of some of
the loans. The principal perpetrators of the fraud were based in Pennsylvania (the Pennsylvania defendants).
They purported to be engaged in the acquisition and development of properties, but they were actually
engaged in a shell game of selling properties to themselves for a profit. When the scam collapsed,
Mortgagelinq and Freddie Mac (hereinafter "the lenders") were left with inadequate collateral. On March
13, 1991, Mortgagelinq sued the Pennsylvania defendants in the U.S. District Court for the Eastern District
of Pennsylvania. Mortgagelinq described that action (Mortgagelinq I) as an action "against the central
figures in the fraudulent scheme."
On January 31, 1992, Freddie Mac sought to intervene as a plaintiff in Mortgagelinq I. That motion
was granted on February 14, 1992. One day prior to the entry of that order, the lenders filed the complaint
that is the subject of this appeal in Superior Court, Law Division, Camden County (Mortgagelinq II). The
defendants in this action are three title insurance companies, a title agency, and three individuals alleged to
be employees of either the title insurance companies or the title agency (the New Jersey defendants). The
allegations in Mortgagelinq II involve the same twenty-four mortgage transactions that form the basis for the
allegations contained in the Mortgagelinq I complaint in Pennsylvania. The lenders allege that the title
companies who closed title in many of the land transactions by the Pennsylvania defendants must have been
aware of the fraud, which involved the same parties repeatedly acquiring properties and reselling them at
much higher prices. The scheme and its alleged effect on the lenders are apparently identical.
After filing the Mortgagelinq II complaint, some of the Mortgagelinq I defendants sought to compel
the joinder of the New Jersey defendants in the Pennsylvania action. The lenders opposed those applications
and the District Court refused to join the New Jersey defendants in the proceedings.
Some of the New Jersey defendants then moved to dismiss the complaints filed against them in New
Jersey on the basis of the entire controversy doctrine and other grounds, asserting that the lenders
deliberately delayed filing their New Jersey action until after the time period allowed for joinder in the
federal action had expired. The Law Division granted the motion and dismissed the complaints on the basis
of the entire controversy doctrine. The court found that the lenders were aware of their cause of action
against the New Jersey defendants at least as early as the filing date of the federal action in Pennsylvania,
and that the subject matter was identical in both suits. The court also found that the lenders deliberately
withheld their claims against the New Jersey defendants in the first action. Thus, the court held that the
entire controversy doctrine should operate to bar suits against parties who could and should have been joined
in a previous suit despite the fact that the earlier suit was brought in another state or in federal court.
On appeal, the Appellate Division affirmed the dismissal of the complaint. The Supreme Court
granted the lenders' petition for certification.
HELD: When a party deliberately chooses to fragment litigation by suing certain parties in another
jurisdiction and withholds claims against other parties, a New Jersey court need not later entertain
the claims against the omitted parties if jurisdiction was available in the first forum.
1. New Jersey's goals are served by precluding claimants from bringing an action against a party that could
have been joined in an earlier action brought elsewhere. A court must consider whether a trial court,
confronted in an earlier action with an entire controversy application, would clearly have found grounds to
excuse joinder. Here, the Pennsylvania federal court would not have severed the New Jersey defendants had
there been a timely effort to join them. Further, any claim that joinder would have been inappropriate is
weakened by the lenders' failure to give the trial court the opportunity to make such a determination.
Moreover, excusable neglect is not present in this case. The lenders were represented by sophisticated
attorneys and there is no evidence of unfairness to the litigants attributable to attorney neglect. Of course,
the U.S. District Court need not follow this Court's views of party joinder. (pp. 8-11)
2. If Pennsylvania courts do not have a comparable party-joinder rule, principles of comity suggest that New
Jersey should not seek to export its entire controversy doctrine to regulate the conduct of attorneys in that
jurisdiction. However, New Jersey courts need not necessarily grant relief when party's deliberately refrain
from seeking relief in other jurisdictions when doing so would have been much fairer to all parties involved.
There is a delicate balance between the interests of the two jurisdictions that must accommodate the
interests of justice. (pp. 11-12)
3. Because the binding or preclusive effect of a judgment is determined primarily by the jurisdiction that
entered it, in the context of federalism, the Court must consider what effect should be given our entire-controversy rule. The Court finds that a dismissal for failure to comply with the entire controversy doctrine
is more similar to a threshold adjudication than to an adjudication on the merits of the claim. That does not
mean that a successive New Jersey action may be brought because the threshold bar would remain in place
and be effective as a final adjudication for purposes of any further New Jersey proceedings. That threshold
is not a barrier elsewhere, however. Maintaining a cohesive federal system does not require that the other
parts of the federal system honor our entire controversy doctrine. It is assumed that the federal court will
carefully consider the powerful federal interest in the vindication of the rights of a federally-created
mortgage-lending agency. (pp. 13-17)
Judgment of the Appellate Division is AFFIRMED IN PART, insofar as it applies to the entire
controversy doctrine to bar the successive actions in New Jersey under the present circumstances and the
judgment is REVERSED IN PART, insofar as it dismissed the complaints with prejudice.
