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Finally, a Entire Controversy Doctrine We Can Live With

by Arnold Natoli, Craig Davis, and Gregory Schwartz

It was not long ago that the entire controversy doctrine (ECD) was the dread of litigators in New Jersey who trembled at the consequences of failing to comply with its all-pervasive and draconian joinder rules. Recent Appellate Division decisions, and particularly March 25's Hobart Brothers Co. v. National Union Fire Insurance Co., A-3155-06T2, should instill hope that those dark and confounding days are behind us.

In Hobart Brothers, the Appellate Division rejected a reflexive application of Rule -4.5-1's party notice and joinder requirements, which would have precluded a policyholder's action against its liability insurer, and recognized that a party might have legitimate reasons apart from litigation strategy for not having joined another party in prior litigation. One of those reasons was a party's desire to preserve certain relationships it had with others, for example, by not suing them. By respecting such business or personal considerations- and not trampling them under the heel of "efficiency" - the court has maintained a course toward a fairer and more reasonable ECD that so promotes judicial economy, though not at the expense of all other values.

The ECD's humble roots are the 1947 Constitution's merging of legal and equitable relief in New Jersey courts. The requirement that legal and equitable claims be joined in a single action -"so that all matters in controversy between the parties may be Completely determined" - puttered along unremarkably for a time; but judicial decisions soon broadened it to include mandatory joinder of counter claims defenses and cross-claims. This judicial doctrine - still confined to mandatory claim joinder -was formalized in 1979 as Rule 4.27-1 (b) and, with the state supreme Court's 1989 decision in Cogdell v. Hospital Center at Orange the doctrine came to demand the mandatory joinder of all parties with a material interest in the litigation. The new rule, formalized in Rule 4.30A, provided for "the preclusion of the omitted claims" in the event of non joinder of "claims or parties.

Cogdell’s voracious preclusionary rule contained the germ of its own demise. In the m id-1990x, through a series of judicial decisions that are all too well-known to New Jersey practitioners, the ECD grew out of control, like some irradiated monster in a 1950s sci-fi movie. It looked as if it would devour all litigation that stood in its path, as the court saw fit to apply it to preclude, inter alia, claims against parties not joined in earlier litigation in another jurisdiction and, in the notorious Circle Chevrolet v. Giordano, Hallerane & Ciesla decision, to malpractice claims against attorneys who had not been joined in the underlying litigation in which the malpractice was alleged to have occurred.

The bar decried this transmogrification of the ECD from a relatively straightforward, albeit broad, claim joinder rule to an unforgiving and overbroad preclusionary rule - driven by what seemed to many to be an obsessive and extraordinarily inefficient devotion to efficiency. Dissenting, and foreshadowing the doctrine's later reform, Justice Gary S. Stein criticized the court for converting the doctrine "from an equitable device into a trap for the unsuspecting."

Court reins it in

The New Jersey Supreme Court heeded the outcry and in a decision in 1997 remarkable as much for its modesty and self-critical candor as for its legal pronouncements, slew - or at least hewed down to size - the monster that had been created. In Olds v. Donnelly, 150 N.J. 424, New Jersey awoke from its procedural bad dream. The court both repudiated Circle Chevrolet- holding the ECD did not require a party to assert a legal malpractice claim against its own attorney in the action giving rise to the claim - and also commissioned its Civil Practice Committee to re-examine the party joinder rule.

The committee fulfilled its charge, and effective Sept. 1, 1998, mandatory, preclusionary party joinder was stricken from the rules. In its place, Rule 4:5-1 (b) simply requires a party disclose, among other things, "any non-party who should be joined in the action:" It is then a matter of the court's discretion whether to notify the party or to require the party's joinder under Rule 4:29-1. Whereas possible sanctions for failure to make the required disclosure include "dismissal of a successive action against [the undisclosed] party," such an extraordinary remedy is appropriate only when failure to comply was "inexcusable" and the undisclosed party was "substantially prejudiced" by the failure.

Thus, the ECD has evolved in a full circle (almost) and returned to its sane function of promoting fairness and judicial economy by preventing litigants from strategically and selectively asserting claims to manipulate the judicial process. In restoring this modest - and more usable - form of the rule, the Olds court repeatedly referred to the importance of the attorney-client relationship as a basis for rejecting mandatory party joinder. The court sensibly reasoned a client might wish to maintain that relationship and that a mandatory joinder requirement would impair "valuable relationships by requiring the assertion of claims against parties one otherwise would not sue." In sum, the court concluded that party autonomy, especially as it relates concretely to a party's desire to maintain certain relationships, deserved a higher level of respect than adherence to abstract notions of fairness and, especially, efficiency.

