Court of Appeals Rules on Res Judicata Case

In the recently decided Mannion case, the Indiana Court of Appeals was asked to determine the res judicata effect of an involuntary dismissal of a prior foreclosure action. (Res judicata is a matter that has been adjudicated by a competent court and may not be pursued further by the same parties.)

‍Background

‍In Mannion, the borrower executed a note and mortgage on a residence in Kokomo. In October 2007, that borrower filed bankruptcy, then received a discharge in February 2009 that included a discharge of personal liability under the note and mortgage. After this, the borrower didn’t make payments and in April 2009, the lender’s predecessor in interest filed an in rem foreclosure action.

This foreclosure action was subsequently dismissed in March 2010 pursuant to Trial Rule 41(E) because the plaintiff didn’t take action in the case for more than 60 days. In Indiana, a dismissal under 41(E) is a dismissal on the merits and presumed to be with prejudice unless specifically stated otherwise. The plaintiff filed a second in rem foreclosure action in 2012, but dismissed it voluntarily in 2017.

In April 2018, the lender filed a third in rem foreclosure action seeking to enforce a default that occurred after the first in rem foreclosure had been involuntarily dismissed in 2010. The parties filed cross-motions for summary judgment. The borrower argued that the first foreclosure’s 41(E) dismissal was a bar to any subsequent foreclosure actions. The lender argued that the differing default dates denied that res judicata applied to the pending foreclosure. The trial court granted summary judgment in favor of the lender and against the borrower.

‍Indiana Court of Appeals Reversal‍

But the Indiana Court of Appeals reversed the trial court, determining that “the relief sought in both foreclosure actions was an in rem judgment for the amount due on the mortgage,” and further that the “fact that a different amount was alleged in each of the foreclosure actions is of no consequence.” Relying on its prior decision in Grant, the court disagreed with the lender’s assertion that the different dates of default distinguished the third foreclosure action from the first because the borrower’s personal liability had been discharged.

Lastly, the court addressed a public policy argument raised by the lender that the borrower should not be given the property “free and clear.” In rejecting the argument, the court noted that “the creditor created the situation as a direct result of its failure to prosecute, and the homeowner obtained a judgment on the merits.” For these reasons, “the judgment should have its full res judicata effect in accordance with res judicata principles.”

‍Implications

‍This is an important decision for mortgage servicers, plaintiffs, and their default litigation counsels alike. The Court of Appeals did not consider the stance of the industry or case law at the time of the initial dismissal, and did not otherwise evaluate why the initial 41(E) dismissal may not have been appealed. As a result, it is essential that plaintiffs and their counsel now proceed cautiously in refiling previously dismissed foreclosures in Indiana.