JUSTICE POLLOCK, dissenting, in which JUSTICE STEIN joins, is of the view that federal law
would not preclude the lenders from maintaining an action against the New Jersey defendants in federal
courts. Thus, by looking to New Jersey's entire controversy doctrine rather than applicable federal law, the
majority has erred. Moreover, distracted by a misplaced perception of judicial efficiency, the majority has
lost sight of the equities. Justice Pollock finds it manifestly unfair to permit swindlers to escape liability
merely because the lenders' counsel did not appreciate that the failure to join the New Jersey defendants in
the earlier federal action would preclude the lenders from maintaining a subsequent suit in the courts of this
State. Moreover, despite the majority's assertion to the contrary, the necessary implication of its holding is
to export the entire-controversy doctrine to another jurisdiction.
JUSTICES HANDLER, GARIBALDI and COLEMAN join in JUSTICE O'HERN's opinion.
JUSTICE POLLOCK filed a separate dissenting opinion in which JUSTICE STEIN joins. CHIEF
JUSTICE WILENTZ did not participate.
SUPREME COURT OF NEW JERSEY
A-
104 September Term 1994
MORTGAGELINQ CORPORATION AND
FEDERAL HOME LOAN MORTGAGE
CORPORATION,
Plaintiffs-Appellants,
v.
COMMONWEALTH LAND TITLE
INSURANCE COMPANY, EDWARD B.
CAVALLARO, SR., CONTINENTAL
TITLE INSURANCE COMPANY,
ELIZABETH A. KEHOE, and LAWYERS
TITLE INSURANCE CORPORATION,
Defendants-Respondents,
and
MARKLAND TITLE SERVICES, INC.,
AND ROBERTA A. RANKIN,
Defendants.
Argued March 27, 1995 -- Decided August 1, 1995
On certification to the Superior Court,
Appellate Division, whose opinion is reported
at
275 N.J. Super. 79 (1994).
John Philip Kirchner argued the cause for
appellants (Flaster, Greenberg, Wallenstein,
Roderick, Spirgel, Zuckerman, Skinner &
Kirchner, attorneys).
Maureen S. Binetti argued the cause for
respondent Lawyers Title Insurance
Corporation (Wilentz, Goldman & Spitzer,
attorneys).
Michael N. Onufrak argued the cause for respondents Commonwealth Land Title Insurance Company, Edward B. Cavallaro, Sr., Continental Title Insurance Company, and Elizabeth A. Kehoe (White and Williams, attorneys for Commonwealth Land Title Insurance Company; Miller, Alfano &
Raspanti,attorneys for Elizabeth A. Kehoe;
Duane, Morris & Heckscher, attorneys for
Continental Title Insurance Company; and John
Wendell Beavers & Assoc., attorneys for
Edward B. Cavallaro, Sr.; Mr. Onufrak, Ann
Weikers, Steven M. Janove, Joshua Sarner, and
John Wendell Beavers, on the brief).
The opinion of the Court was delivered by
O'HERN, J.
This is one of a series of entire controversy cases decided
this term. See Circle Chevrolet Co. v. Giordano, Halleran &
Ciesla, ___ N.J. ___ (1995); Mystic Isle Dev. Corp. v. Perskie &
Nehmad, ___ N.J. ___ (1995); DiTrolio v. Antiles, ___ N.J. ___
(1995). Each case presents a slightly different aspect of the
problems that have arisen in the application of the entire
controversy doctrine. The issue in this case, most broadly
stated, is whether the doctrine has an extraterritorial effect.
The specific question is whether New Jersey courts are obliged to
entertain claims against parties that could have been joined with
substantially similar claims pursued by the same plaintiffs
against other parties elsewhere.
We hold that when a party deliberately chooses to fragment
litigation by suing certain parties in another jurisdiction and
withholds claims against other parties, a New Jersey court need
not later entertain the claims against the omitted parties if
jurisdiction was available in the first forum. In doing so we do
not export our entire controversy doctrine to other
jurisdictions, but merely hold that our notions of procedural
fairness do not permit the claims that could have brought
elsewhere to be brought in New Jersey. This ruling presupposes
that when the procedural rules of foreign jurisdictions permit
the omitted claims to be brought later, the foreign jurisdiction
is free to entertain such claims. Just as we do not seek to
export our procedural requirements of party joinder, we do not
seek to export any preclusive effect to our rules of party
joinder.
The case arises from a massive fraud committed on the plaintiff mortgage lender, Mortgagelinq Corporation (Mortgagelinq), and the Federal Home Loan Mortgage Corporation (Freddie Mac), assignee of some of the loans.See footnote 1 There is more than enough blame to go around. Defendants in this case, principally South Jersey title insurance companies, are allegedly accessories to the fraud. What happened was deceptively simple. The principal perpetrators of the fraud were based in Pennsylvania (the Pennsylvania defendants). They purported to be engaged in the acquisition and development of properties, but they were actually engaged in a shell game of selling properties to themselves. They elevated the art of the deal to new heights.
A brief of defendant Lawyers Title Insurance Corporation
describes the scheme succinctly. The Pennsylvania defendants
would purchase property from its owner for a purchase price near
its fair market value (the A transaction). The property was
fraudulently resold on the same day to another Pennsylvania
defendant (the B transaction) at a price substantially higher
than the purchase price of the A transaction. All but one of the
twenty-four mortgage transactions alleged to be part of the
fraudulent scheme involved property located within Atlantic
County, New Jersey. The transactions took place between May 1990
and February 1991. In each instance, Mortgagelinq, a New
Jersey/Pennsylvania-based mortgage lender, provided mortgage
financing based on the inflated purchase price in the B
transaction. Mortgagelinq sold some of the mortgages to Freddie
Mac. The Pennsylvania defendants pocketed the difference between
the real price and the fake price. In fact, sometimes the sham
deals closed before the legitimate deals. Plaintiffs allege that
the title companies who closed title in those transactions must
have been aware of the fraud, which involved the same parties
repeatedly acquiring properties and reselling them at
significantly increased prices.
