The Supreme Court of Wisconsin recently held that claim preclusion does not bar a mortgagor from proceeding with a foreclosure complaint despite a prior litigation which resulted in a dismissal with prejudice if the subsequent litigation is based upon a default and acceleration which occurred after the initial foreclosure proceeding.
A copy of the opinion in available at: Link to Opinion
Following a borrower's default on his mortgage loan, the prior servicer of the loan initiated foreclosure proceedings based upon a default and acceleration alleged to have occurred in 2009. The trial court in this initial foreclosure action determined that the prior servicer failed to demonstrate sufficient evidence that proper notice of default and intent to accelerate was provided to the borrower as required. Consequently, the trial court dismissed the initial foreclosure complaint with prejudice.
After the dismissal of the initial foreclosure complaint, the new loan servicer for the loan provided a new notice of intent to accelerate to the borrower. After the borrower failed to cure the default, the new servicer filed a second foreclosure complaint alleging that the borrower defaulted in 2009 and that proper notice of acceleration had been provided.
The borrower moved to dismiss the second foreclosure complaint arguing that it was barred the doctrine of claim preclusion.
The trial court determined that claim preclusion only barred the portion of the complaint which alleged a default prior to the dismissal with prejudice. However, the trial court allowed the filing of the new foreclosure complaint to provide an allegation of default occurring subsequent to that dismissal.
Following the trial court's ruling, the servicer filed the amended complaint containing the allegations as to the default and acceleration after the dismissal in the initial proceeding and the matter proceeded to trial. At trial on the amended complaint, the court granted judgment of foreclosure and entered a deficiency judgment against the borrower for the entire loan balance.
During the trial, the court also allowed a copy of the original note to be entered into evidence following the production of the original for inspection in open court by counsel and the court.
The borrower appealed the judgment, and the Wisconsin appellate court certified the issue as to whether or not the doctrine of claim preclusion acts as a bar to the second foreclosure action based upon the dismissal with prejudice entered in the initial foreclosure complaint.
In reviewing the issue, the Wisconsin Supreme Court began with a statement as to the standards for the doctrine of claim preclusion in Wisconsin. As you may recall, there are three elements necessary for the doctrine to apply: "(1) an identity between the parties or their privies in the prior and present suits; (2) an identity between the causes of action in the two suits; and, (3) a final judgment on the merits in a court of competent jurisdiction." See N. State Power Co. v. Bugher, 525 N.W.2d 723 (Wis. 1995).
As noted by the Court the only element at issue in the matter at hand was the second -- i.e. whether or not an identity between the two causes of action existed. In Wisconsin, the second factor is determined by applying the "transactional approach" described in Restatement (Second) of Judgments. The "transactional approach" views a claim in factual terms and coterminous with the transaction, and to avoid an analysis of the legal theories presented in the matters. See Restatement (Second) of Judgments § 24 (1982).
The Supreme Court of Wisconsin further explained that the transactional approach to claim preclusion reflects the "expectation that parties who are given the capacity to present their entire controversies shall in fact do so." In other words, the "concept of a transaction connotes a common nucleus of operative facts." See Kruckenberg v. Harvey, 694 N.W.2d 879 (Wis. 2005). Pragmatically speaking, the Court summed up the process as looking to see whether or not the claims in the second action should have been presented in the earlier action.
Applying this standard to the matter at hand, the Court concluded that there was no identity between the two foreclosure actions because each lawsuit relates to a set of operative facts that occurred at a different time.
Specifically, as noted by the Court, the default and acceleration alleged in the second foreclosure action "by way of the amended pleading" could not have been included in the first action as they occurred after the dismissal.
The Wisconsin Supreme Court rejected the argument by the borrower that the doctrine should apply because the entire loan balance had been alleged due and owing in both actions. The Court explained that unlike in cases cited by the borrower, the trial court in the first foreclosure action determined that the loan was not properly accelerated, and consequently, there was no bar to the mortgagee accelerating the loan balance afterwards based upon a subsequent default. See Johnson v. Samson Constr. Corp., 704 A.2d 866 (Me. 1997); U.S. Bank National Ass'n v. Cullota, 899 N.E.2d 987 (Ohio 2008). Notably, the Court did not disagree (or agree) with the courts in Johnson or Cullota, but found that factually, those rulings were distinguishable from the present case.
Explaining the law as to the applicable facts, the Court stated that "[a]fter a lawsuit based on the debtor's failure to make one or more payments is dismissed with prejudice but payment of the note was not validly accelerated because it was never proved the borrower was actually in default, the parties are simply placed back into the position they had held before the commencement of the lawsuit, with the same continuing obligations."
Here, the Court found that following the dismissal of the initial foreclosure action without a determination that the loan had been accelerated, the borrower's obligation to make the monthly installment payments under the loan continued. The borrower's subsequent failure to pay as demanded by the subsequent servicer was a default which allowed for the loan balance to be accelerated.
Accordingly, the Supreme Court of Wisconsin determined that claim preclusion did not apply, and affirmed the trial court's judgment in favor of the mortgagee.
The Court also briefly addressed an issue raised by the parties concerning whether the trial court erred in allowing the entry of a copy of the note into evidence over the borrower's objection. Relying heavily on its recent ruling in Deutsche Bank National Trust Co. v. Wuensch, Case No. 2015AP175 (Wis. Apr. 17, 2018), the Court determined that the trial court did not err.
In Deutsche Bank, the Supreme Court of Wisconsin found that a "promissory note endorsed in blank constitutes self-authenticating commercial paper that may be enforced by the holder of the note." The Court also noted that "generally speaking, a duplicate of a document is admissible to the same extent as the original."
Thus, the Court found that no error occurred because the mortgagee proved that it possessed the original wet-ink note, and there was no issue with admitting a copy into evidence.
Ralph T. Wutscher
Maurice Wutscher LLP
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