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Cenlar FSB v. Malenfant

Supreme Court of Vermont

August 19, 2016

Cenlar FSB
Joseph L. Malenfant, Jr. and Laurie G. Malenfant

         On Appeal from Superior Court, Chittenden Unit, Civil Division Dennis R. Pearson, J.

          Jeffrey J. Hardiman and Randall Souza of Shechtman Halperin Savage, LLP, Pawtucket, Rhode Island, for Plaintiff-Appellant.

          Marc E. Wiener of Marc E. Wiener Law Offices, PLLC, Burlington, for Defendants-Appellees.

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

          ROBINSON, J.

         ¶ 1. This case calls upon us to solve a procedural puzzle involving successive foreclosure actions on the same note. In particular, this case raises the question: What is the impact of a court's dismissal with prejudice of a lender's claim on a promissory note and accompanying foreclosure action with respect to the lender's ability to bring a subsequent claim for default on the note?

         ¶ 2. Lender appeals a judgment for borrowers in lender's second action for a judgment on the note and foreclosure, after the first was dismissed with prejudice. Lender argues that the first dismissal cannot be interpreted as vacating the judgment on the note and for foreclosure that the trial court had previously issued in that case. Alternatively, lender contends that its notice of default in the initial foreclosure action was sufficient to satisfy its notice obligation in connection with its second foreclosure action. We conclude that the trial court's dismissal with prejudice of the lender's first action on the promissory note and complaint for foreclosure did effectively vacate that court's prior judgment for lender on the note and for foreclosure. We conclude that lender was not on this record entitled to pursue a second action because it had not taken any steps to reinstate borrower's monthly payment obligations after lender had accelerated the note. Accordingly, we affirm.

         ¶ 3. The facts and procedural background are not in dispute, except where noted. In 1993, Joseph L. Malenfant, Jr. and Laurie G. Malenfant (borrowers) executed a promissory note secured by a mortgage on their property in Colchester to GMAC Mortgage Corp., the predecessor-in-interest to Cenlar FSB (lender).

         ¶ 4. By May 2008, borrowers had fallen into default on the loan. Lender filed its first action against borrowers for default on the note and a foreclosure remedy in December 2008. See Cenlar FSB v. Malenfant, Docket No. S1664-08 Cnc (Vt. Super. Ct.). On May 22, 2009, the court issued a judgment order finding borrowers to be in default on the note, calculating the amounts due to lender, and issuing a decree of foreclosure in favor of lender in that action.[1]Borrowers timely filed a "letter of appeal" arguing, among other things, that they were in the process of consideration for a loan modification, and that under the applicable regulations the foreclosure process was to be stopped until complete consideration was offered to them. The court issued an entry order directing the lender to show cause why the appeal should not be granted pursuant to Vermont Rule of Civil Procedure 80.1. In September 2009, following a hearing, the trial court ordered the lender to provide information to borrowers about the status of their loan-modification request, and ordered that no certificate of nonredemption would be issued unless the lender had complied with all applicable laws relating to the federal Making Home Affordable Program and explained to the court why borrower's application for loan modification was denied.[2]

         ¶ 5. Borrowers and lender entered into a temporary forbearance and trial payment plan from March to June 2010. During this period, court proceedings were suspended. At a status conference following the end of this period, lender indicated that it was reviewing borrowers' loan-modification application. Lender represented without contradiction that it last received payment on the mortgage in June 2010. Borrowers suggested that from the end of the forbearance period onward, they repeatedly asked lender for information about the balance due to bring their balance current. The court kept the case on the docket, and held a status conference on November 1, 2010. Lender failed to appear. On its own motion, the court issued an order, captioned "Dismissal Order, " which read in its entirety:

A status conference was held in this case [on October 29, 2010]. Both parties were permitted to call in rather than appearing in person. Defendants Malenfant called; Plaintiff did not. This case has been pending since 2008 and despite repeated conferences [in] which it was reported that modification or forbearance agreements were being discussed, nothing has been resolved.
The court hereby dismisses the case with prejudice for Plaintiff's failure to prosecute by failing to appear at the scheduled conference today.

         ¶ 6. Lender did not appeal this order. Neither party filed a motion for relief from judgment or order, V.R.C.P. 60(b), or a motion to alter or amend, V.R.C.P. 59(e). The order did not expressly state whether the judgment order and decree of foreclosure issued on May 22, 2009 was vacated. The legal effect of this unappealed order of dismissal with prejudice is one of the issues in this case.

