The North Carolina Court of Appeals released a decision on August 19, 2014 that may have a significant impact on the non-judicial foreclosure process in the state. The case is Lifestore Bank, f/k/a AF Bank v. Mingo Tribal Preservation Trust Dated January 4, 1993; Pitchfork Basin, LLC, f/k/a EAC Rev No. 6, LLC; Tuscarora Rand, LLC; and Allen C. Moseley, Substitute Trustee (NCCOA14-46).
I. Summary of Facts
Mingo Tribal Preservation Trust Dated January 4, 1993 (hereinafter “Mingo”) signed two different promissory notes with Lifestore Bank, f/k/a AF Bank (hereinafter “Lifestore”). The first note was from Lifestore to Mingo and secured by land owned by Tuscarora Rand, LLC (hereinafter “Tuscarora”). The second note was from Lifestore to Mingo and secured by land owned by Pitchfork Basin, LLC, f/k/a EAC Rev No. 6, LLC (hereinafter “EAC”).
Lifestore initiated a power of sale (non-judicial) foreclosure on December 1, 2010 against Mingo and Tuscarora. An Order permitting a foreclosure sale was entered by the clerk of court but the decision was appealed to Superior Court for a trial de novo. The Superior Court judge affirmed the order permitting the sale. The matter was then appealed to the NC Court of Appeals. Prior to being argued, all parties agreed to a voluntary dismissal without prejudice.
On December 7, 2011, Lifestore initiated a second power of sale foreclosure against Mingo and Tuscarora. The clerk of court again entered an Order permitting a sale. Lifestore filed a second voluntary dismissal without prejudice.
Lifestore initiated a power of sale (non-judicial) foreclosure on December 1, 2010, against Mingo and EAC. An Order permitting a foreclosure sale was entered by the clerk of court but the decision was appealed to Superior Court for a trial de novo. The Superior Court judge affirmed the order permitting the sale. The matter was then appealed to the NC Court of Appeals. Prior to being argued, all parties agreed to a voluntary dismissal without prejudice.
On December 7, 2011, Lifestore initiated a second power of sale foreclosure against Mingo and EAC. The clerk of court again entered an Order permitting a sale. Mingo and EAC appealed the decision to superior court. At the trial de novo, Lifestore orally entered a voluntary dismissal. The oral dismissal was followed by a second written voluntary dismissal without prejudice.
On June 6, 2012, Lifestore filed a new Superior Court action against Mingo, Tuscarora, and EAC seeking judgments for both notes and asking for a judicial foreclosure sale. Mingo moved for summary judgment on all of Plaintiff’s claims, asking that the judicial foreclosure be dismissed pursuant to Rule 41’s two dismissal rule, and seeking collateral estoppel for the suit on the notes. The trial court denied summary judgment on the claims on the Notes, but granted as to the judicial foreclosure claim.
The North Carolina Court of Appeals heard cross appeals from the parties following the trial court’s ruling on Mingo’s summary judgment motion, and rendered a surprising ruling that has the potential to change the face of North Carolina non-judicial foreclosure proceedings. That ruling is the subject of this update.
II. Summary of Legal Reasoning
At issue in the case at hand was whether Lifestore was banned from filing a judicial foreclosure after voluntarily dismissing two non-judicial foreclosures. The court determined that the two dismissal rule of NC Rules of Civil Procedure Rule 41 does not bar a holder from bringing an action for a judicial foreclosure when two voluntary dismissals have been entered on a non-judicial foreclosure. It does, however, bar the filing of a third non-judicial foreclosure.
The court states that the Rules of Civil Procedure apply to a non-judicial foreclosure. This statement is followed by a citation to a previous case (Phil Mech. Constr. Co v. Haywood, 72 N.C. App. 318, 325 S.E.2d 1 (1985)); however, the analysis did not address the discussion in that case about the Rules of Civil Procedure not applying when there is another statutory structure in place.
The Court goes on to explain that Rule 41 and the theory of collateral estoppel do not apply to a judicial foreclosure filed after two voluntary dismissals of prior non-judicial foreclosures. The basic analysis is that a non-judicial foreclosure proceeding under a power of sale provision in a deed of trust is an action separate and distinct from a judicial foreclosure action in civil superior court. The Court’s analysis centered on the scope of relief sought in the different types of actions. The court held that the same core of operative facts and the ability to assert all of the claims in the prior actions would have to be present for Rule 41 to apply as a bar a judicial foreclosure. Because the claims for monetary relief in the suit on the Notes could not be asserted in the special proceedings, and because the judicial foreclosure was a completely separate claim from the power of sale foreclosure claim, the court found and that Rule 41 did not bar the claims asserted in the superior court case.
III. Potential Issues
This ruling has the potential to change the face of non-judicial foreclosure in NC. The holding is that Rule 41 of the NC Rules of Civil Procedure applies to non-judicial foreclosures. This means that the holder of a note may not dismiss more than one non-judicial foreclosure without being barred from filing additional non-judicial foreclosures. This is now precedent and will impact how you evaluate your options before enforcing the terms of the note and deed of trust.
You should carefully review your close and bill instructions in relation to this decision. If you instruct a trustee to file a voluntary dismissal in a non-judicial foreclosure, then you will only have one additional opportunity to pursue a non-judicial foreclosure. Likewise, you should counsel your trustee firms to not file voluntary dismissals without explicit approval. There will likely be a number of matters that will sit inactive and ultimately be dismissed by clerks for lack of prosecution. These situations will arise when a borrower is under review for loss mitigation after a non-judicial foreclosure has been filed.
We are not yet certain how courts will interpret this decision. There are earlier decisions that significantly limit the application of the Rules of Civil Procedure and it is arguable that this decision can be narrowed to only apply to Rule 41. It is also possible that an argument of continuing default could be successfully made; this would allow a new non-judicial foreclosure based on a new default, even where two prior proceedings alleging different default circumstances have been voluntarily dismissed. Essentially, each new missed payment is a new default. This was not addressed at all in the ruling.
The more far-reaching and problematic aspect of the ruling is that it may be interpreted as holding that all of the NC Rules of Civil Procedure apply to non-judicial foreclosures. We can anticipate that counsel for borrowers and mortgagors will argue exactly that. This opens the possibility for countless motions, lengthy discovery requests, challenges to service of process, and arguments for sanctioning holders and trustees that file a non-judicial foreclosure after two voluntary dismissals.
The holder should anticipate matters becoming much more hotly contested as demands for discovery and depositions may be made and motions to dismiss the notice of hearing for failure to state a claim become more prevalent. This has the potential to drag out the timeline for the non- judicial matter and may place them in line on lengthy superior court calendars for any motion hearings on matters outside of the clerk’s authority. This will also significantly increase the fees and costs incurred on non-judicial matters, as they will be treated similarly to judicial matters once they become contested. It may be prudent to handle contested matters as a judicial foreclosure to avoid some of the uncertainty that has arisen in the wake of this decision.