VW CREDIT, INC. v. COAST AUTOMOTIVE GROUP, LTD., et al.

 

NOT FOR PUBLICATION WITHOUT THE

APPROVAL OF THE APPELLATE DIVISION

SUPERIOR COURT OF NEW JERSEY

APPELLATE DIVISION

DOCKET NO. A-0553-04T30553-04T3

VW CREDIT, INC.,

Plaintiff-Respondent,

v.

COAST AUTOMOTIVE GROUP, LTD.,

SHANSAB REALTY, INC., TAMIM

SHANSAB, and ASPEN KNOLLS

AUTOMOTIVE GROUP, LTD.,

Defendants-Appellants.

_______________________________________

 

Argued November 30, 2005 - Decided February 14, 2006

Before Judges Weissbard, Winkelstein and Sabatino.

On appeal from the Superior Court of New Jersey, Law Division, Ocean County, L-1722-03.

Geoffrey J. Hill argued the cause for appellants.

Michael J. Gorman (Daniels & Kaplan) of the Missouri bar, admitted pro hac vice, argued the cause for respondent (Lyons, Doughty & Veldhuis, and Mr. Gorman, attorneys; James F.B. Daniels, Michael J. Gorman, and Hillary Veldhuis, of counsel and on the brief).

PER CURIAM

This commercial loan matter was previously before us on January 14, 2005, at which time we issued a per curiam opinion sustaining in most respects a judgment for compensatory damages obtained by a borrower, Coast Automotive Group ("Coast"), against its lender, VW Credit, Inc. ("VW Credit"), arising out of VW Credit's premature acceleration of a loan.

The protracted dispute now returns to this court, following the Law Division's dismissal of claims that Coast asserted against VW Credit in a second lawsuit between those same parties. The trial court held that Coast's attempt to obtain further relief against VW Credit in that second lawsuit was barred, as a matter of law, under the entire controversy doctrine. We affirm that disposition, substantially for the reasons expressed in Judge Marlene Lynch Ford's perceptive oral opinion granting summary judgment to VW Credit.

We incorporate by reference the factual and procedural history, much of which we need not repeat here, recited in our 48-page opinion that disposed of the parties' first lawsuit.

By way of summary, in August 1991, VW Credit began to provide wholesale floor-plan financing to Coast, an automobile dealership. The financing enabled Coast to purchase its inventory of new vehicles. Tamim Shansab ("Shansab") was the principal and sole shareholder of Coast. The dealership property was owned by a related entity, Shansab Realty, Inc. ("Shansab Realty"). Eventually, VW Credit also loaned funds to Shansab Realty, secured by a mortgage on the premises. The mortgage and corresponding note had a due date of June 15, 1999.

Under the terms of the relevant loan instruments, VW Credit was entitled to accelerate the debt if certain conditions existed. Perceiving that such conditions had been triggered, VW Credit called the loans on December 7, 1995. Shortly thereafter, on December 12, 1995, VW Credit filed a foreclosure action against defendants Coast, Tamim Shansab, his father Nasir Shansab, Shansab Realty and a related entity, Shansab Enterprises, Inc., in the Law Division in Ocean County under Docket No. L-1162-96. In that litigation (which we shall refer to as "the first lawsuit"), VW Credit alleged breach of contract, breach of guarantees, unjust enrichment and replevin, seeking relief in excess of $6,000,000.

The defendants filed multiple counterclaims against VW Credit in the first lawsuit. Their counterclaims alleged, among other things, that VW Credit had acted improperly in calling the mortgage and the note before maturity. Based upon that core factual allegation, defendants advanced a panoply of legal theories against VW Credit, including breach of contract, lender liability, trespass, conversion, fraudulent concealment of assets, tortious interference with contract, breach of fiduciary duty, industrial espionage and various claims of discrimination based upon Shansab's national origin. The counterclaimants sought compensatory and punitive damages, but did not seek a declaratory judgment or any other remedy that would have deemed the remaining balance on the note and mortgage uncollectible upon maturity.

In the summer of 2002, Judge Ford presided over a six-week trial in the first lawsuit. At the close of the proofs, Judge Ford found that VW Credit had breached its contractual obligations, the implied covenant of good faith and fair dealing, and principles of lender liability, by wrongfully calling the debt and accelerating the mortgage. Judge Ford awarded Coast $810,000 in compensatory damages, plus punitive damages. She also dismissed VW Credit's complaint. VW Credit appealed, and Coast and the other defendants cross-appealed certain aspects of the trial court's rulings.

