Muddy Waters: Litigating a New Foreclosure Action After a T.R.41(E) Dismissal

J. Dustin Smith    March 21, 2019

Let’s say that a loan is in default and you want to initiate a new foreclosure action to enforce the terms of the agreement. A quick review of the file, however, reveals that this loan was involved in a prior foreclosure action that was dismissed under Indiana Trial Rule 41(E).

What’s the next step? Do you file a new foreclosure action? Do you go back into the earlier foreclosure to try to set aside the dismissal? Or are you no longer able to enforce the terms of the loan agreement through a foreclosure action?

To answer these questions, or at least get some guidance, we must take a closer look at a trio of cases decided by the Indiana Court of Appeals from 2006 to 2015.

Before we do that, though, here’s a quick, but important, Trial Rule 41(E) refresher. The rule provides that:

“Whenever there has been a failure to comply with these rules or when no action has been taken in a civil case for a period of sixty [60] days, the court, on motion of a party or on its own motion shall order a hearing for the purpose of dismissing such case. The court shall enter an order of dismissal at plaintiff’s costs if the plaintiff shall not show sufficient cause at or before such hearing. Dismissal may be withheld or reinstatement of dismissal may be made subject to the condition that the plaintiff comply with these rules and diligently prosecute the action and upon such terms that the court in its discretion determines to be necessary to assure such diligent prosecution.”

A dismissal under Trial Rule 41(E) can be entered by the court with or without prejudice. However, if the court’s order is silent on the issue, then the dismissal is presumed to be with prejudice. This distinction is very important because it affects how, when, and if a cause of action can be reinstated following dismissal.

The Afolabi Case

In 2006, the Indiana Court of Appeals decided the Afolabi case, which involved filing a new foreclosure action after a prior foreclosure action had been dismissed with prejudice under Trial Rule 41(E).

In Afolabi, the original foreclosure action filed November 30, 1995 was dismissed by the court on September 19, 1998. The borrower failed to make any payments on the note and mortgage after the original foreclosure action, so the lender filed a new action on July 16, 2003. In the foreclosure, the borrower filed a motion to dismiss, claiming that the first foreclosure action accelerated all payments due under the note and mortgage, including past and future payments. Therefore, the second action was barred under the doctrine of res judicata (a matter that has been adjudicated by a competent court and may not be pursued further by the same parties). In response, the lender argued that the second action was filed as a result of the borrower’s defaults that occurred after the original dismissal with prejudice.

The court concluded that res judicata didn’t bar the successive foreclosure claim because the subsequent and separate alleged defaults under the note created a new and independent right in the mortgagee to accelerate payment on the note. It said that evidence established that the facts at issue in each foreclosure action differed because the possible default dates differed. In the first foreclosure, the trial court had to determine whether there were sufficient facts to establish a default before November 30, 1995, while in the second action, the trial court had to determine whether there was a default between September 19, 1998 and November 14, 2005, which was not an issue in the first action.

Following Afolabi, the path to filing a new foreclosure after a Trial Rule 41(E) dismissal was fairly clear. If there were additional defaults following the original dismissal, and the second foreclosure action sought to establish a different date of default than the original foreclosure, the subsequent foreclosure action was permissible.

The Zavodnik Case Came Next

Then, in 2013, the Indiana Court of Appeals was faced with a different question in Zavodnik v. Richards – the res judicata effect on a cause of action that has been dismissed without prejudice. In Zavodnik, the plaintiff filed multiple lawsuits between 2008 and 2010 that were eventually consolidated before one judge for the Marion Superior Court. On March 2, 2011, the judge dismissed all of the lawsuits without prejudice under Indiana Trial Rule 41(E) because the plaintiff failed to comply with local rules and to serve notice to a number of defendants. On April 24 and May 11, 2012, the plaintiff filed new complaints against some of the same defendants and with the same allegations as the originally dismissed complaints.

