U.S. Bank Natl. Assn. v. Gullotta (2008), 120 Ohio St.3d 399
In the recently decided case of U.S. Bank v. Gullotta, the Ohio Supreme Court held that if a lender twice dismisses a foreclosure action against a borrower, the lender may be barred from ever filing another foreclosure action against the borrower, even if the borrower never makes another payment on the promissory note. This decision will likely impact the way lenders handle debt collection actions within the state of Ohio.
The issue presented to the Court in Gullotta was whether or not each missed payment under a promissory note yields a new claim such that any successive actions on the same note involve different claims and are thus exempt from the “two-dismissal rule” contained in Civil Rule 41(A)(1). The “two-dismissal rule” contained in Civil Rule 41(A)(1), addressed by the Court in Gullotta, is one of procedure. In Ohio, a Plaintiff in a lawsuit may choose to voluntarily dismiss the lawsuit prior to trial, subject to certain limitations. Generally, the first dismissal is done without prejudice, which permits the case to be re-filed. After this first dismissal by the Plaintiff, he or she may choose to re-file the lawsuit a second time. The second lawsuit generally has to be re-filed within one year of the first dismissal. If the Plaintiff then dismisses the lawsuit a second time, the Plaintiff will be forever barred from bringing the suit again.
Cases are voluntarily dismissed for a variety of reasons. One reason why cases are dismissed is that counsel is not prepared to take a case to trial. As the trial date approaches, if counsel is under prepared, a common practice is to voluntarily dismiss the case. Counsel often will dismiss the case knowing that they will get a second bite at the apple when they re-file the case. This also gives them a second opportunity to prepare for trial.
The procedural history of Gullota was outlined by the Court. In June 2003, Gullotta executed an adjustable rate note and a mortgage in the amount of $164,900 with MILA, Inc., which subsequently assigned the note to U.S. Bank. On April 9, 2004, U.S. Bank filed its first complaint for money judgment, foreclosure, and relief which declared the entire debt due. On June 8, 2004, U.S. Bank voluntarily dismissed that complaint. On September 9, 2004, U.S. Bank filed its second complaint, duplicating the allegations contained within the first complaint. On March 15, 2005, U.S. Bank dismissed the second complaint.
On October 26, 2005, U.S. Bank filed its third compliant, again duplicating the allegations found in both the first and second complaints. Gullotta filed a motion to dismiss arguing that the two dismissal rule applied. U.S. Bank filed an amended compliant, which mirrored the original compliant; however, instead of seeking interest from the date of default, it sought interest from the date of the second dismissal.
The Court recognized the significant facts of this case to be that “the underlying note and mortgage never changed, that upon the initial default, the bank accelerated the payments owed and demanded the same principal payment that it demanded in every complaint, that Gullotta never made another payment after the initial default, and that U.S. Bank never reinstated the loan.” According to these facts, the Court held that each missed payment under the promissory note did not give rise to a new claim and that Civ.R. 41(A)'s two-dismissal rule applied to this action. Therefore, when U.S. Bank dismissed the second lawsuit, it was barred from ever collecting the debt under the promissory note or foreclosing upon Mr. Gullotta’s property.
However, the Supreme Court noted that its holding in Gullotta would be limited. The Court provided three circumstances that it implied would not be affected by the Gullotta decision. These examples of when the “two dismissal” rule would not apply include: 1) if there was any change to the terms of the note or mortgage; 2) if any payments had been credited to the loan; and 3) if the loan had been reinstated. Inevitably, these examples will be further developed as the issues in Gullotta are further litigated, but what lenders can draw from this opinion is that the “two-dismissal rule” will be applied to actions to collect debt, including foreclosure actions.
While the action in Gullotta happened to be a foreclosure action, stemming from the failure to make payments on a promissory note, the general holding from this case will likely be applied to all actions to collect debts. We caution therefore, if a debt collection or foreclosure action is filed the lender and its attorneys should be prepared to take the case to trial, or if the case needs to be dismissed a second time it should only be dismissed after a novation or other new agreement has been reached with the debtor. If you would like a full copy of the opinion, U.S. Bank National Association v. Gullotta, or if you have any other questions related to creditor rights or foreclosure issues feel free to call upon one of our Finance and Creditor Rights practice group attorneys.