In our January 2005 opinion, we sustained Judge Ford's finding that VW Credit had prematurely called the loan and had otherwise breached its obligations as a lender. We affirmed the judgment in favor of defendants on their counterclaim, but vacated a $250,000 portion of the compensatory damages award and the trial court's imposition of punitive damages.

While the appeal of the first lawsuit was pending, VW Credit filed a new complaint ("the second lawsuit") on June 20, 2003 in Ocean County under Docket No. L-1722-03, against Coast, Tamim Shansab, and Shansab Realty. The complaint also named as a defendant Aspen Knolls Automotive Group ("Aspen Knolls"), an entity that was buying the premises. In the second lawsuit, VW Credit sought to collect on the mortgage and its promissory note, on the ground that the loan had matured, was unpaid, and had become due in full on June 15, 1999. VW Credit sought damages in excess of $3,000,000 in principal, plus interest, fees and costs.

In August 2003, Coast and the other defendants in the second lawsuit answered VW Credit's complaint and filed seven counterclaims, which they supplemented with six more counterclaims in an amended pleading filed in March 2004. Defendants' counterclaims pervasively alleged that "[t]hrough VW Credit's prior bad faith, willful and wanton conduct, VW Credit forfeited the right to collect on its purported mortgage and note."

VW Credit's mortgage and note ultimately were satisfied by Aspen Knolls in December 2003, pursuant to an order in another related case before Judge Ford, Docket No. C-171-02, arising out of issues stemming from Aspen Knolls's purchase of Coast. VW Credit was not a party to that action.

Once the promissory note was paid and the mortgage satisfied, VW Credit voluntarily dismissed its complaint and moved for summary judgment on defendants' counterclaims. Following oral argument, Judge Ford granted VW Credit's motion for summary judgment and dismissed defendants' counterclaims under the entire controversy doctrine.

In her oral decision dismissing the counterclaims, Judge Ford observed:

And I agree that if ever there was a case where the Entire Controversy Doctrine applied it was this case, and, therefore, the motion to dismiss the counterclaims raised is granted.

First of all, the purpose of the Entire Controversy Doctrine is to require the parties to join all claims in one litigation so as to avoid the duplication of litigation, to promote judicial economy, to promote an economy on behalf of the parties involved in this, to prevent the parties from being involved in serial litigation, to require parties to join all of their claims in one action to avoid piecemeal litigation.

In this particular case, there was a dispute over the mortgage itself and the payments under the mortgage and whether or not it was wrongfully accelerated by Volkswagen Credit. That went to a bench trial . . . [and] I decided . . . the actions of Volkswagen Credit . . . [were] effectively a wrongful acceleration of a mortgage which caused damages to the . . . plaintiff [Coast].

Coast, clearly, if it had raised issues about the validity of the mortgage, and which is basically, essentially what they're raising now, if they questioned the validity of the mortgage once that action was taken by . . . VW Credit, they could have and should have, under the Entire Controversy Doctrine, raised those challenges to the validity of the mortgage at that time. . . .

And a mortgage is just another form of a contract. A contract will be binding upon the parties unless the contract is void ab initio. And in this case . . . there was no allegation that the mortgage was void ab initio. And in fact, there's not an issue as to the responsibility under the mortgage for the year that it was in effect. . . .

I don't find any recognition for [the argument], that because of purported wrongful conduct by . . . Volkswagen Credit, which theoretically was that [Coast was] made whole by virtue of the award of compensatory damages and punitive damages and interest, that somehow vitiated the obligation to continue to make payments over the mortgage. And, in fact, the conduct of Coast was such that they continued to pay under the mortgage . . . from '95 . . . [the time during which Coast is now arguing that it was] no longer obligated to pay under the mortgage.

And, in any event, I don't find that there's any legal basis for the argument advanced by Coast, which is basically that they should be absolved of any responsibility under the mortgage in addition to obtaining compensatory and punitive damages and so forth. . . .

And, also, if there was an issue as to the validity of the mortgage, it was the obligation of Coast to raise that issue in connection with the . . . action . . . under 1162-96.

So I think that because of the policy considerations, under the Entire Controversy Doctrine, the fact that these claims could have been raised in connection with that action and they were not and that they relate to the contractual relationship between the parties as a result of the mortgage, that . . . the Entire Controversy Doctrine would have required that these claims which are essentially the same types of challenges to the mortgage which could have been raised in connection with the original action is applicable. And, therefore, even if I don't address the other issues, I think the Entire Controversy Doctrine . . . compelled Coast to join the subject matter of its counterclaims now in the original action, and they did not. Therefore, they are precluded from doing so. . . .