When the scam collapsed, the lenders were left with
inadequate collateral. On March 13, 1991, Mortgagelinq sued the
Pennsylvania defendants in the U.S. District Court for the
Eastern District of Pennsylvania. Plaintiffs described that
action (Mortgagelinq I) as an action "against the central figures
in the fraudulent scheme." Those figures included a mortgage
broker, a principal and several employees of that broker, an
appraiser, an individual who "managed the affairs" of the
corporate defendants (the shell corporations), the attorneys who
received fees in connection with the transactions, a real estate
agency and its employees, an insurance agency and its employees,
and an individual who purportedly reviewed the alleged fraudulent
appraisals.
On January 31, 1992, Freddie Mac sought to intervene as a
plaintiff in Mortgagelinq I. The District Court granted its
unopposed motion by an order dated February 14, 1992. One day
prior to the entry of that order, Mortgagelinq and Freddie Mac
filed the complaint in this case in the Superior Court, Law
Division, Camden County. Defendants in this action are three
title insurance companies, a title agency, and three individuals
alleged to be employees of either the title insurance companies
or the title agency (the New Jersey defendants).
The allegations of the Mortgagelinq II complaint filed in
New Jersey involve the same twenty-four mortgage transactions
that formed the basis for the allegations contained in the
Mortgagelinq I complaint in Pennsylvania. The scheme and its
alleged effect upon plaintiffs are apparently identical.
After the filing of the Mortgagelinq II complaint, some of
the Mortgagelinq I defendants sought to compel the joinder of the
New Jersey defendants in the Pennsylvania action as either direct
defendants or third-party defendants. Both Mortgagelinq and
Freddie Mac opposed those applications, asserting that the
Pennsylvania defendants (as well as the plaintiffs) had known of
the role of the New Jersey defendants in the underlying
transactions since the inception of Mortgagelinq I. The district
court refused to join the New Jersey defendants in the
proceedings pending there.
Some of the New Jersey defendants then moved to dismiss the
complaints filed against them in New Jersey on the basis of the
entire controversy doctrine and other grounds. The New Jersey
defendants asserted that plaintiffs deliberately delayed filing
their New Jersey action until after the time period allowed for
joinder in the federal action had expired. The Law Division
granted the motion and dismissed the complaints on the basis of
the entire controversy doctrine.
The Law Division found that Mortgagelinq and Freddie Mac
were aware of their causes of action against the omitted parties,
the New Jersey defendants, at least as early as the filing date
of the federal action in Pennsylvania, and that "the subject
matter is identical in both suits and that plaintiffs
affirmatively chose to bifurcate from the federal action trial of
the causes against the New Jersey defendants despite this fact."
262 N.J. Super. 178, 183 (Law Div. 1992). The court also stated
that "the parties proceeded against in New Jersey were amenable
to in personam jurisdiction by the Pennsylvania federal court,
either by virtue of their domiciles in that state or their
business contacts with it." Id. at 189.
Finding that "the issues, facts, causes of action and
transactions in both cases were virtually identical," id. at 189,
and that the plaintiffs had deliberately withheld their claims in
the first action, the court held that "the entire controversy
doctrine operates to bar suits against parties which could and
should have been joined in a previous suit despite the fact that
the earlier suit was brought in another state or in federal
court." Id. at 190. The court concluded that such a result was
"fair to the parties of this and similar cases and will prevent
prejudice to the omitted parties and the wasteful manipulations
of the New Jersey courts such as occurred here." Ibid. (Because
the trial court's finding was apparently not based on plaintiffs'
motivations, we need not discuss such issues.)
Plaintiffs later sought to have the Law Division amend the
"with prejudice aspect" of its orders of dismissal. The court
declined to do so, holding that it intended its prior ruling to
bar litigation of plaintiffs' claims in New Jersey pursuant to
the entire controversy doctrine.
Thereafter, on September 11, 1992, plaintiffs filed a
complaint against the New Jersey defendants in the U.S. District
Court for the Eastern District of Pennsylvania (Mortgagelinq
III).See footnote 2 In lieu of filing an answer to the complaint in
Mortgagelinq III, all of the New Jersey defendants moved to
dismiss that complaint on the basis of the Full Faith and Credit
Clause of the U.S. Constitution. The district court denied those
motions, and noted that once the New Jersey ruling dismissing
plaintiffs' claims became final, that judgment might preclude
plaintiffs from pursuing further action against the New Jersey
defendants in federal courts. On plaintiffs' appeal of
Mortgagelinq II, the Appellate Division affirmed the Law
Division's decision dismissing the complaint.
275 N.J. Super. 79
(1994).
We granted the plaintiffs' petition for certification.
