Daily Development for Friday, February 6, 2009
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Husch Blackwell Sanders
Kansas City, Missouri

MORTGAGES; FORECLOSURE; JUDICIAL; DISMISSAL; RES JUDICATA: Ohio Supreme Court rules that where creditor has twice dismissed an action to collect (through foreclosure) a defaulted and accelerated debt, it is barred by statutory res judicata rule from refiling the claim, even if it files for the period of default extending from a date after the second prior dismissal. 

U.S. Bank Nat’l Assoc. v. Gulotta, ---N.E.2d ----, 120 Ohio St.3d 399, 2008 WL 5157899 (Ohio 12/10/08)

That’s right, dear readers, because of negligence on the part of the lender in bringing its foreclosure action (there was authority that should have warned it), Mr. Gullotta apparently walks away scot free from a $164,000 mortgage debt (plus interest at 7.35%)  on which he defaulted less than a year after signing the papers and on which he has apparently not paid a cent in almost five years.  . 

The bank first filed for foreclosure, based upon the accelerated debt, in April, 2004.  Two months later, it voluntarily dismissed the complaint.  We’re not told why.  This being Ohio, however, this loan may have been caught up in the “prove the chain of ownership of the note” issues prevalent in the trial courts there.  The same lawyer refiled an action for foreclosure a little more than a year later.  About six months after that, a different lawyer representing the bank voluntarily dismissed that complaint.

Later, the bank again filed a third complaint to collect on the note, this time (forewarned by Gullotta’s responsive motion to dismiss) proferring an amended complainit demanding payment of the same accelerated sum but with interest only from a date after the second dismissal. 

Gullotta argued that, nevertheless, under the “two bites” rule articulated in the Ohio Rules of Procedure, Section 41(A), a plaintiff can indeed voluntarily dismiss, generally without prejudice,  but check out this language: :

“Unless otherwise stated in the notice of dismissal or stipulation, the dismissal is without prejudice, except that a notice of dismissal operates as an adjudication upon the merits of any claim that the plaintiff has once dismissed in any court.”

A Third Circuit Court of Appeals case had already invoked this section to find that when an instalment note has been accelerated, and an action to collect it is twice dismissed by the creditor, the claim is deemed finally adjudicated against the creditor.  But an Ohio appeals court had rejected the Tenth Circuit reasoning and had permitted a claim on an accelerated debt following two dismissals, assuming that the claim was for interest on that debt following the second dismissal.  The technical rationale was that the debt remained unpaid and each new day was a new default.  The practical rationale was that to read the statute in the way proposed by Gullotta would “toughen up” lenders, discouraging from giving borrowers a break by dismissing a foreclosure action, and thus frustrating desirable workout bargaining between the parties in the shadow of a foreclosure.

The trial court and appeals court bought in on this reasoning, but Gullotta then sought federal court review in light of the conflict with the federal analysis, and the Third Circuit promptly bounced the issue over to the Ohio Supreme Court for resolution of the Ohio rule.

The Supreme Court acknowledged the problems that might arise with workout bargaining, but felt compelled to agree with the Third Circuit that an accelerated debt is a single debt, and that practical difficulties don’t change the meaning of the statute, which bars a third complaint on the “merits of any claim that the plaintiff has once dismissed.”  The debt is the same, the accelerated amount is the same - in short, the claim is the same.

Two judges dissented on the grounds of practicality (as noted) but also raised a technical argument that the impact of the second dismissal was an adjudication that Gullotta was not in default in November of 2003.  But, the dissent argued, the plaintiff was free to show that Gullotta was in default in April, 2005, after the second complaint had been dismissed.  The dissent noted that cases in Florida, and Indiana had made similar decisions (although the described facts of those cases seem a bit different.)

Comment: The answer probably lies with the legislature.  The editor isn’t sure whose side the Ohio legislature might be on at the moment, but suspects that lenders will get no relief on this issue or on the “who owns the note” issue without a reasonably generous package of concessions to homeowners in default.  Since most of the “Ohio lenders” in fact are virtually nameless groups of secruitized owners spread throughout the globe and unable to reach agreement on where their best interests lie on any of these issues, it may be a long slog.

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