Entire Controversy Doctrine Does Not Bar Second Case Brought by Party Who, as a Defendant, Defeated a Prior Case for Failure to State a Claim

Bank Leumi USA v. Kloss, 243 N.J. 218 (2020). As discussed here, this was a case involving a certified question from the Third Circuit Court of Appeals, and for the second time in the last month, Justice Fernandez-Vina wrote the Court’s opinion.

The certified question was “When a party filed, in lieu of an answer, a motion to dismiss under Rule 4:6-2(e) for failure to state a claim, and the court dismissed with prejudice, is that party subject to claim preclusion when—in a later suit that it files arising from the same transactional facts—the defendant asserts the entire controversy doctrine as an affirmative defense?” By a 6-0 vote (Justice Patterson did not participate), the Court answered in the negative.

Bank Leumi and Kloss had a dispute over a subordination agreement between them that was entered into in connection with Bank Leumi’s loan of money to Munire Furniture Company, Inc., to whom Kloss had also lent money. Kloss sued Bank Leumi in New Jersey state court. In lieu of filing an Answer, or any counterclaim, Bank Leumi moved to dismiss that case for failure to state a claim, under Rule 4:6-2(e). But since Bank Leumi had submitted material that went beyond Kloss’s Complaint, the court converted Bank Leumi’s motion into one for summary judgment and granted that relief.

Bank Leumi then sued Kloss in federal court, “asserting claims from the same transaction.” Kloss moved to dismiss that case on the grounds that the entire controversy doctrine required Bank Leumi to present its claim as a counterclaim in Kloss’s state court action, so that Bank Leumi was barred from bringing its new federal court case. The District Court granted dismissal, Bank Leumi appealed, and the Third Circuit posed its certified question, which the Supreme Court accepted unchanged.

After discussing a number of Court Rules that played into the decision, Justice Fernandez-Vina noted that the entire controversy doctrine “remains an equitable doctrine whose application is left to judicial discretion based on the factual circumstances of individual cases.” Those “equitable considerations,” as well as “the text of the court rules,” an Appellate Division decision in Allstate New Jersey Ins. Co. v. Cherry Hill Pain & Rehab. Institute, 389 N.J. Super. 130 (App. Div. 2006), which came out the way the Court ultimately did here, and the Restatement (Second) of Judgments, all led to the answer the Supreme Court gave.

Justice Fernandez-Vina noted that “Rule 4:6-2 provides two options for how defendants may proceed when presented with a facially deficient complaint.” One choice is to file an Answer, in which case the defendnat must assert any claims encompassed by the entire doctrine, Rule 4:30A. The other choice is to file a motion to dismiss, as Bank Leumi did. In that circumstance, “there is no reason for the moving party to then file additional pleadings [such as counterclaims] until the motion to dismiss is ruled upon.”

“Answering the certified question in the positive here would effectively make the second option unavailable to litigants who anticipate they may at some point have an affirmative claim of their own or who simply prefer a more cautious approach.” The Court “decline[d] to create such a strong disincentive for a valid option countenanced by our court rules.”

“Equitable considerations,” Justice Fernandez-Vina said, led to the same result. A party that files a motion to dismiss does not have an opportunity to assert within that motion any affirmative claims that that party might have. If that party wins dismissal and then bring a second case of its own, “it would be profoundly inequitable to then deprive the winning party of the opportunity to assert any claim.”