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First Union National Bank v. Penn Salem Marina

May 10, 2007

FIRST UNION NATIONAL BANK, AS INDENTURE TRUSTEE, PLAINTIFF-RESPONDENT,
v.
PENN SALEM MARINA, INC., DEFENDANT-APPELLANT, AND MARVIN HITCHNER, JR., MARVIN HITCHNER, III, FGS ASSOCIATES, L.L.C., AND ABC CORP., A FICTITIOUS COMPANY, DEFENDANTS.



On certification to the Superior Court, Appellate Division, whose opinion is reported at 383 N.J. Super. 562 (2006).

SYLLABUS BY THE COURT

(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).

The issue before the Court is whether a lender in a foreclosure proceeding is entitled to recover a judgment that is inconsistent with and greater than the amount fixed in a prior Law Division action on the same indebtedness.

On May 4, 2001, the predecessor in interest to First Union National Bank (First Union) provided a commercial loan to Marvin K. Hitchner, Jr. and Penn Salem Marina, Inc. (Penn Salem) in the amount of $750,000. The promissory note was secured in part by a first mortgage on Hitchner's commercial real property, a marina in Pennsville. The note required the borrower, beginning on July, 1, 2001, to pay interest at the rate of 13.5% per year through monthly installments of $9,737.39. The note also required payment of the entire remaining principal with all accrued unpaid interest on June 1, 2016.

The mortgage and security agreement, referred to in the documents as the Security Instrument, was fully incorporated into the note by reference and secured performance of the obligations under the note. The instrument outlined the lender's rights and obligations in the event of a default, provided for legal fees incurred by First Union in enforcing the obligations under the note, and permitted the lender to recover judgment on the note either before, during, or after any proceedings for the enforcement of the Security Instrument.

In late 2002, the Hitchner and Penn Salem defaulted on the note by failing to make their monthly payments. In January 2003, First Union filed a complaint on the note in the Law Division against Hitchner, Penn Salem and Hitchner, III, who is not a party to this appeal (Law Division Action), seeking the principal and interest accruing on and after November 8, 2002 to the date of the final judgment, post-judgment interest, attorneys' fees, and costs. Hitchner and Penn Salem failed to answer the complaint and First Union moved for a default judgment. As part of that application, First Union filed the requisite certification, which set forth the amount of $833,835.03 as due and owing to First Union, together with interest to accrue thereon from August 3, 2003 at a rate of $269.02 per day.

First Union also sought attorneys' fees and costs of $11,944.69, for a combined total of $845,779.72. On August 8, 2003, the trial court in the Law Division Action entered a final judgment by default in the amount of $845,779.72. Penn Salem and Hitchner's motion to vacate the default judgment was denied and they did not appeal that decision.

On February 4, 2003, less than a month after filing the Law Division Action, First Union also filed in the Chancery Division a separate mortgage foreclosure action against the same defendants (Foreclosure Action). In that action, First Union sought judgment in its favor, fixing the amount due on the note and mortgage, together with interest, post-judgment interest, late charges, advances, attorneys' fees, and costs of suit. First Union also sought to have the property sold to satisfy the amount due.

On November 10, 2003, the Chancery Division entered an order allowing Hitchner and Penn Salem to file a late answer and counterclaim. On February 24, 2004, the Chancery Division granted First Union's motion for summary judgment and remanded the matter to the Foreclosure Unit for processing as an uncontested matter. On June 24, 2004, First Union moved for entry of final judgment and submitted a certification describing the amounts due and owing; however, the schedule annexed to this certification that summarized the same amounts referred to in the text of the certification contained higher numbers for most of the categories of damages.

Defendants filed late objections to First Union's application, asserting that the amount sought in the Foreclosure Action of $1,043,085 was substantially higher than the final judgment of $845,779.72 previously entered on the note in the Law Division Action. Defendants argued that any final foreclosure judgment should be consistent with the judgment in the Law Division on the underlying debt. On January 13, 2005, a final judgment in foreclosure was entered in favor of First Union in the amount of $1,042,111.36.

