“No Counterclaims” Clause in Loan Agreement is Invalid

Investors Savings Bank v. Waldo Jersey City LLP, 418 N.J. Super. 149 (App. Div. 2011).  A loan agreement provided that all documents relating to the loan were legal, valid, binding and enforceable, and “free from any right of setoff, counterclaim or other defense.”  Plaintiff, the lender, began a foreclosure action and, in a separate damages case, sued for the balance due on the loan.  Defendants counterclaimed in the damages action, asserting that plaintiff had breached the loan agreement.  Plaintiff moved for dismissal based on the “no counterclaim” clause.  The Law Division granted the motion, defendants appealed, and the Appellate Division, in an opinion by Judge Fisher, reversed. 

Though the Appellate Division found that this was a “novel question” in New Jersey, the Court”s basic reasoning in resolving it was simple:  the clause does not extinguish a defendant borrower’s claims, but merely forces the borrower to bring a separate action to assert such claims.  Plaintiff actually conceded that, according to Judge Fisher’s opinion.  Thus, since Rule 4:7-1 compels a party to present counterclaims “arising from the same operative facts or transaction in a single suit,” the “no counterclaims” provision “is contrary to the policies contained in our court rules.” 

In other words, there was no reason to create two separate cases when one case, encompassing all issues, would suffice.  That was especially so because if defendants had filed a separate case, the two suits would have been consolidated anyway.  There was no need for such a circuitous journey when a short, direct trip would arrive at the same destination.

There was some balm for the plaintiff, however.  The Appellate Division enforced a jury trial waiver contained in the loan documents and affirmed the Law Division’s decision to strike a jury demand that defendants had made.  The jury trial waiver was conspicuous in the document, there was no evidence that defendants’ jury trial waiver was unknowing, and defendants were represented by counsel.