In Re Foreclosure of a Deed of Trust Executed by Herndon , 245 N.C. App. 83 ( 2016 )

IN THE COURT OF APPEALS OF NORTH CAROLINA
No. COA15-488
Filed: 19 January 2016
Sampson County, No. 14 SP 36
IN THE MATTER OF THE FORECLOSURE OF A DEED OF TRUST EXECUTED
BY RANDALL HERNDON AND NONA R. HERNDON AKA NONA RENEE
HERNDON DATED AUGUST 3, 2001 AND RECORDED IN BOOK 1403 AT PAGE
773 IN THE SAMPSON COUNTY PUBLIC REGISTRY, NORTH CAROLINA
Appeal by Petitioner from order entered 30 December 2014 by Judge Gale M.
Adams in Sampson County Superior Court. Heard in the Court of Appeals 21 October
2015.
Shapiro & Ingle, LLP, by Jason K. Purser, for Petitioner.
Brent Adams & Associates, by Brenton D. Adams, for Respondents.
STEPHENS, Judge.
Factual and Procedural Background
On 3 August 2001, Respondent Randall Herndon (“Herndon”) executed a
promissory note in favor of Long Beach Mortgage Company (“Long Beach”) in
consideration for a $60,800 loan. The loan was payable over 30 years at a rate of
11.25% interest. Herndon and his wife, Respondent Nona R. Herndon, executed a
deed of trust to secure the debt with real property located at 1375 Union Church Road
in Dunn (“the home”). Herndon defaulted on the debt beginning with his failure to
make a payment due 1 November 2007 and never again made a payment on the loan.
IN RE: HERNDON
Opinion of the Court
After the note was executed, Long Beach endorsed it such that it was payable
to “blank.” By November 2009, Petitioner U.S. Bank National Association (“the
bank”) was in possession of the note and was trustee of the deed of trust. On 4
November 2009, the substitute trustee, on behalf of the bank, filed in the Superior
Court in Sampson County a notice of hearing in support of its foreclosure petition in
file number 09 SP 246 (“the first foreclosure petition”). The notice of hearing stated
that the petition would be heard on 7 June 2010, noted that the debt had been
accelerated, and generally described a payment default. The substitute trustee
obtained continuances for the hearing several times, with the last hearing date set
for 25 August 2011. However, on 19 August 2011, the substitute trustee took a
voluntary dismissal of the special proceeding pursuant to Rule of Civil Procedure
41(a).
On 8 December 2011, the substitute trustee filed a notice of hearing in support
of a foreclosure petition in file number 11 SP 248 (“the second foreclosure petition”).
The notice set the hearing in the second foreclosure proceeding for 9 February 2012,
noted that the debt had been accelerated, and generally described a payment default.
Following a series of continuances, the second petition came on for hearing on 4
October 2012. At the hearing, evidence was presented, including an acceleration
warning letter dated 21 October 2011. At the conclusion of the hearing, the clerk
entered an order permitting foreclosure, which the Herndons appealed to the superior
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Opinion of the Court
court the following day. However, before the appeal was heard, the substitute trustee
again took a voluntary dismissal of the special proceeding pursuant to Rule 41(a).
On 21 February 2014, the substitute trustee filed a notice of hearing in support
of a foreclosure petition in file number 14 SP 36 (“the third foreclosure petition”). The
notice set the hearing in the third foreclosure proceeding for 27 March 2014 and noted
that the debt had been accelerated. The hearing was continued several times. At the
hearing on 21 August 2014, evidence was presented to the clerk, who entered an order
permitting foreclosure on the same day. The Herndons appealed that order to the
Sampson County Superior Court on 2 September 2014. Following a hearing in
November 2014, the Honorable Gale M. Adams, Judge presiding, entered an order on
30 December 2014 reversing the clerk’s order and dismissing the proceeding (“the
dismissal order”). The dismissal order provided:
It appearing to the [c]ourt that the Petitioner, U.S. Bank
National Association, as Trustee, Successor in Interest to
Wachovia Bank, National Association, (formerly known as
First Union National Bank) as Trustee, for Long Beach
Mortgage Loan Trust 2001-4, brought two previous special
proceedings; 09 SP 246 and 11 SP 248. The only document
of substance in file 09 SP 246 is a Notice of Hearing which
contains no date or other information regarding default.
