"No More Mr. Nice Guy" - How Ohio's "Two Dismissal Rule" Can Thwart Foreclosures by Unwary Lenders
Last month, the Ohio Supreme Court issued a relatively unremarkable opinion that lenders, like any other plaintiff, have but two chances to get their pleadings right. However, because I've just been posting about Ohio's foreclosure process, and the case involved an unusual - but not extraordinary - sequence of events which ultimately barred the lender from foreclosing on a deliquent mortgage loan, it can't hurt to remind everyone of the importance of proper preparation before - and after - a foreclosure complaint is filed.
In U.S. Bank National Association v. Guillotta, 2008-Ohio-6268 (the Court's Office of Public Information prepared this brief summary of the decision which in this case, probably actually is all you need to read), ruled 5-2 that a lender who had previously dismissed a foreclosure against a borrower twice before, apparently with no additional payments or other intervening action by the borrower occurring, could not file yet a third foreclosure action against the borrower.
Why the lender dismissed the previous foreclosures is a bit unclear - the opinion gives no details . The sequence of events appears to have been the following:
- June 2003 mortgage note executed
- April 2004 first foreclosure instituted
- June 2004 first foreclosure dismissed
- September 2004 second foreclosure filed
- March 2005 second foreclosure dismissed
- October 2005 third foreclosure filed
Typically, under Ohio Rule of Civil Procedure 41(A), two unilateral voluntary dismissals of an action function as an adjudication on the merits and preclude the plaintiff from reinstituting suit on the claims embodied in the matter dismissed. The lender tried to argue that each new missed payment gave rise to a new claim that would obviate res judicata claims.
In contrast to the Tenth Appellate District which had previously rejected this sort of argument in EMC Mtge Corp. v, Jenkins, 164 Ohio App.3d 240, 2005-Ohio-5799, 842 N.E.2d 855,, the Stark County Court of Appeals actually held for the lender. Certified to the Ohio Supreme Court was the issue:
Whether or not each missed payment under a promissory note and mortgage yields a new claim such that any successive actions on the same note and mortgage involve different claims and are thus exempt from the 'two-dismissal rule' contained in Civ. R. 41(A)(1).
The Decision. Perhaps the most interesting part of the decision (which runs 17 pages, including a 5 page dissent by Justice O'Donnell) is the explicit narrowness of the holding. The Ohio Supreme Court said:
The question certified to us defies an answer that can apply to all cases, In this case we hold that each missed payment under the promissory note and mortgage did not give rise to a new claim....
This case is this case. The significant facts here are that the underlying note and mortgage never changed, that upon the initial default the bank accelerated the payments owed and demanded the same prinicipal payment that it demanded in every complaint, that Gullotta never made another payment after the initial defauult, and that U.S. Bank never reinstated the loan. (emphasis supplied)
The Ohio Supreme Court took pains to point out that the "two dismissal' rule would not apply if the third claim was different from the earlier dismissed claims and noted with approval that
there are examples from Ohio courts where successive foreclosure actions were indeed considered to be different claims. In those cases, however, the underlying agreement had significantly changed or the mortgage had been reinstated following the earlier default.
Among the situations the Court found different from the one at hand was one in which a court had ruled against the mortgagee in the first case and forced it to reinstate the mortgage and the mortgagee was suing on a default on the reinstated mortgage. in another case different acts of default were alleged
With respect to the concern of the appellate court that enforcement of the "two dismissal" rule would chill negotiations between lenders and their deliquent borrowers, the Court observed:
We agree that negotiations between a mortgagee and mortgagor to prevent an ultimate foreclosure is desirable for all the partie and for the state as a whole. here , there is nothing in the record to indicate that there were any fruitful negotiations between the parties. had there been any change as to the terms of the note or mrtgage, had any payments been credited, or had the loan been reinstated, then this case would concern a different set of operative facts, and res judicata would not be in play.
Practical BIZPOINTERS. I don't think this case should cause any particular alarm for lenders. At worst, it simply stands for the proposition that the lender ought to be sure it has actually gotten something befgore agreeing to dismiss a pending foreclosure which is good business procedure in any event. If a lender has in good faith entered into some sort of mortgage modifcation with a borrower after insittuting a foreclosure which causes the foreclosure to be dismissed, that is not this case and the lender probably has little to be concerned about.
Perhaps the most important point is that if there has been some sort of "arrangement' made with a deliquent borrower, then there IS a need for the lender to document that some sort of arrangement has been made with the delinquent borrower to accomodate that borrower. Documentation at least as formal as notes, and preferably at least a very short writen agreement should accompany a foreclosure dismissal, not just an oral conversation with the borrower to the effect that the loan will be brought current or the default otherwise cured.
