Provident Funding Associates, L.P. v. Campney

         On Appeal from Superior Court, Rutland Unit, Civil Division William D. Cohen, J.

          Andrew S. Cannella of Bendett and McHugh, P.C., Farmington, Connecticut, for Plaintiff-Appellant.

          John J. Welch, Jr., Rutland, for Defendant-Appellee Joan Campney.

          Paul S. Kulig of Kulig Law Offices, P.C., Rutland, for Defendants-Appellees Arnold and Peggy Campney.

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

          REIBER, C.J.

         ¶ 1. Senior mortgagee appeals the trial court's order dismissing junior mortgagee as a defendant from senior mortgagee's fourth foreclosure action against mortgagors. The trial court determined that junior mortgagee was entitled to dismissal as an equitable remedy because senior mortgagee had imposed unnecessary costs on junior mortgagee by repeatedly filing foreclosure actions against defendants and failing to prosecute them to completion. The court's order had the effect of reordering the priority of mortgages, making senior mortgagee's interest second in priority to that of junior mortgagee.^[1] We reverse and remand for the court to consider monetary sanctions, such as attorney's fees, as an alternative sanction.^[2]

         ¶ 2. This is the fourth in a series of foreclosure actions involving a parcel of real property in Clarendon, Vermont. In March 2007, defendants-mortgagors Arnold and Peggy Campney executed a promissory note to E-Loans, Inc. for $310, 000, secured by a mortgage on the Clarendon property. The note and mortgage are now held by senior mortgagee Provident Funding Associates, L.P., the plaintiff in this case, pursuant to a special endorsement. Junior mortgagee Joan Campney also held a mortgage on the Clarendon property that was recorded in 2004. She signed a subordination agreement in March 2007 in which she agreed that her mortgage would be inferior in priority to senior mortgagee's mortgage.

         ¶ 3. Mortgagors failed to make payments called for under the note and mortgage, and senior mortgagee filed a foreclosure action against them in October 2008. Junior mortgagee was also named as a defendant.^[3] The action was dismissed without prejudice at senior mortgagee's request in January 2009.

         ¶ 4. In August 2009, senior mortgagee filed another foreclosure action against the same defendants. Senior mortgagee moved for default judgment, but it apparently did not provide proof that it was the holder of the promissory note. In October 2009, the court ordered senior mortgagee to produce an endorsed note to establish its standing to foreclose upon the mortgage. Senior mortgagee did not respond. The court dismissed the action for failure to prosecute in January 2010.

         ¶ 5. Senior mortgagee filed a third foreclosure action in December 2010. In June 2011, the court sent notice to senior mortgagee that the action would be dismissed because it appeared that the defendants had not been served with the complaint. Senior mortgagee did not respond, and the court dismissed the action in August 2011 due to senior mortgagee's failure to prosecute the case. Senior mortgagee filed a motion to reopen, alleging that it had provided proof of service. The court denied the motion in November 2011 because there were several other irregularities with senior mortgagee's filings and senior mortgagee had failed to respond to the court's warning of dismissal.^[4]

         ¶ 6. Senior mortgagee commenced the present action in January 2012. Junior mortgagee moved to dismiss the case, arguing that the court's previous dismissals operated as an adjudication on the merits under Vermont Rule of Civil Procedure 41(b)(3) and barred further litigation of the same claims.

         ¶ 7. The trial court granted junior mortgagee's motion in an order issued in June 2012. Although the motion ostensibly sought to dismiss the entire case, the court only addressed whether the dismissal of the third action rendered finality to the interests of junior mortgagee in the present action. The court agreed with senior mortgagee that the present action was a "new claim" because "further defaults have occurred since the [third claim] was filed." The court held that senior mortgagee was not precluded under Rule 41(b) from filing the present action against junior mortgagee, despite the dismissals of the earlier actions.^[5] It based this conclusion on U.S. Bank National Ass'n v. Kimball, in which we held that the dismissal "with prejudice" of a foreclosure suit for lack of standing did not cancel the underlying note or mortgage or preclude subsequent foreclosure proceedings "based on proven delinquency." 2011 VT 81, ¶ 23, 190 Vt. 210, 27 A.2d 1087.^[6]

         ¶ 8. However, the trial court determined that because foreclosure proceedings are equitable in nature, it could use its equitable powers to dismiss junior mortgagee as a defendant.^[7] The trial court concluded that "undisputed facts" supported the equitable remedy of dismissal of ...