         ¶ 7. In September 2011, lender filed a second action for default on the note, and sought foreclosure. The parties engaged in mediation but did not resolve the case. After the trial court denied lender's motion for summary judgment, it held a final hearing on the merits in June 2014. At that hearing, lender introduced evidence of the total redemption amount on that date and the total accelerated balance owed under the mortgage loan, assuming a default date of September 1, 2008-a different date from the default date asserted in the first default action. The court dismissed this second foreclosure action because lender failed to send a new default notice prior to filing the second foreclosure action. As the court explained in its written order, the mortgage deed required the lender to give the borrowers at least thirty days' notice of default and an opportunity to cure. Lender's representative testified that the default date upon which this second foreclosure action was based was different from the first. Because the filing of this second action was based on "a new, and different set of operative facts, " the court dismissed the claim based on lender's failure to "complete the circle [by] . . . sen[ding] Defendants [a] notice of default and acceleration" based on the default date alleged in the second foreclosure action.

         ¶ 8. The court made it clear that lender was free to file a new, third foreclosure action against borrowers, this time complying with the contractual requirement of notice before acceleration, with an opportunity to cure. However, argument at the hearing revealed divergent views by the parties concerning the effect of both prior dismissals-the court's dismissal of the first foreclosure action with prejudice and also its dismissal of the second foreclosure action-on the scope of lender's potential third claim on the note and for foreclosure. Moreover, the court wanted to be clear about the intended preclusive effect of its dismissal of this second foreclosure action with respect to any future action. After argument and briefing by the parties, the court issued a written decision and final judgment order on September 18, 2014, reiterating its dismissal of the second foreclosure action and discussing the prospective effect of its dismissal, as well as the court's prior dismissal of the first foreclosure case.

         ¶ 9. The court rejected lender's argument that the May 2009 foreclosure judgment for lender was still in effect. It concluded that the only logical way to construe the court's November 1, 2010 dismissal of that case was to understand it as vacating the underlying foreclosure judgment. Moreover, it noted that lender's own conduct supported the court's understanding that the dismissal with prejudice required the lender to start over, with a "clean slate." Lender did not attempt to enforce the prior foreclosure decree, or request a certificate of nonredemption, but instead filed a new foreclosure action on the same note, using a later default date than the first action. Finally, the court noted that the issue was "largely academic, " as the court would be highly unlikely to allow lender the necessary extension of time to sell the foreclosed property. The court declined to consider whether the court in the first foreclosure action had the authority to dismiss that case with prejudice, noting that lender did not appeal the dismissal order at the time.

         ¶ 10. Considering the preclusive effect of this second dismissal with respect to the relief that would be available to lender in a third action, the court stated that "all foreclosure actions are fundamentally equitable in nature, and thus the court has some discretion in adjusting the parties' respective rights and liabilities . . . to achieve a result which is . . . fair and just, " within the constraints of statute. The court concluded that precluding lender from recovering any of the amounts it had advanced to pay borrowers' real-estate taxes through the course of these proceedings would be "harsh and fundamentally unfair." But the court concluded that its final judgment would bar lender from recovering of all of the accrued interest-as well as attorney's fees, late fees, filing fees, recording fees, and other costs incurred-from May 1, 2008 (the default date lender sought to prove in the first foreclosure action) to September 18, 2014 (the date of the court's final order dismissing the second foreclosure action). The court found that this would "strike the necessary balance between honoring finality and enforcing the court's orders, and still allowing [lender] to recover amounts where it is . . . out-of-pocket and has a more cognizable financial interest and a more compelling equitable claim." The court also noted that lender would, in any event, still have to come up with yet another new, and different date of default in order to pursue a third foreclosure action.

         ¶ 11. Lender filed this appeal. Lender challenges the trial court's ruling that the initial foreclosure judgment was vacated by implication, both because the dismissal order did not reference the prior foreclosure judgment or specify that the judgment was vacated, and because the trial court lacked the authority to vacate the foreclosure judgment. Lender further challenges the trial court's dismissal of the second foreclosure action, arguing that it satisfied the notice requirement by virtue of its initial notice of default to borrowers prior to the first action.

