By Thomas M. Kester
Albert Einstein is (allegedly) credited with saying, “The definition of insanity is doing the same thing over and over again, but expecting different results.” This is such a hackneyed quote and reminds me of vaudeville’s approach to comedy. Oliver Wendell Homes Sr.,1 in The Autocrat of the Breakfast-Table (1858), offers—in my opinion—a more discerning (and amusing) explanation: “Insanity is often the logic of an accurate mind overtasked. Good mental machinery ought to break its own wheels and levers, if anything is thrust among them suddenly which tends to stop them or reverse their motion. A weak mind does not accumulate force enough to hurt itself; stupidity often saves a man from going mad.”
“Hey, Tom, what’s the point?” Simply to elucidate that humans are creatures of habit and habit is repetitive, and the vast majority of humans are not insane (albeit we all have our eccentric moments). Who hasn’t explored couch cushions multiple times for one’s key in an almost Sisyphean fashion, knowing you came up empty handed just moments before? Maybe it’s chaos theory, self-doubt, or, because you threw the keys across the room, only Schrödinger and Heisenberg can locate them. Like the great Fonzie, perhaps we also believe that the jukebox will start only after the perfect maneuver is executed. We just need a little more time.
Speaking of time, it’s time to visit the instant case’s topics: real estate transactions and pleadings. On the surface they appear mundane, repetitive, and mainly involve paper pushing. Under the water, these monotonous actions harbor legal benefits. They can provide predictability, ease of process, and, besides, who wants to deal with pedantic legal requirements? If you don’t believe me (or want some reading material that will put you to sleep) I implore you to look up “common law pleading” and “code pleading”—both historically used in American court systems—to understand why “notice pleading” is the preferred method in civil procedure. This case illustrates that doing the same thing over and over again may not—at least after a bit—give you the desired results you wanted (I’m sure there is a Rolling Stones reference that I could throw in here).
The factual recital: on March 18, 2005, Borrower executed a promissory note to Option One Mortgage Corporation for $54,000, secured by a mortgage on the real property (the note and mortgage are now held by Deutsche Bank National Trust Company (“Lender”)) pursuant to an endorsement in blank contained in an allonge to the note and an assignment of mortgage from American Home Mortgage Serving, Inc. (“AHMSI”), successor-in-interest to Option One. On July 2010, there is payment default by Borrower, and Borrower and AHMSI entered into a loan modification agreement, whereby principal was increased to $77,270.65. Borrower continued to default on his payments and Lender filed a complaint (“Complaint #1”) for judgment on the promissory note, mortgage foreclosure, and deficiency judgment in October 2011.
Now comes the interesting part: the case’s procedural posture. Please note that for each complaint referenced, “lender filed virtually the exact same” one each time.
Complaint #1: after Borrower defaulted, Lender filed two motions seeking extensions of time because “the parties were involved in settlement discussions.” After the second one expired, the action was dismissed “without prejudice” (i.e., does not bar a subsequent suit on the same cause of action) on November 26, 2012.
Complaint #2: in March 2013, Lender filed a second action, “utilizing an identical complaint with the addition of an allegation of the modification and increased principal amount.” In January 2014, superior court “notified lender that borrower had not entered an appearance and directed lender to file a motion for default judgment within two weeks.” Two weeks come and Lender hadn’t filed a motion for default judgment and, on March 31, 2014, the trial court “dismissed the action without a specific statement indicating whether dismissal was with or without prejudice.”
Complaint #3: Borrower still didn’t make any payments on the note. In September 2014, Lender files complaint that is “identical” to Complaint #2. Borrower files pro se appearance and an attorney (on Borrower’s behalf) moves to dismiss the action based on claim preclusion.
Claim preclusion (sometimes used interchangeably with “collateral estoppel” and res judicata) is a “doctrine recognizing that the determination of facts litigated between two parties in a proceeding is binding on those parties in all future proceedings against each other.” Law likes finality. I’ll admit: sometimes finality isn’t satisfying (like the The Sopranos series finale) but other times it can provide the requisite closure (“Now small fowls flew screaming over the yet yawning gulf; a sullen white surf beat against its steep sides; then all collapsed, and the great shroud of the sea rolled on as it rolled five thousand years ago”). Whatever the view, re-litigating the same case/issue/facts ad infinitum draws out both uncertainty and is not in keeping with judicial economy.
The superior court (in Complaint #3) stated that “lender ‘willfully fail[ed] to heed the court’s warning after having a prior case dismissed” and was a “sophisticated user” with “approximately seventy-five foreclosure cases currently pending in the state.” By dismissing the action under the Vermont Rules of Civil Procedure (“VRCP”) 41(b)(3), the borrower got a “windfall.” Even so, the trial court reasoned, the outcome was “fair in light of lender’s multiple squandered opportunities to ‘avail itself of the benefits of Vermont’s judicial process.’” Lender appeals.
On appeal, Lender raises five arguments: (1) whether considering untimely motion to dismiss over Lender’s objection was an abuse of discretion; (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 SCOV precedent; (4) whether dismissal under civil procedure rules precludes foreclosure if there is a future default; and (5) if prior dismissed action was a sanction, whether it was error to preclude enforcement of note/mortgage.
As to Lender’s first argument, the SCOV concludes it has no real basis because Lender “waived any opportunity to contest the timeliness of the answer and motion to dismiss” due to their untimely response to the motion to dismiss. As there was an “absence of any demonstrated prejudice to lender from the delay,” and the SCOV favors merit-based over default-based adjudications, the SCOV finds that the trial court acted within its discretion when it granted the motion to dismiss.
As to Lender’s second argument, under the VRCP and unless stated, a trial court’s “dismissal predicated on a lender’s failure to seek a default judgment operates as an adjudication on the merits.” SCOV notes that this interpretation is consistent with federal and other state courts. As to Lender’s third argument, Lender’s reference to SCOV case law addressing dismissal, based on lack of jurisdiction, is not applicable to this case’s facts.
As to Lender’s fourth argument, this argument is raised for the first time on appeal and the superior court did not address it below. SCOV reasons that the Lender did not properly preserve this issue for appeal.
Finally, as to Lender’s fifth argument: “Lender was not subjected to a special penalty or sanction; the decision that dismissal was with prejudice is explicitly part of Rule 41, and lender was on notice of it.” SCOV states that Lender could have avoided this “windfall” because it was on notice and had similar pending matters. Of note, “It [Lender] would have been in a stronger position if the third complaint, the one in this case, reflected the earlier dismissal and the requested consequences of that dismissal” rather than filing almost identical complaints each time.
Ultimately, the SCOV holds: “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.” However, the SCOV “decline[s] to address lender’s argument that a new foreclosure action could be based on a new default” without any evidence of default before it.
Ultimately, the SCOV holds: “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.” However, the SCOV “decline[s] to address lender’s argument that a new foreclosure action could be based on a new default” without any evidence of default before it.
1 While a physician and noteworthy Boston poet, he was also the father of Oliver Wendell Holmes Jr., who would eventually become an Associate Justice of the Supreme Court of the United States. ↩
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