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Thomas & Cheryl Koziol, Inc. v. Lasalle National Bank


March 29, 2010


On appeal from the Superior Court of New Jersey, Law Division, Bergen County, L-6429-05.

Per curiam.


Argued March 8, 2010

Before Judges Rodríguez, Reisner and Chambers.

Plaintiff Thomas & Cheryl Koziol, Inc. (Koziol) appeals from two orders of the Law Division, dated May 12, 2006 and November 15, 2007, dismissing its complaint on motions for summary judgment. On this appeal, plaintiff contends that the Law Division erred in dismissing its complaint against the receiver and its agents and surety (receiver defendants) for lack of an expert witness; and that the court erred in dismissing its claims concerning flood insurance on grounds of res judicata and collateral estoppel. We affirm the November 15 order dismissing the complaint against the receiver defendants. We reverse the May 12 order and remand the flood insurance issues to the trial court. We will discuss the issues in separate sections of this opinion.

A. The Insurance Issue

This case has its origins in a 1998 complaint filed by LaSalle National Bank to foreclose a mortgage on an apartment building owned by Thomas & Cheryl Koziol, Inc. (Koziol). Koziol filed its answer in 1998, and thereafter the foreclosure was hotly contested as to both the issue of whether the mortgage was in default, and as to the amount due. In September 1999, while the litigation was pending, Hurricane Floyd struck New Jersey, causing flooding that damaged the apartment building. There is no dispute that Koziol had allowed the insurance on the building to lapse, and as a result LaSalle had "force placed" insurance on the building. It turned out that the force placed insurance did not cover flood damage.*fn1 However, LaSalle was able to recover a little over $128,000 from an errors and omissions (E&O) policy procured by GMAC, one of the mortgage servicers.

In the course of the foreclosure litigation, Koziol claimed that it was entitled to some or all of the proceeds of the E&O policy, in part because LaSalle and its mortgage servicers were negligent for force placing insurance that did not include flood coverage. LaSalle's stated defense was that Koziol was not entitled to the E&O proceeds because it was not the named insured on that policy. Judge Simon decided that Koziol was not entitled to the E&O policy proceeds. Her oral opinion, however, stated no rationale beyond one sentence indicating her agreement with LaSalle's position. The court entered a final judgment of foreclosure on November 7, 2001, quantifying the amount due.*fn2

On its direct appeal from the foreclosure judgment and in its petition for certification, Koziol continued to pursue its claim for approximately $103,000 in proceeds from the E&O policy. On Koziol's appeal, we rejected its claims concerning the insurance issue and affirmed the foreclosure orders and the order denying reconsideration. LaSalle Nat'l Bank v. Thomas & Cheryl Koziol, Inc., No. A-2849-01 (App. Div. Apr. 6, 2004). However, our opinion did not discuss Koziol's claims or the trial court's ruling in any detail.

That brings us to the Law Division action that gave rise to this appeal. In a complaint filed on September 14, 2005, Koziol claimed that LaSalle and its servicing agents (collectively, LaSalle) were negligent in failing to obtain flood insurance on the building. Koziol contended that in force placing insurance on the building, LaSalle undertook a duty to Koziol to obtain appropriate insurance including flood insurance. Koziol claimed that due to the lack of flood insurance, it was never reimbursed for over $200,000 worth of repairs to the building and it also lost considerable rental income.*fn3 The Law Division judge dismissed those claims, because they either were raised or could have been raised in the litigation over the amount due on the foreclosure judgment and in the 2004 appeal.

In the foreclosure action, neither party sought a plenary trial on the dispute over the amount due; instead they relied on written submissions. The relevant question is whether, during that phase of the foreclosure proceeding, Koziol either asserted, or was precluded from asserting, a claim that it was entitled to an offset for losses incurred due to LaSalle's failure to procure flood insurance, and if it asserted such a claim, whether the claim was decided.

In opposing this appeal, the LaSalle defendants contend that Koziol had an opportunity to litigate the insurance issue during the litigation before Judge Simon and on the resulting appeal from her decisions. They also contend that Koziol raised the issue in the foreclosure case and lost on the merits, and then re-raised the issue, albeit with an expanded damage claim, in the Law Division action.

In a June 1, 2007 trial brief that Koziol filed with the Law Division, Koziol represented to the court that it made the building repairs in 1999 and knew by January 14, 2000, that there was no flood insurance. The default trial began in January 2000 and ended in June 2000. Hence, prior to the end of the default trial and long prior to the litigation over the amount due, Koziol knew that it would be looking to obtain the proceeds of the E&O policy to cover its outlay for the repairs, due to LaSalle's failure to obtain flood insurance. However, Koziol contends that the E&O policy proceeds represented a sum certain, which it could claim on legal grounds without delaying the foreclosure litigation, while its claims for repair costs and rental losses were unliquidated and would have required additional discovery to adjudicate. See R. 4:7-1 (requiring a defendant to "set off a liquidated debt or demand"). The latter process would have been contrary to the desires of all parties, and the court, to bring the foreclosure litigation to a conclusion.