So . . . for those reasons the motion for summary judgment will be granted.

Defendants appeal, principally contending that the trial court misapplied the entire controversy doctrine in barring their counterclaims in the second lawsuit as a matter of law. Defendants also present responsive arguments on various contentions that VW Credit had raised in the trial court, but which had not been relied upon by Judge Ford in dismissing the counterclaims.

I.

The entire controversy doctrine in our State advances the policies of mandatory joinder and claim preclusion associated with the more widely known doctrine of res judicata. See Pressler, Current N.J. Court Rules, comment 2 on R. 4:30A (2006); see, e.g., McNeil v. Legislative Appor'mt Com'n, 177 N.J. 364, 395 (2003)("The concept that a party is required to bring all possible claims in one proceeding is embodied in the closely linked concepts of res judicata and the entire controversy doctrine."), cert. denied, 540 U.S. 1107, 124 S. Ct. 1068, 157 L. Ed. 2d 893 (2004); In re Estate of Gabrellian, 372 N.J. Super. 432 (App. Div. 2004)(holding the doctrine of res judicata barred a second probate action when all claims could and should have been brought in the first action because the facts supporting both actions were the same), certif. denied, 182 N.J. 430 (2005); see also Long v. Lewis, 318 N.J. Super. 449, 459 (App. Div. 1999) ("The claim preclusion aspect of the entire controversy doctrine is essentially res judicata by another name.").

Res judicata, or the concept of claim preclusion, is a long-established doctrine that restricts a litigant's ability to bring claims in a subsequent civil action that were or could have been adjudicated in an earlier lawsuit involving the same parties. Lubliner v. Bd. Of Alcoholic Bev. Control, 33 N.J. 428, 435 (1960). The doctrine "rests upon policy considerations which seek to guard the individual against vexatious repetitious litigation and the public against the serious burdens which such litigation imposes upon the community." Ibid. For these reasons, the original judgment carries with it preclusive effects.

In this vein, the Restatement (Second) of Judgments, which describes the contours of res judicata in considerable detail, defines the term "preclusive effects" as "limitations on the opportunity in a second action to litigate claims . . . that were litigated, or could have been litigated, in a prior action." Restatement (Second) of Judgments 1 Scope at 1 (1982). Under res judicata principles, the claims asserted belatedly in the subsequent action are said to have "merged" into the original judgment. Pursuant to such rules of merger, when a plaintiff obtains a valid and final judgment, that plaintiff may not "thereafter maintain an action on the original claim or any part thereof, although he [or she] may be able to maintain an action upon the judgment . . .[.]" Id. at 18(1) at 151.

The same consequences attach for a defendant who interposes a counterclaim in the original lawsuit. Such a counterclaimant functionally is considered a plaintiff, bound by the preclusive effects of that counterclaim, once it is adjudicated. Specifically, the Second Restatement prescribes that "where the defendant interposes a counterclaim on which judgment is rendered in his favor, the rules of merger are applicable to the claim stated in the counterclaim . . . [.]" Id. at 21 & comment a, at 181.

Likewise, the entire controversy doctrine in New Jersey requires litigants in a civil action to raise all affirmative claims arising from a single controversy that each party might have against another party, including counterclaims and crossclaims. R. 4:30A. The doctrine is a preclusionary device, intended to prevent fractionalized litigation by requiring the assertion of all claims arising from a single controversy in a single action. Prevratil v. Mohr, 145 N.J. 180, 190 (1996). The reasons behind the doctrine are threefold: "(1) the need for complete and final disposition through the avoidance of piecemeal decisions; (2) fairness to parties to the action and those with a material interest in the action; and (3) efficiency and the avoidance of waste and the reduction of delay." DiTrolio v. Antiles, 142 N.J. 253, 267 (1995).

The entire controversy doctrine applies to successive suits with related claims. Id. at 268. "In determining whether successive claims constitute one controversy for purposes of the doctrine, the central consideration is whether the claims against the different parties arise from related facts or the same transaction or series of transactions." Id. at 267. It is the factual context "giving rise to the controversy itself, rather than a commonality of claims, issues or parties, that triggers the requirement of joinder to create a cohesive and complete litigation." Mystic Isle Dev. Corp. v. Perskie & Nehmad, 142 N.J. 310, 323 (1995); see also DiTrolio, supra, 142 N.J. at 267-68 ("It is the core set of facts that provides the link between distinct claims against the same or different parties and triggers the requirement that they be determined in one proceeding.").