138 N.J. 270 (1994).
In Crispin v. Volkswagenwerk, A.G., 96 N.J. 336 (1984), we realized that the time had come to reconsider the application of the entire controversy doctrine to parties. Previously, the entire controversy doctrine had served to preclude later prosecution of claims between the same parties if the claims could have been joined in prior proceedings between the parties. Wm. Blanchard Co. v. Beach Concrete Co., Inc. 150 N.J. Super. 277, 292-93 (App. Div.), certif. denied, 75 N.J. 528 (1977). In
Crispin, supra, we recognized the many difficult problems posed
by the extension of the doctrine to parties. We noted: "We will
proceed on a step-by-step basis recognizing that the doctrine is
one of judicial fairness and will be invoked in that spirit."
Crispin, supra, 96 N.J. at 343.
In Cogdell v. Hospital Center at Orange,
116 N.J. 7 (1989),
we took the next step and established a mandatory party-joinder
rule similar to the mandatory claim-joinder rule. We noted that
"consistent with the entire controversy doctrine, justice
requires that it be applied only prospectively and to all cases
not already on appeal." Id. at 28. As a result of the holding
in Cogdell, we promulgated Rule 4:30A, which became effective on
September 4, 1990. That rule provides:
Non-joinder of claims or parties
required to be joined by the entire
controversy doctrine shall result in the
preclusion of the omitted claims to the
extent required by the entire controversy
doctrine, except as otherwise provided by R.
4:64-5 (foreclosure actions) and R. 4:67-4(a)
(leave required for counterclaims or cross-claims in summary actions).
Had Mortgagelinq I and Mortgagelinq II been brought successively in New Jersey courts, there would be little doubt that application of the entire controversy doctrine would preclude the omitted claims. The issue is whether the non-joinder of parties in a related action in the Pennsylvania federal court results in the same party preclusion in New Jersey.
If so, what is the effect of that preclusion in other
jurisdictions?
Heretofore our joinder rules have been understood to apply
when claims have been omitted from proceedings in another
jurisdiction. See Guidice v. Drew Chem. Corp.,
210 N.J. Super. 32 (App. Div.) (precluding, under entire controversy doctrine,
claims that could have been brought in related New York
proceedings), certif. granted and summarily remanded on other
grounds,
104 N.J. 465 (1986). And failure to join parties in an
in-state federal court action would preclude later state court
proceedings against the omitted parties. Gross v. Cohen DuFour &
Assocs.,
273 N.J. Super. 617 (Law Div. 1994). The precedential
value of Kimmins Abatement Corp. v. Conestoga-Rovers & Assocs.,
Inc.,
253 N.J. Super. 162 (Law Div. 1991) (holding that entire
controversy doctrine did not bar second lawsuit against defendant
who was not party to first lawsuit in another state), is clouded
by speculation concerning the issue of personal jurisdiction in
Colorado over the defendants omitted from the proceedings there.
In Mortgagelinq II, as in Guidice, supra, and Gross, supra, New
Jersey's goals are served by precluding claimants from bringing
an action against a party that could have been joined in an
earlier action brought elsewhere. The issue is whether it is
fair to do so. One aspect of that review is consideration of
whether a trial court, confronted in the earlier action with an
entire controversy application, "would clearly have found grounds
to excuse joinder." DiTrolio, supra, ___ N.J. at ___ (slip op.
at 25-26). That analysis presumes that the omitted parties could
have been subject to the jurisdiction of the other forum.
We believe that the Pennsylvania federal court would not
have severed the New Jersey defendants had there been a timely
effort to join them. Further, any later claim that joinder would
have been inappropriate is weakened by plaintiffs' failure to
give the trial court the opportunity to make such a
determination. Excusable neglect "attributable to an honest
mistake that is compatible with due diligence or reasonable
prudence," Mancini v. EDS,
132 N.J. 330, 335 (1993), is not
present in this case. Plaintiffs are represented by
sophisticated attorneys; there is no evidence of unfairness to a
litigant attributable to such attorney neglect. Of course, this
does not mean that the Pennsylvania federal court must follow our
views of party joinder.
One of the underpinnings of the entire controversy doctrine,
in addition to fairness to the parties, is fairness to the system
of judicial administration. "Judicial economy and efficiency--the avoidance of waste and delay--remain constants in the
application of the entire controversy doctrine. Fragmented and
multiple litigation takes its toll on not only the parties but
the judicial institution and the public." Cogdell, supra, 116
N.J. at 23. Each jurisdiction is free to assess the importance
of such values. Our own Committee on Civil Practice recently
recommended that the Court reconsider the principles of the
entire controversy doctrine because it was not convinced that the
doctrine necessarily produced judicial efficiency. The Committee
was concerned that in some instances the doctrine would produce
inefficiencies in the conduct of complex litigation. 1994 Report
of the Supreme Court Comm. on Civil Practice,
136 N.J.L.J. 581,
589 (Supp. Feb. 14, 1994). Hence, the entire controversy
doctrine is hardly one of either uniform application or universal
acceptance.