Both 09 SP 246 and 11 SP 248 were voluntarily dismissed.
On the basis of the record, evidence presented, and
arguments of counsel, the [c]ourt is of the opinion the
dismissal in 11 SP 248 acted as an adjudication on the
merits pursuant to Rule 41(a)(1) of the North Carolina
Rules of Civil Procedure.
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IN RE: HERNDON
Opinion of the Court
On 27 January 2015, the substitute trustee gave notice of appeal from the dismissal
order.
Discussion
On appeal, the substitute trustee argues that the superior court erred in (1)
excluding an affidavit from Dana Crawford and (2) dismissing the third foreclosure
petition under the “two dismissal rule” of Rule 41(a). As discussed below, we reverse
the dismissal order.
I. The Crawford affidavit
The substitute trustee first argues that the superior court erred in excluding
an affidavit from Dana Crawford, a document control officer employed by the
authorized servicer handling Herndon’s loan for the bank. However, on appeal, the
substitute trustee acknowledges that “neither party expressly sought to admit [the
Crawford affidavit]” at the hearing before the superior court, “although [the
substitute trustee’s] counsel did refer to it.” After reviewing the transcript of the 3
November 2014 proceeding in the superior court, we agree that the Crawford affidavit
was never offered for admission.
Toward the end of the motion hearing, the Crawford affidavit was discussed by
Robert Hood, counsel for the substitute trustee:
THE COURT: Mr. Hood, can I see the affidavit that
you have for the third [foreclosure petition]?
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IN RE: HERNDON
Opinion of the Court
MR. HOOD: Yes, your Honor. I have two new
affidavits. They are identical. May I approach? This
would be in addition to the affidavit that’s in the special
proceeding file already.
THE COURT: Mr. Hood, I’ve gone through this entire
file. I see this affidavit in the file, but it’s not the one you’ve
handed up. It’s different.
MR. HOOD: Yes.
THE COURT: Y’all want to—go ahead.
MR. HOOD: I was just going to ask, is that the
affidavit in the file of August 21st? I think that was clocked
in on August 21st, 2014?
THE COURT: Let me go back to that.
MR. HOOD: Yes, your Honor. The second—the two
affidavits that I tendered today are—they have more
information and they were executed specifically for this
proceeding today. I have another copy. I have the first one.
THE COURT: So when you say that the affidavit that
you handed up is in the file, this affidavit that you handed
up is not actually in the file. It’s a different affidavit.
MR. HOOD: No. No. A different affidavit. I’m
sorry. I may have misspoke, your Honor. There was an
affidavit at the original hearing that is in the file and that’s
the one that was clocked in on August 21st.
THE COURT: Yes.
MR. HOOD: The two affidavits that I handed up
today, they are not in the file. Those were specifically for
today’s proceeding.
THE COURT: What’s the purpose of that?
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IN RE: HERNDON
Opinion of the Court
MR. HOOD: The purpose of the two affidavits, your
Honor, were just to bolster the, again, the notion of the
elements of default on behalf of the respondent[s].
Personally, they are superfluous because the original
affidavit that was clocked in at the hearing was sufficient.
The clerk said it was sufficient. That’s why she entered the
order. But, again, our client wanted to be crystal clear as
to the nature of the default. A little bit of the history is
there on the second page. They are identical, executed only
three days apart from each other.
It is not uncommon for our client to introduce another
affidavit of default, especially when we are submitting both
the original note and Deed of Trust.
(Emphasis added). There followed a brief discussion with the Herndons’ counsel
during which the affidavits were not mentioned, and the substitute trustee’s counsel
expressed concern about the original note and deed of trust which the trial court had
been reviewing. Judge Adams responded, “A copy of the note is in the file. Let me
hand back these affidavits also. The note is in the file.” That remark ends the hearing
transcript, and nothing in the transcript suggests that the substitute trustee’s
counsel ever asked that the affidavits be admitted or clarified for the court that he
did not want the affidavits to be returned along with the original note and deed of
trust.
