December 22, 2011
MILLENNIUM BCPBANK, N.A., PLAINTIFF-APPELLANT,
FIRST AMERICAN TITLE INSURANCE COMPANY, DEFENDANT-RESPONDENT, AND SOCIETY HILL TITLE AGENCY, INC., DEFENDANT.
FIRST AMERICAN TITLE INSURANCE COMPANY, THIRD-PARTY PLAINTIFF,
ANTONIO PINTO, ANA PINTO AND VOUGA BUILDERS, L.L.C., THIRD-PARTY DEFENDANTS.
On appeal from the Superior Court of New Jersey, Law Division, Bergen County, Docket No. L-7324-08.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Argued May 18, 2011
Before Judges Fuentes, Nugent and Kestin.
Plaintiff, Millennium bcpbank, N.A. (Millennium), appeals from two Law Division orders: the July 23, 2010 order that denied Millennium's motion to have the court declare the entire controversy doctrine inapplicable to this action; and the September 22, 2010 order that granted summary judgment to First American Title Insurance Company (First American) based on the entire controversy doctrine. We reverse and remand.
We discern the following facts and procedural history from the trial court motion record. Millennium is a mortgage lender. The genesis of this action is a $400,000 loan (the Loan) Millennium made to Antonio and Ana Pinto on December 30, 2005. Antonio Pinto was a principal in Vouga Builders, LLC, which guaranteed the Loan. The Pintos and Vouga secured the Loan by mortgaging two parcels of real estate in Newark, one located on 18th Street, the other on 19th Street. Vouga owned the 18th Street property and Antonio Pinto owned the 19th Street property. In addition to the Loan, the mortgages secured all other indebtedness of the Pintos to Millennium.
When Millennium drafted the mortgages, it switched the owners' names, so that the mortgage on the 18th Street property owned by Vouga incorrectly identified Pinto as the owner, and the mortgage on the 19th Street property owned by Pinto incorrectly identified Vouga as the owner. As a result, when Millennium recorded the mortgages they were indexed under the wrong mortgagor names. First American issued a title policy insuring the mortgages.
On September 15, 2006, Vouga conveyed title to the 18th Street property to Ana Pinto, who re-sold the property on November 1, 2006, to Adebayo and Adesola Fakorede. The Fakoredes' title search did not disclose the Millennium mortgage. Later, after learning of the mortgage, the Fakoredes commenced a quiet title action on June 16, 2008, against the Pintos, Vouga Builders, and Millennium (the Fakorede action). The Fakoredes served their complaint on Millennium on June 24, 2008.
In response to the Fakorede action, Millennium's counsel wrote to First American on July 1, 2008, enclosed a copy of the Fakorede complaint, and submitted a proof of claim. On August 22, 2008, First American responded and denied coverage. In its denial letter, First American stated, among other things:
Please note the following EXCLUSIONS which appear in the policy: "The following matters are expressly excluded from the coverage of this policy and the Company will not pay loss or damage, costs, attorneys' fees or expenses which arise by reason of:
3. Defects, liens, encumbrances, adverse claims or other matters:
(a) Created, suffered, assumed or agreed to by the insured claimant . . . " bcpbank, N.A., created/prepared the mortgage document to be executed by Antonio Pinto and evidently attached the incorrect metes and bounds description of the property. It is alleged the mortgage is defective because Antonio Pinto did not own the property described therein. Thus, the alleged defect was created by bcpbank, N.A. The policy excludes from coverage defects created by the insured (See EXCLUSION cited above). Where matters giving rise to a claim are excluded from coverage, the Company has no duty to defend.
Your claim that the mortgage executed by Vouga Builders, LLC is invalid and unenforceable is also excluded from coverage. bcpbank, N.A. created the mortgage to be executed by Vouga Builders, LLC and described therein property not owned by Vouga Builders, LLC. As the defect in the mortgage was created by bcpbank, N.A., the Company is not obligated to pay loss or damage, costs, attorneys' fees or expenses which arise by reason of defects created by the insured.