If Pennsylvania courts do not have a comparable party
joinder rule, principles of comity suggest that New Jersey should
not seek to export its entire controversy doctrine to regulate
the conduct of attorneys in that jurisdiction. In other words,
attorneys conducting litigation in Pennsylvania courts should not
have to accommodate their practices to the demands of New Jersey
courts. A corollary of that proposition, however, is that New
Jersey courts need not necessarily grant relief when parties
deliberately refrain from seeking relief in other jurisdictions
when doing so would have been much fairer to all parties
involved. There is a delicate balance between the interests of
the two jurisdictions that must accommodate the interests of
justice. "The Rules of Practice are not an end unto themselves,
but a means of serving the ends of justice." Viviano v. CBS,
Inc.,
101 N.J. 538, 550-51 (1986).
The best way to reconcile those interests is to understand what our interests are, and what the foreign jurisdiction's interests may be. In two recent cases, Watkins v. Resorts International Hotel & Casino, Inc., 124 N.J. 398 (1991), and Velasquez v. Franz, 123 N.J. 498 (1991), we examined the interrelationship and preclusive effect of federal court judgments in state court proceedings. Because the federal courts are considered those of another sovereign, State v. Minter, 116 N.J. 269, 279 (1989), those cases will also serve to guide us in cases involving proceedings in other states.
We restate a few of the basic principles set forth in Watkins and Velasquez. Issue preclusion is an aspect of the doctrine of res judicata. "The term `res judicata' refers broadly to the common-law doctrine barring relitigation of claims or issues that have already been adjudicated." Velasquez, supra, 123 N.J. at 505.See footnote 3
For a judicial decision to be accorded res judicata effect, it must be a valid and final adjudication on the merits of the claim. * * *
Typically, the merits of a claim are
adjudicated following a full trial of the
substantive issues. * * *
Increasingly, however, statutes, rules
and court decisions operate to bar retrial of
judgments that do not pass directly on the
substance of a claim. * * *
A judgment of involuntary dismissal or a
dismissal with prejudice constitutes an
adjudication on the merits "as fully and
completely as if the order had been entered
after trial."
[Id. at 506-07 (quoting Gambocz v.
Yelencsics,
468 F.2d 837 (3d Cir. 1972)).]
"In general, the binding effect of a judgment is determined by
the law of the jurisdiction that rendered it." Watkins, supra,
124 N.J. at 411 (citing Restatement (Second) of Conflict of Laws,
§ 95 comment e (1971)).
Our Rule 4:37-2(a) now labels every dismissal for failure to
comply with a rule or order as "without prejudice unless
otherwise specified in the order." By contrast, under Federal
Rule of Civil Procedure 41(b) every such dismissal operates as an
adjudication on the merits unless the court specifies otherwise
or unless the dismissal is "for lack of jurisdiction, for
improper venue, or for failure to join a party under Rule 19."
"As construed by the United States Supreme Court, adjudications
not on the merits under Rule 41(b) include `those dismissals
which are based on a plaintiff's failure to comply with a
precondition requisite to [a] [c]ourt's going forward to
determine the merits of his [or her] substantive claim.'"
Watkins, supra, 124 N.J. at 417 (quoting Costello v. United
States,
365 U.S. 265, 285,
81 S. Ct. 534, 545,
5 L. Ed.2d 551,
564 (1961)).
In Watkins, we stated that "a federal dismissal constitutes
an adjudication on the merits unless the court specifies
otherwise or the dismissal is based on a threshold issue
concerning the court's ability to proceed to determine the
substantive merits of the claim." Ibid. We held that standing
is a threshold issue that eschews evaluation of the merits and,
accordingly, we did not give preclusive effect to a federal
dismissal for lack of standing. Id. at 417-18. On the other
hand, in Velasquez, supra, 123 N.J. at 508-11, we found that a
dismissal for lack of capacity to be sued constituted a judgment
on the merits. Because the binding effect of a judgment is
determined primarily by the jurisdiction that entered it, we
must, in this context of federalism, consider what effect should
be given to Rule 4:30A in this case.
We believe that the better analogy is to Watkins, and
conclude that a dismissal for failure to comply with the entire
controversy doctrine is more similar to a threshold adjudication
than to an adjudication on the merits of the claim. That does
not mean that a successive New Jersey action may be brought,
because, barring any change in circumstances, the threshold bar
would remain in place and be as effective as a final adjudication
for purposes of any further New Jersey proceedings. However, our
threshold is not a barrier elsewhere.See footnote 4
In Watkins, supra, 124 N.J. at 410, we noted the philosophy
underlying our decision:
Just as cohesion between state courts is
necessary for national unity, cohesion
between state and federal courts is necessary
for the continuing vitality of the federalist
system. Maintaining a cohesive federal
system requires not only that federal courts
honor state court judgments as mandated by
28 U.S.C. §1738, but also that state courts
honor federal court judgments.
Maintaining a cohesive federal system (and the Full Faith and Credit Clause melds the state courts into that system) does not require that the other parts of the federal system honor our entire controversy doctrine. There is a powerful federal interest in the vindication of the rights of a federally-created mortgage-lending agency. We assume that the federal court will carefully consider the vindication of that interest. That court may adhere to its previously expressed views concerning the preclusive effect of the Mortgagelinq I proceeding. We thus do no disservice to our dissenting members' concerns about the
interests of comity and properly allowing the federal court to
determine the res judicata effect of its earlier judgment. Our
Rules of Practice are "a means of serving the ends of justice."
Viviano, supra, 101 N.J. at 551.
The judgment of the Appellate Division is affirmed insofar
as it applies the entire controversy doctrine to bar the
successive actions in New Jersey under the present circumstances.
The judgment is reversed insofar as it dismissed the complaints
with prejudice.
