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Following Rule 41(E) Dismissal For Failure To Prosecute, Can A Second Suit Be Filed?

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.   

Case cite.  Grant v. The Bank of New York, 20 N.E.3d 733 (Ind. Ct. App. 2015). 

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.   

Related posts. 

Single Note/Multiple Mortgages In Different States: Can The Indiana Mortgage Be Foreclosed And, If So, When?

Facts:  A prospective lender client was considering a high-dollar commercial loan to be documented by a single promissory note secured by several mortgages in several states, including Indiana.  In the event of a default under the note, the lawsuit to enforce the note – the action to obtain the judgment under the note – would not be in Indiana. 

Issues:  The lender generally wanted to know whether the Indiana mortgage would be enforceable.  Since Indiana law requires mortgages to be foreclosed in the county where the mortgaged real estate is located (Ind. Code 32-30-10-3), one of my first questions was how, if at all, could the Indiana mortgage be foreclosed, given that the action on the note would be pursued in a different state?  My next thought concerned how any Indiana foreclosure action would be impacted by the promissory note case in the other state? 

Statutes: I reviewed several Indiana statutes for answers, including I.C. 32-30-10 (Mortgage Foreclosure Actions) and I.C. 32-29 (Mortgages).  According to my research, there are no statutes directly on point.  None of the statutes contemplate what to do when there are multiple mortgages in different states securing a single note, although from experience I understand that a debt can be secured by multiple mortgages.  Generally, the structure appeared to be sound.  The enforcement of a default was the trickier matter.  Other than I.C. 32-30-10-3 mentioned above, the only other instructive Indiana statute was I.C. 32-30-10-10, which says in pertinent part:

A plaintiff may not:
(1) proceed to foreclose the mortgagee’s mortgage:
    (A) While the plaintiff is prosecuting any other action for the same debt or matter that is secured by the mortgage; [or]
    (B) While the plaintiff is seeking to obtain execution of any judgment in any other action
(2) Prosecute any other action for the same matter while the plaintiff is foreclosing the mortgagee’s mortgage or prosecuting a judgment of foreclosure.

What I think this statute says is that a lender cannot, in one suit, pursue a judgment under the promissory note while at the same time, in a separate suit, foreclose the mortgage securing the note.  The two actions must occur simultaneously within the same case, or they must be done sequentially – with the note action first to establish the debt to be foreclosed.  Having said this, as noted below, Indiana case law either interpreting or applying Section 10 is extremely limited.  Further, it’s frankly unclear to me what the words “matter” or “same matter” mean in Section 10. 

Case law:  The good news is that there are five Indiana Supreme Court cases that deal with the concepts in Section 10, and one of those cases actually cites to an older version of the statute.  The bad news is that all of the five cases are from the 1800’s.  Assuming the 21st Century courts follow the 19th Century decisions, a lender should be able to obtain a judgment on a note without abandoning its mortgage lien on the mortgaged premises.  In other words, recovery of a judgment on a debt is not a bar to a subsequent action to foreclose the mortgage.  Moreover, a lender, holding a judgment on a debt, may proceed to foreclose the mortgage without going through the judgment execution process. 

Conclusions:  Indiana law appears to be settled that there can be two suits – one on the note and one on the mortgage – as long as the two suits are not pending at the same time.  This principle seems to be supported by the Setree opinion, which I discussed last year - Full Faith And Credit: Indiana Foreclosure’s Die Was Cast By Kentucky Judgment.  Referring back to the original issues above, my opinion is that the Indiana mortgage generally should be enforceable but that the Indiana foreclosure action cannot be commenced until after the entry of the out-of-state judgment on the promissory note.  The unresolved question in my mind is whether the post-judgment Indiana foreclosure action could be prosecuted simultaneously with foreclosure actions in other states. 

If you are aware of any case law to the contrary or have litigated these matters previously, please post a comment or email me at john.waller@woodenmclaughlin.com.  I’d be curious as to any thoughts or input. 

Now, back to March Madness….