Meanwhile, the Pintos had defaulted on the Loan and Millennium had filed a Law Division complaint on June 16, 2008, against the Pintos, Vouga, and New Alvarinho Realty, LLC,*fn1 to recover the balance due on the Loan and other indebtedness of the Pintos (the Pinto action). On July 30, 2008, after First American had disclaimed coverage with respect to the Fakorede action, Millennium amended its complaint in the Pinto action to include four additional counts. The additional counts recited the drafting errors in the mortgages on the Newark properties, the Pintos' failure to disclose the drafting errors, Vouga's conveyance of the 18th Street Newark property to Ana Pinto, and Ana Pinto's subsequent conveyance of the 18th Street property to the Fakoredes. Based upon those facts, Millennium's amended complaint alleged causes of action against the Pintos and Vouga for fraud, conversion, and "fraudulent and tortuous conspiracy." The amended complaint also included the following certification pursuant to Rule 4:5-1(b)(2):
I certify that the matter in controversy in this action is not the subject of any other action pending in any Court or of a pending arbitration proceeding and that no other action or arbitration proceeding is contemplated, except for a foreclosure action pending in the Superior Court of New Jersey, Chancery Division, Essex County, bearing Docket No. F-26439-08 and one or more mortgage foreclosure actions to be filed foreclosing the mortgages of Defendants on [the parcels], and an action filed against the Plaintiff herein, bcpbank, N.A., and Defendants, Ana M. Pinto, Antonio Pinto and Vouga Builders, LLC, in the Superior Court of New Jersey, Essex County, Chancery Division - General Equity Part, under docket number ESX-C-186-08 [the Fakorede Lawsuit]. I further certify that I am not aware of any other party who should be joined in this action.
Millennium never amended the certification in the Pinto action.
On September 26, 2008, Millennium filed the instant action against First American and its title agent, Society Hill Title Agency, Inc. (the First American action). The complaint included a certification pursuant to Rule 4:5-1(b)(2) that provided:
I certify that the matter in controversy in this action is not the subject of any other action pending in any Court or of a pending arbitration proceeding and that no other action or arbitration proceeding is contemplated. However, controversies arising out of the same facts or some of the same facts are involved in the following pending or contemplated actions: a foreclosure action pending against Antonio Pinto, Ana Pinto and New Alvarinho Realty LLC in the Superior Court of New Jersey, Chancery Division, Essex County, bearing Docket No. F-26439-08, one or more mortgage foreclosure actions to be filed foreclosing [on the parcels], a collection [action] pending against Antonio Pinto, Ana Pinto, New Alvarinho Realty LLC and Vouga Builders in the Superior Court of New Jersey, Law Division, Bergen County, bearing Docket No. L-4618-08 [the Pinto action], and an action filed against the Plaintiff herein, bcpbank, N.A., and Ana M. Pinto, Antonio Pinto and Vouga Builders, LLC in the Superior Court of New Jersey, Essex County, Chancery Division - General Equity Part, under docket number ESX-C-186-08 [the Fakorede action].
I further certify that I am not aware of any other party who should be joined in this action.
On November 6, 2008, First American filed an answer to Millennium's complaint. Meanwhile, Millennium had been negotiating a settlement with the Pintos, which they reached on December 5, 2008. As part of the settlement, Millennium executed a "Forbearance Agreement," which stated the parties agreed "to enter a Consent Judgment on the 1st, 2nd, 3rd, 4th, 5th and 6th counts [alleging non-payment of the loans] of the Amended Complaint," and that the Pinto defendants agreed to "deliver Deeds in Lieu of Foreclosure to Bank or its designee for [the parcels]," as well as "enter a Consent Order consenting to judgment of foreclosure in the Millennium Foreclosure Action . . . ." In exchange, the Pinto defendants would receive credits on the subject loans and, as relevant to the matter at hand, the Bank agreed to "waive and release all claims of fraud or any other intentional tort asserted or which could have been asserted in [the Pinto action]." To that end, the parties agreed to "execute a Stipulation of Dismissal without Prejudice of the 7th, 8th, 9th and 10th counts [alleging fraud, conversion, and conspiracy] of the Amended Complaint." The stipulation of partial dismissal was filed on February 5, 2009,*fn2 and the consent judgment was filed on February 6, 2009.
