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Deutsche Bank v. Pinette

Supreme Court of Vermont

June 24, 2016

Deutsche Bank
v.
Kevin Pinette

         On Appeal from Superior Court, Caledonia Unit, Civil Division Robert R. Bent, J.

          Jeffrey J. Hardiman and Douglas A. Giron of Schechtman Halperin Savage, LLP, Pawtucket, Rhode Island, for Plaintiff-Appellant.

          Grace B. Pazdan, Vermont Legal Aid, Inc., Montpelier, for Defendant-Appellee. Thomas A. Cox, Portland, Maine, and Geoff Walsh, National Consumer Law Center, Boston, Massachusetts, for Amicus Curiae National Consumer Law Center.

          PRESENT: Reiber, C.J., Dooley, Skoglund, Robinson and Eaton, JJ.

          DOOLEY, J.

         ¶ 1. Plaintiff Deutsche Bank National Trust Company (lender), as trustee appeals from the decision of the Caledonia Superior Court granting defendant Kevin Pinette's (borrower) motion to dismiss. The superior court dismissed lender's claims for mortgage foreclosure, the unpaid balance on a promissory note, and a deficiency judgment on the ground that they were barred by claim preclusion, as lender had previously instituted an identical action against borrower in 2013, which had been dismissed for failure to prosecute. On appeal, lender argues that because the 2013 action did not actually adjudge the enforceability of the note and mortgage, the dismissal did not have preclusive effect. Further, lender urges us to hold that, in the mortgage foreclosure context, dismissals with prejudice do not bar subsequent actions based upon new defaults occurring after dismissal of the prior action. We affirm.

         ¶ 2. Borrower is the owner of real property located at 23 Railroad Street n/k/a 127 Railroad Street in Groton, Vermont. On March 18, 2005, borrower executed a promissory note to Option One Mortgage Corporation for $54, 400.00, secured by a mortgage on the real property on Railroad Street. The note and mortgage are now held by lender pursuant to an endorsement in blank contained in an allonge to the note and an assignment of mortgage from American Home Mortgage Servicing, Inc. (AHMSI), successor-in-interest to Option One. In July 2010, following a payment default by borrower, borrower and AHMSI entered into a loan modification agreement under which the principal loan amount was increased to $77, 270.65. When borrower continued to default on his payments, lender filed a complaint for judgment on the promissory note, mortgage foreclosure, and a deficiency judgment in October 2011.

         ¶ 3. We examine the complaint in some detail because, as we explain below, lender filed virtually the exact same complaint[1] three times and the nature of the complaint is central to the resolution of the main issue in this appeal. The complaint has three counts: (1) Count I for mortgage foreclosure; Count II for judgment on the promissory note of $54, 400.00; and (3) a deficiency judgment if the amounts owing to lender "exceed the value of the mortgaged premises." Lender also listed a number of elements of the relief it sought, including foreclosure of the mortgaged property by sale or strict foreclosure and a "finding by the court of no substantial value in excess of the mortgage debt, " and a deficiency judgment after "disposition of the mortgaged premises and application of the proceeds from that disposition to the debt of the borrower." With respect to the note balance, lender sought a court order that "borrowers pay to the clerk of the court for the benefit of lender all amounts due and to become due on the note and mortgage, with interest thereon, together with sums expended, reasonable attorney's fees and costs."

         ¶ 4. Borrower did not enter an appearance or file an answer. Following borrower's default, lender filed two motions seeking extensions of time to obtain a judgment because the parties were involved in settlement discussions. These were granted, but after the second extension expired, the superior court dismissed the action without prejudice on November 26, 2012.

         ¶ 5. In March 2013, lender filed a second action in the Caledonia Superior Court against borrower, utilizing an identical complaint with the addition of an allegation of the modification and increased principal amount. Borrower once again did not answer or appear. In January 2014, some eight months after borrower defaulted, the superior court notified lender that borrower had not entered an appearance and directed lender to file a motion for default judgment within two weeks. Lender failed to do so, and on March 31, 2014, the court dismissed the action without a specific statement indicating whether dismissal was with or without prejudice.

         ¶ 6. Apparently, borrower made no further payments on the note. In September 2014, lender filed the instant action, again using a complaint identical to the 2013 complaint. The complaint was served on September 29, 2014. This time, borrower filed a pro se appearance and answer on October 31, 2014; a lawyer employed by Vermont Legal Aid filed a limited appearance for borrower on the same date and moved to dismiss on the basis of claim preclusion. Based on that motion, the superior court dismissed the action, but reopened when lender eventually responded in February, 2015. After briefing, the court again granted the motion to dismiss, ruling that this third action was barred by the dismissal of the second action with prejudice.

         ¶ 7. In its decision, the superior court concluded that under V.R.C.P. 41(b), an involuntary dismissal that does not specify whether it is with or without prejudice is assumed to be with prejudice. The court saw no reason to depart from this established principle of Vermont law in the case at bar; lender "willfully fail[ed] to heed the court's warning after having a prior case dismissed, " despite being a "sophisticated user of the court system" with approximately seventy-five foreclosure cases currently pending in the state. The court noted that it was within lender's power to seek an enlargement of time in the dismissed case, file a Rule 60 motion concerning the dismissal, or appeal the previous dismissal. The court recognized that the result of lender's failure to perform any of the above actions was a "windfall" for borrower, but stressed that such an outcome was fair in light of lender's multiple squandered opportunities "to avail itself of the benefits of Vermont's judicial process" and the necessity of the finality of judgments to sound judicial administration. This appeal followed.

         ¶ 8. On appeal, lender asks us to consider the following issues: 1) whether the superior court abused its discretion in considering an untimely motion to dismiss over lender's objection; 2) whether a dismissal for failure to apply for default judgment operates as adjudication "on the merits" which precludes a subsequent action based upon a new default; 3) whether the superior court misapplied our holding in U.S. Bank National Association v. Kimball, 2011 VT 81, 190 Vt. 210, 27 A.3d 1087; 4) whether, in the context of a foreclosure, a dismissal under V.R.C.P. 41(b)(3) constitutes a permanent bar to foreclose based upon a future default; and 5) whether, to the extent that the prior dismissal was a sanction, the superior court abused its discretion or committed an error of law in precluding lender from enforcing the note and/or mortgage. We hold that in this case, where a mortgagee who has exercised the option to accelerate the amount due on a promissory note has an action dismissed under V.R.C.P. 41(b)(3), and lender does not allege a new default after the dismissal, that dismissal functions as an adjudication on the merits which precludes further litigation on the underlying note. Because borrower does not owe on the underlying note, the mortgage security cannot be foreclosed.

         ¶ 9. We review motions to dismiss de novo. Prive v. Vermont Asbestos Group, 2010 VT 2, ¶ 14, 187 Vt. 280, 992 A.2d 1035 (citation omitted). In rendering our decision, "we must assume as true all factual allegations pleaded by the nonmoving party." Id. ¶ 2 (quotation omitted).

         ¶ 10. We begin by addressing lender's claim that the case should be reinstated because borrower's answer and motion to dismiss were untimely. ...


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