         I. Impact of the Dismissal of the First Action on the Court's Prior Foreclosure Judgment

         ¶ 12. The trial court did not err in concluding that the final judgment in the first foreclosure action was vacated by implication, and that the final judgment of dismissal is not now subject to collateral attack in this action. Lender contends that the trial court's first dismissal did not vacate the prior foreclosure judgment, and that, if it did, the trial court had no authority to, on its own initiative, vacate the prior judgment without notice to the parties or legally cognizable grounds. Lender points out that there was no pending motion to dismiss, nor any pending Rule 60 motion to vacate or amend the foreclosure judgment order at the time of the trial court's dismissal order. The trial court's dismissal did not comport with the notice requirements for dismissal on the court's own motion pursuant to Rule 41(b), and the case did not meet the requirements under Rule 41(b) for dismissal on the court's motion. And, even if the mediation process for which the parties had effectively put the post-foreclosure judgment proceedings on hold had been mandatory under the applicable statute, which lender says it was not, dismissal with prejudice was not a sanction available under the statute in connection with lender's conduct in that mediation process. In sum, lender argues the trial court had no authority to vacate the final foreclosure judgment.[3]

         ¶ 13. We begin with the question of whether the court's dismissal of the first foreclosure action effectively vacated the related foreclosure judgment. The interpretation and effect of a court's judgment or order is a question of law, which we review de novo. See TBF Fin., LLC v. Gregoire, 2015 VT 36, ¶ 19, 198 Vt. 607, 118 A.3d 511.

         ¶ 14. We agree with the trial court that the only reasonable way to read the court's November 2010 dismissal of the first foreclosure action was that it effectively vacated the foreclosure judgment for lender. The dismissal for failure to prosecute was issued in response to lender's failure to appear for a status conference, and to its delay in resolving borrowers' loan-modification application. If the order dismissing the first foreclosure action did not vacate the foreclosure judgment in that case, then it would have created an irremediable legal limbo. The court had already issued an order indicating that further judicial proceedings would be required before a certificate of nonredemption could be issued. By dismissing the case with prejudice, the court ended all judicial proceedings. See In re Estate of Benjamin, 2014 MT 241, ¶ 11, 339 P.3d 1232 (explaining that dismissal with prejudice "is as conclusive of the rights of the parties as if the suit had been prosecuted to a final adjudication adverse to the plaintiff" (quotation omitted)). Accordingly, if the dismissal order did not vacate the foreclosure judgment, as lender now argues, then lender would have been left with a foreclosure judgment authorizing a judicial sale coupled with a combination of orders ensuring that no judicial sale could ever occur pursuant to that order. That would be an unreasonable interpretation. See Poston Feed Mill Co. v. Leyva, 438 S.W.2d 366, 369 (Tex. Civ. App. 1969) (holding that if trial court's order contradicts or is materially inconsistent with earlier order dealing with same subject matter, latter order operates to implicitly vacate prior order, even if latter order does not so expressly provide).

         ¶ 15. Moreover, as the trial court noted, lender's post-dismissal actions confirm that it understood the dismissal on the merits to essentially vacate the first foreclosure judgment. In fact, in the hearing below in connection with this second foreclosure action, the lender stated that the first foreclosure judgment had been vacated to allow parties to try to settle, and emphasized that it had chosen a new default in connection with the second foreclosure action.

         ¶ 16. We do not reach lender's argument that the trial court in November 2010 had no authority to vacate the May 2009 foreclosure judgment because this argument is an impermissible collateral challenge to the first unappealed dismissal order. Lender makes potentially persuasive arguments that the trial court did not have the authority under the circumstances to vacate the final judgment of foreclosure. See U.S. Bank Nat'l Ass'n v. Kimball, 2011 VT 81, ¶ 22, 190 Vt. 210, 27 A.3d 1087 ("Nevertheless, and despite the court's invocation of 'with prejudice' in its dismissal order, U.S. Bank cannot be precluded from pursuing foreclosure on the merits should it be prepared to prove the necessary elements."). But at this point, lender is essentially mounting a collateral attack on a final judgment. We thus do not reach lender's argument that the trial court had no authority to vacate the foreclosure judgment in its dismissal order. Lender did not timely appeal the dismissal order, and we cannot now revisit the issue. Miller v. A.N. Deringer, Inc., 146 Vt. 59, 60, 498 A.2d 501, 502 (1985) ("Judgments from which timely appeals are not taken are conclusive upon the parties.").