In April 2010, Society Hill filed a motion seeking leave to file an amended answer asserting the entire controversy doctrine as an affirmative defense and asserting a third-party complaint against the Pintos and Vouga. The motion was granted and thereafter, in June 2010, Society Hill moved for summary judgment, arguing that the entire controversy doctrine barred Millennium's claims. Millennium cross-moved for an order holding that the entire controversy doctrine did not apply to the instant action. On July 23, 2010, the trial court granted Society Hill's motion and denied Millennium's cross-motion.*fn3
Thereafter, Millennium moved for reconsideration and First American moved for summary judgment based upon the entire controversy doctrine. On September 22, 2010, the trial court denied Millennium's motion for reconsideration and granted First American's summary judgment motion.
The court determined that Millennium failed to comply with Rule 4:5-1(b)(2) when it amended its complaint in the Pinto action. Finding that the Pinto and First American actions were "successive" because they arose out of the same facts, namely, the Loan and related mortgages, the court also determined that Millennium's failure to comply with the notice requirement of Rule 4:5-1(b)(2) was inexcusable because Millennium knew it had a potential claim against First American. The court concluded that First American would be substantially prejudiced by the Forbearance Agreement executed by Millennium in favor of the Pinto defendants. Finally, the court concluded that Millennium had been made whole by its settlement with the Pinto defendants, notwithstanding that it was unable to collect the full amount of its judgment.
We review the trial judge's summary judgment order de novo, using the standard set forth in Brill v. Guardian Life Ins. Co. of Am., 142 N.J. 520, 540 (1995). See Prudential Prop. & Cas. Ins. Co. v. Boylan, 307 N.J. Super. 162, 167 (App. Div.), certif. denied, 154 N.J. 608 (1998). That standard requires that the court determine "whether the competent evidential materials presented, when viewed in the light most favorable to the non-moving party, are sufficient to permit a rational factfinder to resolve the alleged disputed issue in favor of the non-moving party." Brill, supra, 142 N.J. at 540.
The entire controversy doctrine refers to our Supreme Court's "approach to joinder of claims and parties" that has "evolved through a series of decisions" and rule amendments. Kent Motor Cars, Inc. v. Reynolds & Reynolds, Co., 207 N.J. 428, 442-43 (2011). Currently, the doctrine requires joinder of claims but not joinder of parties. R. 4:30A. Rule 4:5-1(b)(2) requires instead that a party provide notice in its first pleading of the names of other potentially liable parties. The rule provides in pertinent part:
Each party shall include with the first pleading a certification . . . [and] shall disclose in the certification the names of any non-party who should be joined in the action pursuant to R. 4:28 or who is subject to joinder pursuant to R. 4:29-1(b) because of potential liability to any party on the basis of the same transactional facts. . . . If a party fails to comply with its obligations under this rule, the court may impose an appropriate sanction including dismissal of a successive action against a party whose existence was not disclosed or the imposition on the non-complying party of litigation expenses that could have been avoided by compliance with this rule. A successive action shall not, however, be dismissed for failure of compliance with this rule unless the failure of compliance was inexcusable and the right of the undisclosed party to defend the successive action has been substantially prejudiced by not having been identified in the prior action.
"The entire controversy doctrine is fact sensitive and dependent upon the particular circumstances of a given case." 700 Highway 33 LLC v. Pollio, 421 N.J. Super. 231, 236 (App. Div. 2011).
Thus, a trial court deciding an entire controversy dismissal motion must first determine from the competent evidence before it whether a Rule 4:5-1(b)(2) disclosure should have been made in a prior action because a non-party was subject to joinder pursuant to Rule 4:28 or Rule 4:29-1(b). If so, the court must then determine whether
(1) the actions are "successive actions,"
(2) the opposing party's failure to make the disclosure in the prior action was "inexcusable," and (3) "the right of the undisclosed party to defend the successive action has been substantially prejudiced by not having been identified in the prior action." R. 4:5-1(b)(2). If those elements have been established, the trial court may decide to impose an appropriate sanction. Dismissal is a sanction of last resort. [Id. at 236-237 (citing Kent Motor Cars, Inc., supra, 207 N.J. at 453-54).]
"The entire controversy doctrine is, at bottom, an equitable one," Hobart Bros. v. Nat'l. Union Fire Ins., 354 N.J. Super. 229, 241 (App. Div.), certif. denied, 175 N.J. 170 (2002), having as its "twin goals . . . ensuring fairness to parties and achieving economy of judicial resources." Kent Motor Cars, supra, 207 N.J. at 443.