On this appeal, Koziol only challenges the dismissal of counts three, four, and five of its complaint, which allege breach of contract with respect to LaSalle's force placement of insurance, third-party beneficiary insurance claims, and negligence.*fn4 We conclude that the negligence and related claims Koziol seeks to assert and the accompanying damage claims (reimbursements of its costs to repair flood damage, and rents lost as a result of the flood damage) are not barred by collateral estoppel.

While Koziol asserted negligence as one theory for its claim to the E&O policy, Judge Simon did not adjudicate the negligence claim.*fn5 The other legal theories and claims were neither raised nor adjudicated. Further, whether LaSalle was entitled to the E&O proceeds, as the named insured on an E&O policy insuring its interest as mortgagee, is not the same issue as whether LaSalle owed Koziol a duty (by contract or on an equitable theory) to procure valid flood insurance if it was going to force place insurance on the premises.

The doctrine of collateral estoppel "bars relitigation of any issue which was actually determined in a prior action, generally between the same parties, involving a different claim or cause of action." Ziegelheim v. Apollo, 128 N.J. 250, 265 (1992) (quoting State v. Gonzalez, 75 N.J. 181, 186 (1977)). The purpose of the doctrine is to avoid relitigating issues that have been fully and fairly litigated and determined in an earlier proceeding. First Union Nat'l Bank v. Penn Salem Marina, Inc., 190 N.J. 342, 352 (2007); Lopez v. Patel, 407 N.J. Super. 79, 93 (App. Div. 2009). Collateral estoppel is an equitable remedy, and the decision of whether to apply it in a particular case is left to the trial court's discretion after the court "weigh[s] economy against fairness." Barker v. Brinegar, 346 N.J. Super. 558, 566 (App. Div. 2002).

To successfully assert the bar of collateral estoppel, a party must establish the following factors:

(1) the issue to be precluded is identical to the issue decided in the prior proceeding; (2) the issue was actually litigated in the prior proceeding; (3) the court in the prior proceeding issued a final judgment on the merits; (4) the determination of the issue was essential to the prior judgment; and (5) the party against whom the doctrine is asserted was a party to or in privity with a party to the earlier proceeding. [First Union Nat'l Bank v. Penn Salem Marina, Inc., supra, 190 N.J. at 352 (quoting Hennessey v. Winslow Twp., 183 N.J. 593, 599 (2005)).]

Because collateral estoppel is limited to issues actually litigated and decided in a prior action, that doctrine cannot be applied here to bar Koziol's claims of negligence, third party beneficiary, and breach of contract as they relate to the defective flood insurance policy. Ibid. Those issues were not actually litigated and decided in the foreclosure action. "[W]hen the five elements of collateral estoppel . . . are not satisfied, the inquiry ends." Perez v. Rent-A-Center, Inc., 186 N.J. 188, 199 (2006).

We also cannot conclude that Koziol's claims are barred by the entire controversy doctrine. The doctrine has limited applicability in foreclosure cases, because only "germane" counterclaims may be raised in foreclosure actions. See R. 4:64-5. Therefore, the Court Rules concerning mandatory or permissive counterclaims, Rule 4:7-1, and the entire controversy doctrine, Rule 4:30A, contain specific exceptions for foreclosure actions. Because Koziol did not attempt to amend its foreclosure pleading to include a counterclaim for repair costs or lost rents based on negligent failure to insure the premises, Judge Simon did not have occasion to determine whether such a claim would have been "germane." However, on this record we have no reason to believe that she would have permitted it.

On the current appeal, Koziol claims that, during the extended and contentious litigation over the issues of default and the amount due on the mortgage, Judge Simon limited the claims Koziol could assert against LaSalle. Koziol quotes an interchange between its counsel and the judge during which she indicated that issues of "lender liability" were outside the scope of the foreclosure action and should be litigated in a separate action.*fn6 It is unclear whether that exchange specifically referred to insurance issues,*fn7 and the exchange Koziol has quoted was from the trial on the issue of default, not the later litigation over the amount due.

It is clear that, during the trial on default, the judge was trying to focus the attorneys on the issue before her at the time, i.e., whether there were any overdue payments giving rise to a default, regardless of the amount due. However, it does appear that the trial judge's comment about "lender liability" being asserted in a "separate action" referred to a lawsuit separate from the foreclosure action. Our conclusion is buttressed somewhat by the judge's later expressions of frustration at the hearing on the amount due, over the length of time it had taken to litigate the foreclosure case and the "nightmare" it had posed for the mortgagee. While it would have been the better practice for Koziol to have sought leave to file a counterclaim, if only to ensure that those claims would be deemed preserved for later litigation, we are satisfied that they should not be barred under these circumstances. See DiIorio v. Structural Stone & Brick, Co., 368 N.J. Super. 134, 139 (App. Div. 2004).

