Defaulting borrowers sure do keep trying hard to get foreclosures kicked out on any procedural grounds possible. In our last go around, dear readers, you’ll recall the North Carolina Court of Appeals weighed in on the NC foreclosure statute of limitations and held that there is a very long shelf life for NC foreclosures (sometimes up to 40 years). In this latest edition, we review a brand new Court of Appeals opinion (In re Beasley, June 2, 2015) which also came out in favor of lenders – this time involving whether a third foreclosure can be barred by the “two dismissal” rule. Not to spoil the punch line, but it turns out that, at least in North Carolina, you are rarely “out” with just two strikes.

The Facts

Lender (a trust for a Morgan Stanley affiliate) held a $1 million note secured by a deed of trust on North Carolina beachfront property. The borrower stopped making payments in 2009. In 2011, Lender accelerated the debt and instituted a non-judicial foreclosure, which was subsequently dismissed without prejudice in 2012. In 2013, Lender instituted a second foreclosure proceeding. Borrower moved to dismiss the foreclosure and Lender took a second dismissal without prejudice. Even though the voluntary dismissal had been entered in the second foreclosure, the trial court entered an order holding that any foreclosure was now barred by the “two dismissal” rule of North Carolina Rule of Civil Procedure 41. Lender appealed and the Court of Appeals reversed.

The Law

North Carolina’s Rule 41 is similar to the Federal Rules of Civil Procedure and those adopted in many states. It provides that a single voluntary dismissal by a plaintiff without prejudice does not affect the ability to refile the same claims, but that two voluntary dismissals (i.e. the “two dismissal rule”) will act as a ruling on the merits which can preclude the filing of any subsequent actions “based on or including the same claim.”

The key question before the Court in Beasley was whether the acceleration of the note in connection with the first foreclosure meant that both the first and second foreclosures involved the exact same claims. If so, then the two dismissal rule would bar any subsequent foreclosures.

The Court of Appeals noted that this was a new issue for North Carolina courts, and the topic had caused a split in other jurisdictions. On the one hand, states like Florida held that subsequent foreclosure actions were not barred simply because the lender had accelerated the debt. Other states, like Ohio, held that once a debt was accelerated, there was only one applicable default and subsequent foreclosures would be barred since they were based on the same claim as the prior action.

Fortunately for lenders operating in North Carolina, the Court of Appeals held that acceleration of the debt was not dispositive. Since each missed monthly payment constituted a new default under the debt under North Carolina law, a subsequent foreclosure which included at least one new monthly missed payment constituted a new claim not barred by Rule 41 or res judicata (regardless of whether the debt had been accelerated).

The Moral

While no lender should file and then dismiss a foreclosure proceeding without good reason, there are situations in which a single voluntary dismissal without prejudice (or even two) can be the best course of action. If faced with that situation in North Carolina, lenders can now breathe easier as to whether such a dismissal will bar them from trying to foreclose in the future.

******

Questions regarding this case update or financial services litigation can be addressed to Will Esser at willesser@parkerpoe.com / 704-372-9000. This legal update does not constitute the provision of legal advice or the creation of an attorney/client relationship with any party.