In Zavodnik, the plaintiff argued that his original complaint(s) dismissal without prejudice under Trial Rule 41(E) had no res judicata effect and didn’t hamper his ability to file an entirely new complaint in a different court. In opposition, the defendant asserted that the plaintiff was required to petition to have the prior actions reinstated. The court determined that when a trial court has involuntarily dismissed a case without prejudice pursuant to Trial Rule 41(E), that rule’s subsection (F) permits the dismissing trial court the discretion to consider whether a complaint should be reinstated.

Thus, the decision in Zavodnik clarified that a dismissal without prejudice under Trial Rule 41(E) doesn’t trigger the same res judicata considerations and is therefore not controlled by the decision in Afolabi. Instead, a dismissal without prejudice is subject to the procedural requirement set forth in Trial Rule 41(E) and (F).

Next, the Grant Case

Just a few years later in 2015, the Indiana Court of Appeals was faced again with questions concerning res judicata and Trial Rule 41(E) dismissals when it decided the Grant case. In Grant, the borrowers obtained a mortgage debt discharge in a 2007 bankruptcy and then stopped making mortgage payments.

On November 26, 2007, the plaintiff filed an in rem foreclosure complaint but failed to take any action for more than a year, so the court dismissed the cause of action pursuant to Trial Rule 41(E). Two months after unsuccessfully attempting to reinstate the first foreclosure action, the plaintiff filed a new lawsuit against the borrowers asserting the same allegations and seeking the same relief.

The borrowers alleged that filing an entirely new complaint in a different court contravened T.R. 41(E) and (F) so the plaintiff shouldn’t be allowed to avoid the rule’s reinstatement requirement simply by filing a new complaint. In response, the plaintiff argued that the two foreclosure actions weren’t the same because the plaintiff sought different relief in each action.

The court ultimately determined that the plaintiff’s new foreclosure action filing was improper because the borrowers’ personal liability had been discharged in bankruptcy, the relief sought in both foreclosure actions was the same, and both complaints were based on the same alleged default.

Where Does This Leave Us?

With that background, let us revisit the primary question posed at the beginning of this article: Can you proceed with filing a new foreclosure action after a prior foreclosure has been dismissed under Trial Rule 41(E)?

If the dismissal is without prejudice, the answer is a straightforward no. Under Zavodnik, the plaintiff should follow the procedures outlined in Trial Rule 41(F) rather than filing a new foreclosure action.

But what about a dismissal with prejudice? That is where the appellate court decisions in Afolabi and Grant have muddied the waters. Afolabi suggests that a new foreclosure action is permissible if the borrower continues to default on the loan, because each missed payment creates a new right of action that wasn’t contemplated by the earlier foreclosure. This approach works as long as the new complaint seeks to establish a default date that is after the prior dismissal.

However, in Grant, where the plaintiff sought in rem relief because the borrowers had been discharged in bankruptcy, the Court of Appeals used this new fact pattern to decide that the relief sought in both foreclosure actions was precisely the same. Thus, Grant would seem to suggest that if the dismissed foreclosure action sought in rem relief, you can’t proceed with filing a new foreclosure action because the relief sought would be the same as the original complaint.

Nevertheless, the court’s opinion does leave some wiggle room. The court’s opinion specifically points out that both complaints in Grant were based on the same alleged default. This would seem to fall in line with court’s holding in Afolabi that if the default date is different in each complaint, then the facts and evidence needed to prove the default would be different for each action.

Strategies To Use

While the path to saving your subsequent foreclosure action certainly isn’t clear, and the court’s opinion in Grant definitely makes it an uphill battle, there are strategies you can use for the best chance at success. Most importantly, the default date used for the subsequent foreclosure action needs to be a date after the prior foreclosure was dismissed. This factor was strongly emphasized in both Afolabi and Grant.

In addition to a new default date, ensure that the facts and evidence needed to prove the subsequent default are different from the facts and evidence needed for the prior dismissal. This can be done by excluding prior late fees, interest, and other costs that were incurred before the earlier foreclosure was dismissed.

Combining these strategies with a fact pattern distinguishable from Grant should allow your subsequent foreclosure action to proceed where others have failed.

tags: Foreclosure, Indiana, Legislation

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