JUSTICES HANDLER, GARIBALDI and COLEMAN join in JUSTICE
O'HERN's opinion. JUSTICE POLLOCK filed a separate dissenting
opinion in which JUSTICE STEIN joins. CHIEF JUSTICE WILENTZ did
not participate.
SUPREME COURT OF NEW JERSEY
A-
104 September Term 1994
MORTGAGELINQ CORPORATION and
FEDERAL HOME LOAN MORTGAGE
CORPORATION,
Plaintiffs-Appellants,
v.
COMMONWEALTH LAND TITLE
INSURANCE COMPANY, EDWARD B.
CAVALLARO, SR., CONTINENTAL
TITLE INSURANCE COMPANY,
ELIZABETH A. KEHOE, and LAWYERS
TITLE INSURANCE CORPORATION,
Defendants-Respondents,
and
MARKLAND TITLE SERVICES, INC.,
and ROBERTA A. RANKIN,
Defendants.
POLLOCK, J., dissenting.
I respectfully submit that the majority has reached the
wrong result for the wrong reason. Confronted with allegations
of a massive fraud, the majority has barred the defrauded parties
from seeking redress in the courts of this State. To achieve
this untoward result, the majority extends unduly New Jersey's
entire-controversy doctrine to determine the preclusive effect of
a judgment rendered by a federal court in another state. I
dissent.
Because this matter arises on the grant of defendants'
motion for summary judgment, we accept plaintiffs' statement of
the facts and give plaintiffs the benefit of all favorable
inferences that flow from those facts. Judson v. Peoples Bank &
Trust Co.,
17 N.J. 67, 75 (1954). So viewed, defendants are
either title companies or settlement clerks employed by the title
companies who participated in defrauding plaintiffs of several
million dollars. In a suit in the United States District Court
for the Eastern District of Pennsylvania, plaintiffs recovered a
judgment against the principal perpetrators. The issue here is
whether plaintiffs' recovery of a judgment against those
defendants should preclude plaintiffs from suing the present
defendants in the state courts of New Jersey.
Under established choice-of-law principles, the preclusive effect of a judgment is determined by the law of the jurisdiction that rendered it. Watkins v. Resorts Int'l Hotel & Casino, Inc., 124 N.J. 398, 411 (1991); see also Restatement (Second) of Conflict of Laws § 95 (1971) ("What issues are determined by a valid judgment is determined, subject to constitutional limitations, by the local law of the State where the judgment was rendered."); Restatement (Second) of Judgments § 86 (1982) ("A valid and final judgment of a state court has the same effects under the rules of res judicata in a subsequent action in a federal court that the judgment has by the law of the state in
which the judgment was rendered . . . ."); Restatement (Second)
of Judgments § 87 (1982) ("Federal law determines the effects
under the rules of res judicata of a judgment of a federal
court."). "If [a] plaintiff would be precluded from maintaining
. . . a second action in the [jurisdiction] of rendition, he will
similarly be barred from maintaining such an action in other
[jurisdictions]." Restatement (Second) of Conflict of Laws § 95
comment e (1971). Federal law would not preclude plaintiffs from
maintaining an action against these defendants in federal courts.
Consequently, I would not bar plaintiffs from pursuing the
defendants in the courts of this State.
The entire-controversy doctrine proceeds from significant policy considerations, including judicial efficiency and fairness to litigants. Cogdell v. Hospital Ctr. at Orange, 116 N.J. 7, 15 (1989). Like other legal doctrines, however, the entire controversy doctrine has its limits. For me, today's decision exceeds those limits.
To comprehend the reach of the majority's decision, it may help to compare briefly New Jersey's entire-controversy doctrine with claim preclusion elsewhere. New Jersey's approach to claim preclusion, as embodied in the entire-controversy doctrine, is unique. See generally Kevin Haverty, Note, The Entire
Controversy Doctrine in New Jersey and the Nominal Party
Exception: When is the Entire Controversy Not the Entire
Controversy?,
23 Rutgers L.J. 341, 344-45 (1992) (explaining that
source of doctrine is 1947 New Jersey Constitution); William J.
Volonte, Comment, The Entire Controversy Doctrine: A Novel
Approach to Judicial Efficiency,
12 Seton Hall L. Rev. 260, 260
(1982) (providing a historical overview of the development of "an
unusual procedural rule called the `entire controversy
doctrine'"). No other jurisdiction has adopted so strict a rule
on claims joinder. See Arthur F. Greenbaum, Jacks or Better to
Open: Procedural Limitations on Co-Party and Third-Party Claims,
74 Minn. L. Rev. 507, 562 n.233 (1990) ("New York provides a
model of a permissive joinder approach to multi-claim litigation,
while New Jersey takes a compulsory joinder approach. The
Federal Rules approach falls between the two.") (citation
omitted). Compare Fed. R. Civ. P. 13(a) (compulsory
counterclaims) with Fed. R. Civ. P. 13(b) (permissive
counterclaims) and Fed. R. Civ. P. 13(g) (permissive cross-claims).