With these principles in mind, we turn first to Millennium's certification in the Pinto action.
The trial court was correct in concluding that Millennium should have amended its certification in the Pinto action to identify both First American and the First American action because First American was subject to joinder pursuant to Rule 4:28 and Rule 4:29-1(b). Rule 4:5-1(b)(2) imposes upon a party the continuing obligation to disclose other actions, pending or contemplated, and the names of any non-party who should be joined pursuant to Rule 4:28 or Rule 4:29-1(b). Rule 4:28-1(a)(2) requires, among other things, the joinder of a person who "claims an interest in the subject of the action and is so situated that the disposition of the action and the person's absence may . . . impair or impede the person's ability to protect that interest . . . ." Rule 4:29-1(b) permits the court to order joinder of parties "who may be liable to any party on the basis of the same transactional facts." First American argues that by not being joined in the Pinto action, its subrogation rights have been impeded or impaired. Millennium claims that First American is liable based on the same transactional facts underlying the Pinto action. We conclude Millennium should have amended its certification in the Pinto action to identify First American and the First American action.
Next, we agree with the trial court that the Pinto and First American actions were "successive." In determining whether actions are successive, "the central consideration is whether the claims against the different parties arise from related facts or the same transaction or series of transactions." DiTrolio v. Antiles, 142 N.J. 253, 267 (1995). Here, the Pinto and First American actions arise from the same series of transactions; namely, the Loan, the securing of the Loan by mortgages on the Newark properties, First American's issuance of a title policy to Millennium, and the alleged fraudulent sale of the properties.
Nor did the trial court err by concluding that Millennium's failure to provide the notice required by Rule 4:5-1(b)(2) was inexcusable. Millennium knew, after it was served with the Fakorede complaint and after it filed its amended complaint in the Pinto action, of its claim against First American. Millennium also knew or should have known that First American had a subrogation claim against the Pintos and Vouga. Millennium has offered no valid excuse for failing to file an amended certification in the Pinto action.
Millennium argues that its failure to amend the certification in the Pinto action was not inexcusable because the Pinto defendants never answered the complaint and likely would not have acted upon any information provided in the amended certification. Its settlement with the Pinto defendants belies this argument. Millennium also points out that it identified the Pinto action when it filed the First American action. This after-the-fact-event does not justify non-compliance with Rule 4:5-1(b)(2) at the time Millennium filed the amended complaint in the Pinto action.
We turn now to the central issue in this appeal and the last prong of the entire controversy analysis: was First American substantially prejudiced by Millennium's failure to amend its certification in the Pinto action? Millennium contends that (1) First American and the trial court were made aware of the relationship between the cases when Millennium included a proper certification in its complaint in the First American action; (2) the entry of the consent judgment against Pinto and Vouga did not equate to Millennium's loss under the title policy issued by First American; and (3) the trial court erred when it held that First American's subrogation rights had been prejudiced.
First American contends that it has been substantially prejudiced by Millennium's execution of the Forbearance Agreement in which Millennium waived its right to pursue intentional tort claims against the Pintos and Vouga, and in which it agreed not to contest the discharge of the Pintos in bankruptcy proceedings. First American argues that if it is required to pay either defense or indemnification costs to Millennium as the result of the Fakorede action, then its subrogation right against the Pintos and Vouga has been substantially impeded, impaired, or nullified by Millennium's execution of the Forbearance Agreement. First American also argues that under its title policy, Millennium could not release the Pintos from fraud claims associated with selling the Newark properties without satisfying the Millennium mortgages. Finally, First American maintains that Millennium filed a misleading certification when it commenced the First American action. Millennium identified the Pinto action as a "collection" action, thereby misleading First American as to the fraud allegations concerning the mortgages. First American asserts that had it been properly notified of the precise nature of the Pinto action, it could have intervened and protected its subrogation rights.