Because we conclude that counts three, four and five of Koziol's complaint are not barred by collateral estoppel or the entire controversy doctrine, we reverse the order dismissing those portions of the complaint and remand those claims to the trial court for further proceedings. In remanding, we imply no view as to the merits of those claims.

B. The Expert Witness Issue

We turn next to Koziol's second appellate issue. In the Law Division action, Koziol also claimed that Laridian Management, Inc., the receiver appointed by Judge Simon during the foreclosure action, had mismanaged the building and otherwise breached its legal and professional duties as a receiver.*fn8 However, during the course of several case management conferences in the Law Division action, Koziol maintained that it would not present any expert witnesses.

In a case management order dated January 19, 2007, the Law Division judge specifically required any party intending to rely on either expert or lay opinion to provide the other side with a report of those opinions. In other words, the judge carefully structured the pre-trial proceedings to avoid any unfair surprises at trial, and to avoid attempts by any party to circumvent the requirement of serving an expert report by claiming that a witness was only going to testify as to "lay opinion." Koziol did not serve any expert or lay witness reports.

In its appellate brief, Koziol admits that in a trial brief submitted on or about July 2, 2007, defendants indicated that expert proofs would be needed and noted that plaintiff had not named an expert. Koziol still did not serve an expert report. On September 20, 2007, long after the close of discovery, and prior to the third scheduled trial date, the receiver defendants filed a motion for summary judgment based, among other things, on Koziol's failure to file an expert report. Koziol opposed the motion, claiming that Thomas Koziol would offer lay testimony based on his many years of experience in managing apartment buildings. However, Koziol also cross-moved for leave to file an expert report.*fn9

In an oral opinion placed on the record on November 2, 2007, the Law Division judge concluded that the professional responsibilities of a court-appointed receiver and property manager were not within the ken of the average juror. He further held that expert testimony was required to establish the standard of care for a receiver and the receiver defendants' alleged breach of that standard. He ruled that Thomas Koziol, who had never acted as a receiver, could not provide expert testimony, and that even if he could, it was too late for Koziol to file an expert report. Accordingly, the judge granted summary judgment dismissing the claims against the receiver defendants.

Plaintiff's complaint contended that the receiver favored the mortgagee's interests over plaintiff's interests and mismanaged the property. Among other things, plaintiff charged the receiver with: alleged breach of fiduciary duty and mismanagement based on payment of rents to LaSalle without a court order; payment of "excessive" insurance premiums; alleged wasteful and excess expenditures for construction; failure to rent apartments with due diligence; failure to increase rents on renewals; improper use of receivership funds to pay counsel fees; and interference with plaintiff's attempts to redeem the mortgage. At oral argument of this appeal, Koziol's attorney clarified that Koziol only sought to pursue claims that the receiver negligently managed the property.

We agree with the trial judge that plaintiff's claims required expert testimony to establish the receiver's professional obligations as a property manager, and to establish that the receiver breached those obligations. "[U]ntrained lay[persons] of ordinary experience and intelligence" could not be expected to resolve those disputed issues without expert testimony. Klimko v. Rose, 84 N.J. 496, 503-04 (1980); Pansini Custom Design Assocs. v. City of Ocean City, 407 N.J. Super. 137, 143 (App. Div. 2009); Froom v. Perel, 377 N.J. Super. 298, 318 (App. Div.), certif. denied, 185 N.J. 267 (2005). Moreover, even if some of the issues could have been addressed through the testimony of a lay witness with experience in property management, as addressed below, plaintiff was not in a position to provide that testimony because it violated its court-ordered discovery obligations.

Specifically, we find no abuse of discretion in the judge's decision to bar Mr. Koziol from testifying as an expert witness or as a lay witness with special expertise. See Bender v. Adelson, 187 N.J. 411, 428 (2006). The January 2007 order clearly put plaintiff on notice of its obligation to name any experts, or any lay witnesses who would offer opinions in the case, and to serve reports as to those opinions. Further, defendants asked plaintiff in interrogatories to name its experts, and plaintiff did not name Thomas Koziol. As the judge noted, by withholding Mr. Koziol's proposed opinions from discovery, plaintiff denied defendants the opportunity to take his deposition on those opinions. It also denied defendants a timely opportunity to obtain their own expert.

We find no abuse of the judge's discretion in denying plaintiff's cross-motion, made on the eve of the third scheduled trial date, for leave to file an expert report. Bender, supra, 187 N.J. at 428. Contrary to its appellate contentions, plaintiff had ample notice that defendants would contend it needed an expert. Defendants' summary judgment motion should have come as no surprise. Accordingly, we affirm the Law Division judge's order dismissing the complaint against the receiver defendants.

Affirmed in part, reversed and remanded in part.

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