Our mandatory party-joinder rule, which deviates
significantly from the party-joinder practice in other
jurisdictions, is not well-known outside our State. Cf. Richard
D. Freer, Avoiding Duplicative Litigation: Rethinking Plaintiff
Autonomy and the Court's Role in Defining the Litigative Unit,
50
U. Pitt. L. Rev. 809, 837, 841-51 (1989) (recommending adoption
of a mandatory party-joinder rule); John C. McCoid, A Single
Package for Multiparty Disputes,
28 Stan. L. Rev. 707, 724-28
(1976) (same). The majority recognizes as much: "[T]he entire
controversy doctrine can hardly be thought to be a doctrine of
either uniform application or universal acceptance." Ante at __
(slip op. at 12).
Even in New Jersey, the compulsory party-joinder rule has
attracted critics. Last year, the Civil Practice Committee
proposed the elimination of mandatory party joinder from the
entire-controversy rule. The committee "concluded that despite
the conceptual appeal of the [entire controversy] rule, it has,
as a matter of practice, created many more difficulties than it
has resolved. 1994 Report of the Supreme Court Comm. on Civil
Practice,
136 N.J.L.J. 581, 589 (Supp. Feb. 14, 1994).
Mandatory party joinder under the Federal Rules of Civil Procedure is less restrictive than under the New Jersey rules. Under the Federal Rules, a plaintiff has more discretion to structure the litigation and to choose which of a multiplicity of defendants to sue. See Fed. R. Civ. P. 20(a) (permissive joinder of all persons asserting, or defending against, joint, several, or alternative right to relief that arises out of same transaction or occurrence and presents common question of law or
fact). For example, to preserve complete diversity, a plaintiff
may elect to sue some, but not all, conceivable defendants. That
election does not foreclose a plaintiff from bringing a
subsequent action against defendants not named in the first
lawsuit.
The Pennsylvania Federal District Court ruled in the action
against the principal perpetrators that plaintiffs need not join
the present defendants. The federal rules do not preclude
plaintiff from bringing a second action against defendants not a
party to the first action. Hence, plaintiffs could have filed a
subsequent action against the present defendants in the federal
courts. New Jersey likewise should allow plaintiffs to maintain
such an action.
Moreover, even if the Federal District Court had dismissed plaintiffs' original suit for failure to join defendants as necessary parties, the federal rules would not preclude plaintiffs from bringing a subsequent action against defendants. Under Federal Rule of Civil Procedure 19(a), certain defendants must be joined if feasible. Rule 19(a), however, applies only if: (1) failure to join the absentee party would prevent complete relief from being accorded among the present parties to the action; or (2) the absentee party claims an interest relating
to the subject matter of the action and is so situated that his
or her absence from the action (i) will have a prejudicial effect
on his or her ability to protect his or her interest, or (ii)
will subject any of the already parties to a substantial risk of
incurring double, multiple, or otherwise inconsistent
obligations.
If, for example, joinder is not feasible because of lack of
personal jurisdiction over the absent party, the federal court
must "determine whether in equity and good conscience the action
should proceed among the parties before it, or should be
dismissed, the absent person being regarded as indispensable."
Fed. R. Civ. P. 19(b). Significantly, Federal Rule of Civil
Practice 41(b) provides:
Unless the court in its order of dismissal
otherwise specifies, a dismissal under this
subdivision and any dismissal not provided
for in this rule, other than a dismissal for
lack of jurisdiction, for improper venue, or
for failure to join a party under Rule 19,
operates as an adjudication on the merits.
Because a dismissal for failure to join a necessary or indispensable party is not an adjudication on the merits, such a dismissal has no preclusive effect. See, e.g., Federated Dep't Stores, Inc. v. Moitie, 452 U.S. 394, 398, 101 S. Ct. 2424, 2428,
69 L. Ed.2d 103, 108 (1981) (enumerating the three elements of
res judicata as (1) same parties from earlier suit or their
privies, (2) same cause of action as earlier suit, and (3) a
valid final judgment on the merits in the earlier suit). In
short, under the federal rules, a plaintiff whose case has been
dismissed for nonjoinder of an indispensable party may
reinstitute suit. It follows that plaintiffs, who recovered a
judgment in their first action, should not be in a worse position
than a plaintiff whose case was dismissed. In sum, I believe
that the majority, by looking to New Jersey's entire-controversy
doctrine rather than applicable federal law, has erred.
I also believe that the majority has reached the wrong result. The polestar of the entire-controversy doctrine is judicial fairness. Reno Auto Sales, Inc. v. Prospect Park Sav. & Loan Ass'n, 243 N.J. Super. 624, 630 (App. Div. 1990); see also Cogdell, supra, 116 N.J. at 27 ("`[T]he doctrine is one of judicial fairness and will be invoked in that spirit.'") (quoting Crispin v. Volkswagenwerk, A.G., 96 N.J. 336, 343 (1984)). Distracted by a misplaced perception of judicial efficiency, the majority has, I believe, lost sight of the equities. As Justice Cardozo warned, "[a] system of procedure is perverted from its proper function when it multiplies impediments to justice without the warrant of clear necessity." Reed v. Allen, 286 U.S. 191,
209,
52 S. Ct. 532, 537,
76 L. Ed. 1054, 1062 (1932) (Cardozo,
J., joined by Brandeis and Stone, JJ., dissenting); cf. also
Federated Dep't Stores, supra, 452 U.S. at 403, 101 S. Ct. at
2430, 69 L. Ed.