The trial court concluded that First American suffered substantial prejudice. The court explained:
Second, in determining whether a party will be substantially prejudiced, it is necessary to consider "whether the party against whom the doctrine is sought to be invoked has had a fair and reasonable opportunity to litigate that claim." Hillsborough Twp. Bd. of Educ. v. Faridy Thorne Frayta, 321 N.J. Super. 275, 284 (App. Div. 1999). The Court notes that Plaintiff reached a settlement with the Pintos in the Pinto Lawsuit, whereby Plaintiff received a judgment of $187,023.60 of the $187,657.35. As stated previously, Plaintiff chose to enter into the settlement with the Pintos for nearly the entire unpaid loan amount. That the Plaintiff has been unable to collect on that judgment should have been a consequence that Plaintiff considered when entering into the settlement in the first place. The Court finds that the result of the settlement has made Plaintiff whole with regard to the unpaid loan. If Plaintiff wanted to pursue its claim against Defendant, Plaintiff should have amended its pleadings in the Pinto Lawsuit to join First American Title as an additional defendant. Although, Plaintiff claims that there can be no 'two bites of the apple' because subrogation rights will apply to First American, it is the opinion of the Court that in the interest of judicial economy and fairness that all claims should have been included in the first action.
Moreover, under R. 4:5-1(b)(2), the Court must consider the right of the undisclosed party to defend the successive action and whether that party has been substantially prejudiced by not having been identified in the prior action. Defendant claims that at no relevant point during this litigation was Defendant aware of Plaintiff's intention to settle claims against the Pintos and Vouga. Defendant contends that the Forbearance Agreement executed between the parties in the Pinto Action severely impairs its subrogation rights.
We agree with the trial court that Millennium did not fully comply with Rule 4:5-1(b)(2). As we have discussed previously, the rule requires the certifying party to disclose "the names of any non-party who should be joined in the action pursuant to R. 4:28 or who is subject to joinder under R. 4:29-1(b) . . . ." The trial court concluded that Millennium's certification misled First American by referring to the Pinto action as a "collection action." Millennium was also required to specifically identify First American as a "non-party who should be joined in the action." Ibid. In view of Millennium's non-compliance with Rule 4:5-1(b)(2), we find nothing wrong with the trial court's conclusion.
Having said that, we nevertheless conclude that the trial court failed to consider First American's disclaimer of coverage and whether the Pintos and Vouga were judgment-proof, considerations relevant to both the summary judgment and entire controversy doctrine analyses. When First American denied coverage for the Fakorede action, it did so based on the drafting errors in the mortgages on the Newark properties.
Those errors were also central to the Pinto action, raising the issue of whether First American would have intervened in an action based on the same drafting errors. Moreover, First American was aware of the Pinto action for approximately two months before the Forbearance Agreement was executed, but made no inquiries with respect to the Pinto action and waited until July 7, 2010, before filing a motion seeking leave to amend its answer to assert the entire controversy doctrine as a defense --nearly eight months after Millennium entered into the Forbearance Agreement and approximately one and one-half years after it first provided notice of the Pinto lawsuit in the certification included in the First American complaint. Considering the foregoing timeline, and considering First American's unqualified disclaimer of coverage, there is both a genuine factual issue in dispute and an equitable evaluation that the trial court must make before imposing the ultimate sanction of dismissal.
In considering First American's claims that Millennium breached its obligations under the title policy, we note that if First American's coverage disclaimer was proper, First American would prevail in the declaratory judgment action. If the disclaimer was improper, then First American breached its title insurance contract, raising the issue of whether Millennium was relieved of performance generally, and of its specific contractual obligation to preserve First American's subrogation claims. Moreover, if First American breached its coverage obligations, then one must question whether Millennium should have further delayed its efforts to settle the Pinto action before the Pintos declared bankruptcy. This is an equitable consideration that must be factored into the entire controversy analysis.
Additionally, the trial court ruled that Millennium had been made whole. If, however, Millennium can demonstrate that its judgment was uncollectible, then it is difficult to see how First American was prejudiced with respect to the judgment for the balance of the Loan. Millennium should have the opportunity to prove that its execution of the Forbearance Agreement, and consequently its impairment of First American's subrogation rights, caused First American no damage. See Rivers v. Allstate Ins. Co., 312 N.J. Super. 379, 385 (App. Div. 1998) (holding that an insured who had extinguished her automobile insurance carrier's subrogation claim could prove a lack of prejudice to the insurer if the insured could demonstrate that the underinsured tortfeasor is assetless, and that it is improbable that an insurer would choose to subrogate against the tortfeasor).
For the foregoing reasons, we reverse and remand to the trial court for further proceedings consistent with this opinion.
Reversed and remanded.