Penn Salem and Hitchner appealed and the Appellate Division affirmed, finding that neither res judicata nor collateral estoppel limit the amount of the foreclosure judgment to the amount of the judgment on the note. The panel concluded that because the two actions are traditionally construed as separate actions, res judicata did not bar the higher amount in the foreclosure action.

The Supreme Court granted Penn Salem's petition for certification.

HELD: When there is an action on a note followed by an action to foreclose on the security, the trial court in the second action should be bound by the judgment entered in the first action to the extent the same categories of damages are claimed in the second as in the first. In this instance, issue preclusion requires that both judgments contain the same amounts for those categories of damages that cover the same period of time.

1. Financial institutions granting mortgage loans to businesses involving the financing of business or commercial properties are not required to first foreclose on a mortgage before seeking entry of a judgment on a note. When a bond and mortgage are used, the judgment in the foreclosure action is res judicata on a subsequent action on the bond. The Court in this case has occasion to decide whether the same determination applies when a note and mortgage, rather than a note and bond, are at issue. (Pp. 9-11)

2. Penn Salem's argument is one of collateral estoppel or issue preclusion rather than res judicata. Issue preclusion requires a similar but less demanding analysis than res judicata or claim preclusion. These doctrines serve important policy goals, including finality, prevention of needless litigation, avoidance of duplication, and reduction of the burden and expense of litigation. Thus, if an issue between the parties was fairly litigated and determined, it should not be relitigated. (Pp. 11-12)

3. In Hennessey v. Winslow Township, the Court outlined the five factors needed to foreclose relitigation of an issue. The first factor requires that the issues be identical. Here, there is a high degree of similarity between the two actions. The two complaints contained virtually the same categories of damages. The primary differences were that in the Foreclosure Action, First Union sought additional items of damages it did not seek in the Law Division Action -- the equitable remedy of a forced sale of the collateral and the legal remedies of default interest and prepayment penalties -- something First Union was authorized to do pursuant to the terms of the mortgage and note. For the purposes of issue preclusion, the damage issues are sufficiently similar to satisfy this factor, limited to only those categories of damages claimed in the Law Division Action. (Pp. 12-15)

4. The second and third factors, requiring that the issues actually be litigated and a final judgment be entered, were either given no weight or were satisfied. The fourth factor requires that the determination of the amount of damages be essential in the first action. Clearly the amount due on the note was essential to the entry of judgment in the Law Division Action. The fifth factor requiring privity of the parties has been met as it is there is no dispute that the parties are the same in both actions. Based on the Court's review of the above factors, the requirements for the application of issue preclusion are satisfied. Therefore, for identical time periods, issue preclusion requires that the amount claimed in each category of damages in the Law Division Action must be the same as the amount claimed in that same category of damages in the Foreclosure Action. (Pp. 15-17)

5. The application of issue preclusion does not prohibit a lender from recovering advances, interest, costs, attorneys' fees, and the like that accrue after the date of the first judgment. Similarly, because the note and mortgage permitted the lender to claim different categories of damages, issue preclusion does not bar First Union's claim for a category of damages that was not sought in the Law Division Action. (Pp. 17-18)

Judgment of the Appellate Division is REVERSED and the matter is REMANDED to the Chancery Division for further proceedings consistent with this opinion.

CHIEF JUSTICE ZAZZALI and JUSTICES LONG, LaVECCHIA, RIVERA-SOTO, and HOENS join in JUSTICE WALLACE'S opinion. JUSTICE ALBIN did not participate.

The opinion of the court was delivered by: Justice Wallace, Jr.

Argued November 28, 2006

The issue in this appeal is whether a lender in a foreclosure proceeding is entitled to recover a judgment that is inconsistent with and greater than the amount fixed in a prior Law Division action on the same indebtedness. The trial court answered the question in the affirmative and the Appellate Division affirmed. We hold that to the extent the note and mortgage provide for the same categories of damages, the amount determined in the first action is binding in the subsequent action. Except for amounts accruing ...


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