In U.S. Bank National Association v. Gullotta, 120 Ohio St 3d 399, the Ohio Supreme Court decided that multiple actions under the same note and mortgage are subject to the two-dismissal rule and res judicata preclusion. The decision could have far-reaching implications for lenders seeking to workout loans with troubled borrowers.
The history of the case is important to understanding its impact. In June 2003, Giuseppe Gullotta entered into a note and mortgage with MILA, Inc., which assigned the note to U.S. Bank. In April 2004, U.S. Bank filed a foreclosure complaint for the total principal due on the note, plus interest from November 1, 2003. It voluntarily dismissed this complaint in June 2004. In September 2004, U.S. Bank filed a second identical complaint, except with interest running from December 1, 2003, which it also voluntarily dismissed in March 2005. In October 2005, U.S. Bank filed a third foreclosure complaint on Gullotta’s note and mortgage. After Gullotta filed a motion to dismiss, U.S. Bank amended its complaint to seek interest only from April 1, 2005 (the first missed payment date after its second dismissal).
Ohio Civil Procedure Rules state that “a notice of dismissal operates as an adjudication on the merits of any claim that the plaintiff has once dismissed in any court.” A second dismissal is with prejudice and res judicata preclusion takes effect. Under a res judicata analysis, any claim “arising out of the transaction or occurrence that was the subject matter of the previous action” is barred.
The Court held that each missed payment under the same note and mortgage does not give rise to a new claim, and therefore U.S. Bank’s two earlier dismissals precluded a third action. It premised this holding on four critical facts: 1) the underlying note and mortgage never changed, 2) the bank accelerated the payment upon initial default and demanded the same principal payment in every complaint, 3) Gullotta never made another payment after his initial default, and 4) U.S. Bank never reinstated the loan.
Here, the Court ruled that U.S. Bank’s third complaint arose from the same transaction or occurrence as its first two. It made a critical distinction between an installment loan payment and a loan post-acceleration. Under an installment contract, each missed payment constitutes a new claim, and thus is not subject to preclusion. If the contract contains an acceleration clause, however, a single breach is a breach of the entire agreement and the requirement to make installment payments “merge[s] into one obligation to pay the entire balance on the note.” Since every claim after acceleration would be based upon that one obligation, claims after a second voluntary dismissal are precluded.
A third claim would not be barred if the claim were somehow different from the prior dismissed claims. For instance, if the note and mortgage had been significantly amended or the mortgage had been reinstated following an earlier default. The Court cited a string of decisions where differences in the underlying obligation permitted claims to proceed.
The lower court was concerned that preventing subsequent claims by mortgagees would rid of any incentive for the mortgagee to negotiate with the mortgagor after filing its foreclosure complaint. The Court dispatched with this argument, however, by stating that if the mortgagee engaged in negotiations that led to altering the note and mortgage or reinstating the loan, any future claims would be permitted because they would arise from a different transaction.
Mortgage holders should bear this decision in mind when pursuing foreclosure or other options against a defaulting borrower. A second voluntary dismissal of a foreclosure action, without a change in the underlying transaction, could bar any future recovery on the note and mortgage. Rather than simply allowing the borrower to begin making payments again, the loan should be reinstated, the terms of the note or mortgage should be amended, or an entirely new agreement should be drafted. As was noted at oral argument, the decision eliminates any incentive for a property owner to pay on a mortgage loan after a second voluntary dismissal.