Lesson. Once a lender files an Indiana foreclosure suit, that lender should either prosecute it or dismiss it without prejudice. Sometimes, particularly in high-volume residential/consumer foreclosure servicing, a file can be ignored to the point that it is automatically dismissed, which could prove problematic or even disastrous. If a post-dismissal second suit is filed, the second complaint must articulate separate and distinct defaults.
Legal issue. Whether the lender’s second mortgage foreclosure action against the borrowers should have been dismissed where the first case was dismissed with prejudice under Ind. Trial Rule 41(E).
Vital facts. In this residential case, the lender filed an in rem (against the property only, not the individuals) complaint to foreclose its mortgage. The borrowers previously had been discharged in bankruptcy, so the lender’s recovery was limited to the mortgaged property. The lender took no action for a year and a half, so the trial court set a Rule 41(E) “call of the docket,” and the lender failed to appear. The trial court dismissed the action for cause for failure to prosecute. Later, the lender filed a new suit asserting the same allegations and seeking the same relief.
Procedural history. The trial court denied the borrowers’ motion to dismiss the second suit and granted the lender’s summary judgment motion. The borrowers appealed.
Key rules. The borrowers’ position hinged on principles of res judicata, a topic I have discussed (see below). Also in play were Rules 41(E) [failure to prosecute] and 41(F) [reinstatement following dismissal]. Further, under Rule 41(B), a dismissal automatically is with prejudice (on the merits) unless the order specifies otherwise. This is a lot of technical lawyer stuff, but generally speaking, though not in all instances, a dismissal “with prejudice” is “conclusive of the rights of the parties and is res judicata as to any questions that might have been litigated.”
Holding. The fundamental question in Grant was whether the first and second actions were the same. The lender argued that the borrowers’ obligations under the loan were ongoing such that any subsequent default (post-dismissal nonpayments) created “a new and independent right to initiate foreclosure.” The Court of Appeals rejected the lender’s contentions, reversed the trial court and ordered the trial court to dismiss the lender’s case.
Policy/rationale. The Court found compelling the fact that the borrowers’ personal liability under the note had been discharged. This meant that the second action had to be the same as the prior action, “which fully contemplated nonpayment due to the bankruptcy.” Indeed the two complaints articulated the same defaults. The Court distinguished Grant from other Indiana case law holding that second suits can be pursued if the facts necessary to establish a default in the first case are different from those necessary to establish a default in the second one.