         ¶ 17. Accordingly, we affirm the trial court's conclusion that the May 2009 foreclosure judgment was effectively vacated by the trial court's November 2010 dismissal of the first foreclosure action.

         II. Effect of Dismissal of the First Action "With Prejudice"

         ¶ 18. The remaining issues in this case all turn on the central question in this case: What is the effect of a court's dismissal on the merits of a foreclosure action, including a contractual claim on the promissory note, on the lender's ability to pursue a later claim for default on the note and foreclosure as a remedy? There is no perfect answer to this question. Although this Court has not previously considered the question, [4] other courts have taken a range of approaches-from concluding that where a lender seeks to accelerate the borrower's repayment obligation on account of a default, a dismissal with prejudice forever precludes a subsequent claim for default on that note, to concluding that the dismissal does not preclude the lender from bringing a subsequent action based on a subsequent default. Each of these approaches is problematic for different reasons, and we adopt a middle path.

         ¶ 19. The preclusive effect of a judgment is a question of law that we review without deference. Breslin v. Synnott, 2012 VT 57, ¶ 8, 192 Vt. 79, 54 A.3d 525.[5]

         ¶ 20. Dismissal of a claim "with prejudice" operates as an adjudication "on the merits." Littlefield v. Town of Colchester, 150 Vt. 249, 251, 552 A.2d 785, 786 (1988); see also Black's Law Dictionary 1837 (10th ed. 2014) (defining the term "with prejudice" to mean "[w]ith loss of all rights; in a way that finally disposes of a party's claim and bars any future action on that claim"). Determining the preclusive effect of the dismissal with prejudice of the first action, and the trial court's ruling in this second action, requires application of the principles of claim preclusion. "The rule of claim preclusion applies when the parties, subject matter, and causes of action in a previous litigation, where the court has issued a final judgment, and in a subsequent litigation are the same or substantially identical." Alden v. Alden, 2010 VT 3, ¶ 9, 187 Vt. 591, 992 A.2d 298 (mem.). "It precludes the parties from relitigating not only those claims that were previously litigated, but also those that should have been raised in previous litigation." Id. (quotation omitted).[6] The trial court's dismissal of lender's first foreclosure action thus operates as an adjudication for borrowers on the merits of the claims that were litigated or should have been raised in that action.

         ¶ 21. This statement of black-letter law does little to advance the analysis. What, exactly, was adjudicated in the first foreclosure action? Whether borrowers were in default on the note on the date of the notice of default that preceded that suit? Whether lender is forever barred from collecting on the note, having accelerated the principal due on the basis of its claim of default? Courts have taken divergent approaches to these questions-none of which is entirely satisfactory.

         ¶ 22. In one line of cases, courts have held that the dismissal with prejudice operates as an adjudication on the merits with respect to the underlying debt in its entirety. The earliest of these cases is Johnson v. Samson Construction Corp., where the Supreme Judicial Court of Maine held that a mortgagee "cannot avoid the consequences of [its] procedural default" by attempting to relitigate nonpayments on a note the debt of which had been accelerated in a previous lawsuit dismissed with prejudice. 1997 ME 220, ¶ 8, 704 A.2d 866. After the borrower defaulted on a May 1990 payment, the lender initiated a foreclosure action in August for the full amount due under the note, as permitted by the acceleration clause of the note. In December 1994, the court dismissed the action with prejudice because the mortgagee failed to file a Report of Conference of Counsel. Id. ¶ 3. In August 1995, the mortgagee filed a second suit, alleging failure to make payments from September 1990 onwards and seeking judgment for the "amount due under the Note." Id. ¶ 4. The trial court granted summary judgment to the borrower on the grounds of res judicata. Id. The Maine high court affirmed:

The promissory note between [the parties] required 240 equal monthly payments of principal and interest. However, the note's acceleration clause provided that "[i]f any default be made in any payment under this Note, and if such default is not made good within thirty (30) days after written notice of same, the entire unpaid principal and accrued interest shall become immediately due and payable without further demand." [The lender's] first cause of action alleged that [borrower] "defaulted on its obligations to the [lender] under the Note" and demanded payment of the entire unpaid principal balance. This suit was an action for the accelerated debt. Once [borrower] triggered the acceleration clause of the note and the entire debt became due, the contract became indivisible. The obligations to pay each installment merged into one obligation to pay the entire balance on the note. The court's dismissal with prejudice of the first action operated as an adjudication on the merits. That ...

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