Court's disdain

This hierarchy of values was an influencing factor in the Appellate Division's decision in Hobart Brothers. The case has undergone a Byzantine procedural history since its inception in 1997, a testament to the unworkable nature of an outdated doctrine.

In 1984, Hobart acquired Nova Industries and with it an industrial site in Nutley where operations had resulted in alleged environmental contamination. The transaction triggered New Jersey's environmental clean-up statute (at the time, the Environmental Clean-up Responsibility Act, or ECRA), which required the seller obtain approval for the transfer from the Department of Environmental Protection. This was not done, however, until 1990, when Hobart sold Nova and, as the seller in the transaction, notified DEP under ECRA. Faced with clean-up costs for the Nutley site, Hobart brought a legal malpractice action against the law firm that represented Nova and had failed to report the transaction. Hobart also sued Nova's primary general liability insurer for reimbursement of clean-up costs.

In each action Hobart certified under Rule 4:5-1 that there were no other parties to be noticed or potentially joined. Nonetheless, while pursuing the actions related to the Nutley clean-up, Hobart's general liability insurer, National Union Fire Insurance Co., was actively defending Hobart against thousands of toxic tort lawsuits pending in another jurisdiction. Hobart settled the two lawsuits related to the Nova site, but as a result of a misdirected communication from its environmental consultant, it settled for significantly less than its estimated liabilities for remediating the Nutley site. Hobart then sued National Union to recover the excess costs.

Non-joinder

Invoking the ECD, National Union moved for summary judgment, asserting Hobart made a "conscious choice" not to join it in the earlier actions against Nova's law firm and insurer, and thus should be precluded from bringing the subsequent action. The trial court agreed in an automated application of the ECD reminiscent of the old days. Hobart appealed; the Appellate Division reversed and remanded, directing the trial court to consider on remand several issues relating to whether Hobart's non-joinder of National Union in the prior actions was "inexcusable" or whether non-joinder substantially prejudiced National Union. The trial court again granted National Union's motion for summary judgment, reflexively finding the failure to join it in the prior actions was inexcusable and had substantially prejudiced National Union.

Hobart appealed again; the Appellate Division reversed again, holding Hobart's non-joinder was not "inexcusable" but, in fact, reasonable, and further that non-joinder did not substantially prejudice National Union. As to prejudice, the court held that both the trial court's ruling and National Union's position were based on mere speculation or were unfounded.

The more important - or at least more interesting - prong of the Appellate Division's holding goes to whether non-joinder of National Union was "inexcusable." First, the court held that because Hobart might have been unaware the National Union policy provided coverage for the Nutley clean-up, its failure to join National Union could not be deemed an instance of deliberate claim-splitting. In addition, the court refused to see the failure to join National Union as inexcusable based in part on testimony by Hobart's general counsel that, at the time, Hobart had a "fine working relationship" with National Union in respect of its toxic tort claims.

Because the liabilities associated with the toxic tort claims against Hobart were potentially much larger than the relatively limited liability associated with the Nutley clean-up, Hobart; according to its counsel, "didn't want to jeopardize the health of that ongoing relationship." The Appellate Division credited this explanation. According to the court, this was not a "strategic choice" or a "calculated claim-splitting" intended to manipulate the judicial process. On the contrary, any conscious decision by Hobart not to join National Union was based on a non-litigation-related consideration - maintaining a business relationship - and was therefore not inexcusable.

The Appellate Division therefore affirmed the ECD applies to "calculated claim-splitting" and does not apply when non-joinder is either "uninformed" or "innocent." Happily, New Jersey courts continue on a trajectory incepted by the Supreme Court in Olds, in which the ECD remains primarily a claims joinder rule and where preclusionary party joinder is a rare circumstance limited to those who strategically manipulate the judicial process and thereby cause substantial prejudice to the excluded party. Absent compelling reasons to do so, New Jersey courts should not sacrifice a party's autonomy to maintain and preserve professional and personal relationships on the alter of judicial economy.

As appeared in New Jersey Lawyer, Monday, July 7, 2008

Arnold Natoli is a partner and Craig Devis is an associate at McCarter & English in Newark. Gregory Schwartz Is a partner at Schwartz Kelly in Annandale. Natoli and Schwartz represented Hobart at various phases of the litigation. The views and opinions expressed here are not necessarily those of the two firms or any of their clients.