However, a party will not be barred from raising additional claims in a subsequent proceeding if that party was unable to assert those claims in the initial proceeding. Mystic Isle, supra, 142 N.J. at 323. Otherwise stated, the entire controversy doctrine "does not apply to bar component claims [either] unknown, unarisen, or unaccrued at the time of the original action." Ibid.

The rules of claim preclusion, whether described as res judicata or as the entire controversy doctrine, are therefore designed to promote judicial economy, fairness and finality. We now consider the merits of defendants' appeal with those core objectives in mind.

II.

Defendants contend, in essence, that the trial court enforced the entire controversy doctrine here against the wrong parties. Specifically, defendants argue that the doctrine barred VW Credit's collection efforts in its second lawsuit, and that their own counterclaims in that lawsuit were entirely appropriate as a responsive measure. VW Credit, according to defendants, took an improper "second bite at the apple" in filing its June 2003 complaint, because its original foreclosure action had already been dismissed, with prejudice, by the Law Division.

By defendants' reasoning, VW Credit's sole and exclusive remedy to recover the unpaid balance on the note and mortgage was to appeal the dismissal of its complaint for foreclosure in the first lawsuit. Having failed to get that dismissal vacated on appeal, VW Credit was precluded from collecting on the balance of the note when it matured. The defendants' counterclaims, therefore, were justifiably provoked by VW Credit's own piecemeal litigation tactics.

We are unpersuaded by these arguments. Fundamentally, we do not presume that the final judgment in the first lawsuit, as modified on appeal, prevented VW Credit from collecting on its note once the note matured in its ordinary course in June 1999. It is true that VW Credit's 1995 foreclosure action was dismissed "with prejudice," because the trial court found that Coast had not been in default of its obligations when VW Credit declared a default and accelerated the loans.

However, Coast and the other defendants never contended in the first lawsuit that the mortgage itself was invalid because of VW Credit's wrongful actions. Since defendants did not advance such a position, the trial court and this court on appeal were never asked to consider, and did not consider, whether VW Credit's premature acceleration of the note stripped VW Credit of the right to collect on the note once it matured. The "with prejudice" dismissal of VW Credit's claims in the first lawsuit must be understood in that light. See Hulmes v. Honda Motor Co., 924 F. Supp. 673, 683 (D.N.J. 1996)(noting that "the characterization of [a] dismissal as 'with prejudice,' or 'without prejudice,' is clearly not dispositive of whether a second suit is barred by the entire controversy doctrine"), aff'd o.b., 141 F.3d 1154 (3d Cir. 1998), cert. denied, 525 U.S. 814, 119 S. Ct. 49, 142 L. Ed. 2d 38 (1998).

Given that a third party, Aspen Knolls, eventually paid off the loan, it is unnecessary for us to reach the merits of VW Credit's second lawsuit. Nor do we need to rule definitively on whether VW Credit's claim to recover its loan on a non-accelerated basis had sufficiently ripened during the pendency of the first lawsuit so as to require VW Credit to seek leave to amend its complaint, and to have that claim adjudicated in the first lawsuit. Rather, we stress that Coast and the other defendants may not justify their own delay in affirmatively seeking to invalidate the note and mortgage by shifting blame to VW Credit in bringing a second lawsuit. Whether or not VW Credit's second lawsuit was meritorious, we must analyze defendants' counterclaims for their own compliance with entire controversy principles.

We fully agree with the trial court that Coast and the other defendants could have sought to declare the entire loan and mortgage invalid in the first lawsuit. The nucleus of operative facts--VW Credit's wrongful acceleration of the loan--had already transpired. The host of legal theories that defendants raised through their counterclaims in the first lawsuit all derived from that same lender misconduct. We see nothing that would have deprived Coast and the other counterclaimants from seeking a judicial declaration of the note's invalidity in the first lawsuit, either through a counterclaim or as an affirmative defense.

