A recent North Carolina Court of Appeals decision in Lifestore Bank v. Mingo confirmed that Rule 41 of the North Carolina Rules of Civil Procedure (referred to as the Two Dismissal Rule) applies to power of sale foreclosure proceedings in North Carolina. Under the Two Dismissal Rule, a second dismissal of a plaintiffs same claims operates as a decision on the merits, prohibiting that plaintiff from raising the same claims for a third time. As discussed below, after a summary of the case, this decision has many implications for real estate secured lenders in North Carolina.
Lifestore Bank (Lifestore) lent the Mingo Tribal Preservation Trust (Mingo) two loans. The first was made in February 12, 2007, in the amount of $2,450,000.00 (Tuscarora Note) and secured by a deed of trust encumbering the Tuscarora Ranch in Wilkes County, North Carolina. The second loan was made on February 8, 2008, in the amount of $1,800,000.00 (“EAC Note”), and was secured by a 2006 promissory note between Mingo and Pitchfork Basin, f/k/a EAC. The 2006 promissory note collateral was in turn secured by a deed of trust between EAC and Mingo. On December 1, 2010, Lifestore filed for foreclosure due to Mingo’s default under both the Tuscarora Note and the EAC Note. The clerk of court entered orders permitting both foreclosures to proceed, but after a series of appeals Lifestore dismissed its foreclosure of the EAC Note collateral on October 7, 2011, and Lifestore dismissed its foreclosure of the Tuscarora Note collateral on October 10, 2011. On December 7, 2011, Lifestore again filed to foreclose its collateral for both notes. The clerk of court again entered orders permitting both foreclosures to proceed, but after a series of appeals Lifestore dismissed its second foreclosures of both the EAC Note collateral and the Tuscarora Note collateral on July 13, 2012. On June 6, 2012, Lifestore filed a complaint against Tuscarora, EAC and Mingo for judgment on the notes and judicial foreclosure of the real property collateral. At issue in this case was whether the Two Dismissal Rule prevented Lifestore from filing this third attempt at foreclosing on the collateral through judgment on the notes and judicial foreclosure, rather than by a power of sale foreclosure.
First the court analyzed this matter by stating that the North Carolina Rules of Civil Procedure applied to power of sale foreclosures, and this included the Two Dismissal Rule. Next the court stated that the two dismissal rule has two elements: (1) the plaintiff must have filed two notices to dismiss under Rule 41(a)(1); and (2) the second action must have been based on or included the same claim as the first action. As a result, the Two Dismissal Rule would prevent Lifestore from filing a third power of sale foreclosure for the same loans and collateral. As stated above, however, Lifestore’s third action was not to attempt to foreclose on the collateral by power of sale foreclosure, but rather through a full blown civil action seeking a judgment and judicial foreclosure of the collateral. The court ruled that because power of sale foreclosure proceedings in North Carolina are limited in jurisdiction and scope, and the civil action for judgment on the notes and judicial foreclosure would be a full blown judicial proceeding, the third attempt to foreclosure on the collateral through a civil action constituted a set of claims separate from the prior power of sale foreclosure proceedings, and therefore not barred by the Two Dismissal Rule.
While the Lifestore Bank v. Mingo decision confirms that the Two Dismissal Rule applies to power of sale foreclosures, it does not overturn other precedent in North Carolina stating that each default under an agreement is treated as a separate claim under Rule 41. See, e.g. Centura Bank v. Hawkins, 159 N.C. App. 456 (2003). This means that if a borrower defaults, the secured lender initiates foreclosure, the borrower reinstates the loan, the borrower defaults again, and the secured lender again initiates foreclosure based on the second default, the foreclosure prior to the reinstatement would not count towards the Two Dismissal Rule if the later foreclosure is dismissed. Additionally, the Two Dismissal Rule does not apply if the parties all stipulate that the case should be dismissed.
As a result of the Lifestore decision, secured lenders may wish to consider the following:
(1) If the loan is reinstated or paid off, the secured lender can instruct the foreclosing trustee to file a dismissal of the foreclosure proceeding. If the loan is paid off and the note cancelled, the lien is extinguished and the lender cannot foreclose again anyway. If the loan is reinstated, any new foreclosures would be based on a new default and the earlier foreclosure would not apply to the Two Dismissal Rule.
(2) If the secured lender wants to stop foreclosure due to reasons other than reinstatement or payoff, such as lack of equity in the property or environmental problems, the secured lender should consider instructing its foreclosing trustee to seek dismissal by a stipulation signed by all the parties and stating that Rule 41(a)(1) does not apply, instead of filing a voluntary dismissal. While more troublesome than dismissing via voluntary dismissal, dismissing the case in this manner would allow the secured party to dismiss the foreclosure again at any time and re-file if any unexpected problems arose during the second foreclosure.
Chris Roede works primarily in the commercial real estate and collections area. He frequently works with secured lenders providing advice and analysis regarding troubled asset loans, including assisting with foreclosures, forbearance agreements, deed in lieu transactions, and short sale agreements. He also assists banks and other financial institutions with operational and regulatory compliance issues. He may be reached at 919.783.2932 or by email at firstname.lastname@example.org.