2d at 111 (Blackmun, J., concurring) (stressing
that preclusion doctrine should be tempered by "overriding
concerns of public policy and simple justice") (citations
omitted); Schum v. Bailey,
578 F.2d 493, 506 (3d Cir. 1978)
(Gibbons, J., concurring) (explaining that a court must depart
from "strict adherence to finality" when fraudulent
misrepresentation induced claimant to litigate first in forum
with less favorable choice-of-law rules); Velasquez v. Franz,
123 N.J. 498, 539, 542 (1991) (Stein, J., dissenting) (urging
pragmatic approach towards res judicata and positing that public
interest occasionally necessitates relaxation of preclusion
rules); 1B James W. Moore et al, Moore's Federal Practice ¶
0.405[12] (2d ed. 1992) (suggesting that res judicata doctrine
may be subject to equitable tempering if rigid application will
produce demonstrably incorrect result).
I fail to see the fairness in preventing defrauded plaintiffs from pursuing just claims against wrongdoers in the courts of this State. It strikes me as manifestly unfair to permit swindlers to escape liability merely because plaintiffs' counsel did not appreciate that the failure to join defendants in
the earlier federal action would preclude plaintiffs from
maintaining a subsequent suit in the courts of this State.
Notwithstanding the majority's assertion to the contrary,
ante at __ (slip op. at 2), the necessary implication of its
holding is to export the entire-controversy doctrine to another
jurisdiction. As a result of the majority's newly- announced
rule, litigants everywhere must join all conceivable parties or
forfeit access to the New Jersey courts.
The Third Circuit has recognized the problems that could be
caused by extraterritorial application of New Jersey's
entire-controversy doctrine when confronting a similar issue.
Electro-Miniatures Corp. v. Wendon Co.,
889 F.2d 41, 45 (3d Cir.
1989). Writing for a unanimous panel, Judge A. Leon Higginbotham
observed:
We note at least the theoretical
possibility that such a holding [applying the
entire controversy doctrine
extraterritorially] might compel careful
litigators in other jurisdictions to raise
all related claims and issues and seek all
available remedies in a single proceeding,
because of the possibility that a subsequent
claim might arise in New Jersey. In this
way, New Jersey would be imposing on
litigants and courts in other states its
policy choice to encourage parties to
litigate all claims, defenses, issues, and
remedies related to a particular transaction.
I am persuaded that permitting plaintiffs to proceed is not
unfair to defendants and will not pose an undue burden on the New
Jersey courts.
Implicitly recognizing the inequity of barring plaintiffs'
claim, the majority suggests that the federal courts should
"carefully consider the vindication of" plaintiffs' rights. Ante
at ___ (slip op. at 16). Although the majority precludes
plaintiffs from suing in the state courts, it leaves them free to
pursue a second action in the federal courts. To achieve this
result, the majority characterizes a state court dismissal based
on the entire-controversy doctrine as one without prejudice. Id.
at ___ (slip op. at 15, 17). Yet, the majority recognizes that
in the state courts the dismissal, in effect, will be preclusive.
Id. at ___ (slip op. at 15). Ironically, the majority reaches
the opposite conclusion when construing the effect of the federal
court judgment. The majority, which finds that the first federal
court judgment precludes the present action, accords the first
federal court judgment greater preclusive effect than would the
federal courts.
Like the majority, I believe that fairness and judicial economy undergird the entire-controversy doctrine. From my
perspective, however, the majority opinion fails to serve either
purpose. I do not see the fairness of preventing defrauded
plaintiffs from maintaining an action in New Jersey merely
because their counsel, while pursuing a Pennsylvania federal
court action, did not follow the New Jersey Rules of Practice.
Furthermore, requiring plaintiffs to pursue a second federal
court action is inefficient. The fair and efficient solution, in
my view, is permit the state court action to proceed.
For these reasons, I would reverse the judgment of the
Appellate Division and remand the matter to the Law Division.
Justice Stein joins in this dissent.
NO. A-104 SEPTEMBER TERM 1994
ON APPEAL FROM
ON CERTIFICATION TO Appellate Division, Superior Court
MORTGAGELINQ CORPORATION, et al.,
Plaintiffs-Appellants,
v.
COMMONWEALTH LAND TITLE
INSURANCE COMPANY, et al.,
Defendants-Respondents,
and
MARKLAND TITLE SERVICES, INC., et al.,
Defendants.
DECIDED August 1, 1995
Justice Handler PRESIDING
OPINION BY Justice O'Hern
CONCURRING OPINION BY
DISSENTING OPINION BY Justice Pollock
Footnote: 1We will draw upon the procedural history and statements of facts as set forth in defendants' briefs. Footnote: 2Mortgagelinq I had by then been concluded by settlements or default judgments against most of the named defendants. Footnote: 3Although party preclusion is not an exact fit for application of principles of res judicata (usually the parties must be the same for res judicata to apply), the concepts are similar. Footnote: 4We note that if the first forum had a compulsory party joinder rule, under choice-of-law principles, the second forum might be obliged to regard the claims against omitted parties as barred. For example, in a diversity action brought in U.S. District Court in New Jersey against parties omitted from a prior state court action in New Jersey, the claims against the omitted parties might be barred. Cf. Byrd v. Blue Ridge Rural Elec. Coop., 356 U.S. 525, 2 L. Ed.2d 953, 78 S. Ct. 893 (1958) (requiring certain state procedures to be followed in diversity case).