Although we do not comment substantively on whether such a declaration of invalidity would have been justified as a proper sanction for VW Credit's misconduct, we believe that it was incumbent upon defendants to request such relief, if they wanted it, in the first lawsuit. Their failure to do so rightly subjects them to the consequences of the entire controversy doctrine. Such claims would have been entirely germane to the first lawsuit. Cf. Sun NLF Ltd. P'ship v. Sasso, 313 N.J. Super. 546, 551 (App. Div. 1998)(noting that a lender's material breach of its obligations under a mortgage is a "germane" counterclaim and may create a valid defense to the lender's foreclosure action on the mortgage; "[i]ndeed, under the entire controversy doctrine, failure to raise the defenses and counterclaims [of such a breach] in the foreclosure action very well might have barred assertion of those claims and defenses in a subsequent action."), certif. denied, 156 N.J. 424 (1998); see also Lewison Bros. v. Washington Sav. Bank, 162 B.R. 974 (Bankr. D.N.J. 1993)(entire controversy doctrine did not permit relitigation in bankruptcy court of lender-liability claims seeking avoidance of liens and disgorgement of funds; the claims were germane to prior foreclosure action because those claims would have provided the debtors with a defense to foreclosure in the earlier action).

Defendants' potential claims were known, had arisen at the time of the initial litigation, and evolved out of the same core set of facts. Further proofs relevant to those claims readily could have been placed before Judge Ford in the summer of 2002 during the six-week trial. Instead, defendants were content to pursue in the first lawsuit only the equitable and monetary claims, which were rather ambitious in their own right, that they chose to include in their pleadings. They did not request Judge Ford to reserve or to sever any potential claim of invalidity for some future proceeding.

We recognize that the polestar for the application of the entire controversy doctrine is judicial fairness. Oliver v. Ambrose, 152 N.J. 383, 395 (1998). The doctrine is an equitable instrument predicated upon "judicial fairness and will be invoked in that spirit." Crispin v. Volkswagenwerk, A.G., 96 N.J. 336, 343 (1984). But we perceive nothing in the record before us demonstrating that the trial court's invocation of the entire controversy doctrine was inequitable.

The defendant borrowers initially received the benefit of their bargain when VW Credit advanced to them the proceeds of the mortgage loan and other financing. Although VW Credit thereafter acted prematurely in calling the loans, its misdeeds were redressed. Indeed, Coast obtained substantial compensatory damages in the first lawsuit for VW Credit's premature collection efforts. We upheld the lion's share of those damages in the first appeal. The subsequent purchaser, not Coast, paid off the balance due to VW Credit on the matured note. Moreover, at oral argument in this appeal, defendants' counsel failed to identify a compelling equitable reason to withhold the normal consequences of claim preclusion, or to persuade us that a revival of defendants' counterclaims would not produce a windfall to the borrowers.

We thus affirm the trial court's application of the entire controversy doctrine to defendants' counterclaims, both as a matter of law and as a matter of equity. As a procedural matter, we also sustain the trial court's enforcement of the doctrine through the mechanism of an order of summary judgment. There were no genuine issues of material fact to be litigated. Brill v. Guardian Life Ins. Co. of Am., 142 N.J. 520, 540 (1995). Indeed, protracting the second lawsuit beyond the summary judgment motion phase would have disserved the policies of judicial economy and fairness to litigants that largely underlie the entire controversy doctrine. See Oliver v. Ambrose, supra, 152 N.J. at 403 (affirming summary judgment granted on entire controversy grounds, despite the fact that the motion was not filed until four years after the filing of the complaint).

We have examined the other arguments raised by defendants and consider them without sufficient merit to warrant further discussion. See R. 2:11-3(e)(1)(A) and (E).

 
Affirmed.

Coast originally did not join in defendants' counterclaims in the first lawsuit, because it had commenced bankruptcy proceedings on December 15, 1995 after being served with VW Credit's complaint. However, Coast did file a sixteen-count complaint in the Bankruptcy Court against VW Credit and other parties, a pleading which contained many of the same affirmative claims that had been advanced by defendants in the Law Division. Eventually, Coast emerged from bankruptcy and joined in the pleadings filed by the other defendants in the first lawsuit, including their counterclaims against VW Credit.

We were not supplied on this appeal with a copy of Coast's counterclaim in the first lawsuit, but the description of its contents, as presented in VW Credit's brief and in our January 2005 opinion, has not been disputed.

Among other things, defendants argued that VW Credit had incorrectly characterized their counterclaims as "moot," had misconstrued prior testimony by Tamim Shansab as "admissions" of the validity of the mortgage, and had erroneously portrayed the counterclaims as an invalid "collateral attack" on prior court orders. We address none of these potential alternative grounds for dismissal, as we have no need to do so in light of our disposition affirming summary judgment on entire controversy grounds.

R. 4:30A, entitled "Entire Controversy Doctrine," states as follows:

Non-joinder of claims 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).

We will not speculate on how that payment may or may not have factored into Coast's negotiations for the sale of the premises, as the record before us is silent on that point.

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February 14, 2006