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Posted: September 26, 2018

Action Not Barred by Entire Controversy Doctrine

On August 23, 2018, Judge DeAngelis of the Morris County Superior Court (Law Division) issued a decision in Maffei v. Apex Fund Services (US), Inc., Docket No. L-63-18, refusing to dismiss an action based on the entire controversy doctrine, explaining:

Defendants argue that Plaintiffs’ Complaint in the present action violates the entire controversy doctrine and Rule 4:5-1(b)(2). Plaintiffs maintain that the present action was improperly brought before this Court because Vicor, the Fund in which many of the Plaintiffs to the present action invested brought a suit against Falci seeking the return of funds that Falci unlawfully took. Defendants submit that many of the background facts in the present case are identical to the facts on which the Falci Action is predicated. Furthermore, many of the Plaintiffs herein are Limited Partners of Vicor who are seeking the same relief in both actions. Therefore, Defendants argue that Plaintiffs should not be permitted to continue the present action.

The purpose of the entire controversy doctrine is to ensure that related claims and matters arising among related parties are adjudicated together rather than in separate, successive, fragmented, or piecemeal litigation. The doctrine is intended to prevent parties from voluntarily holding back a component of a controversy in a single proceeding, by precluding it from being raised in a subsequent proceeding. The rules implementing the entire controversy doctrine have changed over time. Although the doctrine previously required the joinder of related claims and parties, today the scope of the entire controversy doctrine is limited to the preclusion of claims omitted from a first proceeding, as described in Rule 4:30A. The preclusion of a successive action against a person not a party to the first action has been abrogated except in special circumstances involving inexcusable conduct and substantial prejudice to the non-party resulting from omission from the first suit.

Moreover, R. 4:5-1(b)(2) substitutes disclosure for mandatory joinder of non-parties. R. 4:5-1(b)(2) requires a party to certify in its first pleading as to whether the matter in controversy is the subject of any other action pending in any court, and requires the party to disclose in the certification the names of any nonparty who may be joined in the action because of potential liability to any party on the basis of the same transactional facts. Based on this certification, the court determines whether to compel the non-party’s joinder. The purpose of Rule 4:5-1(b)(2) is to provide notice to all parties in each action of the pendency of other actions involving the same controversy. The Rule also provides:

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 noncomplying 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.

Courts should analyze both fairness to the parties and fairness to the system of judicial administration before dismissing claims.

Vicor filed the Falci Action on September 22, 2016 against Falci, his son and business partner. Although Plaintiffs are Vicor investors, neither Plaintiffs nor the Defendants are parties to the Falci Action. Plaintiffs claim that at the time the Falci Action was filed, Plaintiffs did not know the extent of the fraud and the enterprise. At the time of the commencement of the Falci Action, Vicor was not yet in possession of the vast majority of Vidon’s or Fund’s bank account records, Apex’s internal records or emails relating to Vicor, its own email files or the records of its outside auditor. Apex’s involvement in the enterprise and the facts upon which this action was predicated, were uncovered through discovery upon the receipt of these and other documents.

Since Plaintiffs seek to pursue a cause of action against new defendants in this action, rather than to pursue new claims against the defendants from a prior litigation, the entire controversy doctrine may only preclude the Complaint if Plaintiffs engaged in inexcusable conduct and the individual Defendants would be substantially prejudiced by their omission from the first litigation. Moreover, Vicor executed a R. 4:5-1(b)(2) certification at the outset of the first litigation and thereby certified that it was not aware of any other parties who might be potentially liable to Vicor on the basis of the facts pled. R. 4:5-1 provides that dismissal may be an appropriate remedy if Vicor was aware of the Defendants’ role in the facts alleged when it executed the certification.

Defendants argue that they are prejudiced by Plaintiffs’ failure to identify and include the Apex Defendants in the Falci Action because the passage of time has caused depletion in the Fund’s assets affecting Defendants’ right to indemnity from the Funds. Further, Plaintiffs failure to assert their claims or identify the Defendants within the Falci Action resulted in the expiration in the statute of limitation on Plaintiffs’ securities claims. Defendants also state that they are prejudiced by the delay in discovery, because witness’ memories fade and evidence is lost through the passage of time.

The defendants in the Falci Action defaulted and both Falci and his son filed for bankruptcy protection, staying the Falci Action. Defendants have not indicated what discovery was done in the Falci Action to date. The crux of Defendants’ prejudice lies in the passage of time since the initiation of the Falci Action until the commencement of the present matter. However, Plaintiffs assert that they did not know of the claims against Defendants asserted here, contending that Plaintiffs’ awareness of the existence of the Defendants and their general work and involvement with the Sub-Fund and Falci is distinct from the awareness it now has as to the Defendants’ alleged roles with the enterprise including Defendants’ alleged misrepresentations to Plaintiffs’ and involvement in conspiracy. If the Court accepts that Plaintiffs filed the present action promptly upon becoming aware of their claims against the present Defendants, it is unclear how Defendants concerns would have been cured had Plaintiffs filed the within claims in the Falci Action at the same time that the present action was commenced.

At the motion to dismiss stage, the Court must accept Plaintiffs’ allegations as true and afford Plaintiffs all reasonable inferences. Furthermore, Defendants have not presented any evidence of Plaintiffs knowledge of the present claims at the time of the Falci Action except general assertions that Plaintiffs should have known of the claims against Defendants when they knew the facts upon which the Falci Action is predicated. Accordingly, the entire controversy doctrine and R. 4:5-1(b) are not grounds for dismissal of Plaintiffs’ Complaint.

(Internal quotations omitted).

Doctrines such as the entire controversy doctrine (called res judicata in other jurisdictions) limit a plaintiff’s ability to litigate a dispute more than once. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding whether a claim is barred by an earlier action.

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