Further, even assuming arguendo that the affidavits were offered for
admission and that the trial court excluded them, as the substitute trustee notes,
[w]e review a trial court’s decision to exclude evidence
under Rule 403 for abuse of discretion. An abuse of
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IN RE: HERNDON
Opinion of the Court
discretion results when the court’s ruling is manifestly
unsupported by reason or is so arbitrary that it could not
have been the result of a reasoned decision. In our review,
we consider not whether we might disagree with the trial
court, but whether the trial court’s actions are fairly
supported by the record.
State v. Whaley, 362 N.C. 156, 160, 655 S.E.2d 388, 390 (2008) (citations and internal
quotation marks omitted). Exclusion of evidence is proper “under Rule 403 if the trial
court determines its ‘probative value is substantially outweighed by the danger of
unfair prejudice, confusion of the issues, or misleading the jury, or by considerations
of undue delay, waste of time, or needless presentation of cumulative evidence.’ ” Id.
at 159-60, 655 S.E.2d at 390 (quoting N.C. Gen. Stat. § 8C-1, Rule 403) (emphasis
added). The substitute trustee’s counsel stated that the affidavits were being offered
“just to bolster the, again, the notion of the elements of default” and characterized
them as “superfluous” given that other evidence in the file “was sufficient.”
Considering that the proponent of the evidence explicitly described the affidavits as
unnecessary and cumulative, we would reject the argument that the trial court’s
decision not to admit them was “unsupported by reason or [was] so arbitrary that it
could not have been the result of a reasoned decision.” See id. at 160, 655 S.E.2d at
390 (citation and internal quotation marks omitted). Accordingly, even if we were to
hold that the affidavits had been offered into evidence, we would conclude that the
trial court did not abuse its discretion in declining to admit them. This argument is
overruled.
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IN RE: HERNDON
Opinion of the Court
II. The two dismissal rule
The substitute trustee next argues that the superior court erred in dismissing
the third foreclosure petition under the two dismissal rule of Rule 41(a). We agree.
We begin by addressing the substitute trustee’s assertion that the loan was not
accelerated until 21 August 2011, the date of the only acceleration warning letter
included in the record before us. The substitute trustee contends that the first
foreclosure petition was filed before the loan was accelerated and was thus based
upon Herndon’s default on the individual payments up to the time of filing, while the
second foreclosure petition was filed after the loan was accelerated and, thus, was
based on Herndon’s default on the total remaining balance owed. As a result, the
substitute trustee urges that, because the claim in the second foreclosure petition was
not based upon the same transaction or occurrence as the first foreclosure petition,
the two dismissal rule was not triggered by dismissal of the second foreclosure
petition. We must reject the factual premise of the substitute trustee’s argument on
this point. The 4 November 2009 notice of hearing in support of the first foreclosure
petition specifically states that the loan had been accelerated as of that date.
However, in light of recent precedent from this Court, this factual point makes no
difference in our resolution of the central question before us, to wit, whether the two
dismissal rule was applicable in this matter.
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IN RE: HERNDON
Opinion of the Court
“A creditor can seek to enforce payment of a promissory note by pursuing
foreclosure by power of sale, judicial foreclosure, or by filing for a money judgment,
or all three options, until the debt has been satisfied.” Lifestore Bank v. Mingo Tribal
Pres. Trust, __ N.C. App. __, __, 763 S.E.2d 6, 7 (2014), disc. review denied, __ N.C.
__, 771 S.E.2d 306 (2015). “A foreclosure under power of sale is a type of special
proceeding, to which our Rules of Civil Procedure apply[,]” id. at __, 763 S.E.2d at 9
(citation omitted), including Rule 41(a) which
provides that a notice of dismissal operates as an
adjudication upon the merits when filed by a plaintiff who
has once dismissed an action based on or including the
same claim. This provision is commonly referred to as the
two dismissal rule. According to Rule 41(a)’s two dismissal
rule, a second dismissal of an action asserting claims based
upon the same transaction or occurrence as a previously
dismissed action operates as an adjudication on the merits
and bars a third action based upon the same set of facts.
In order to determine whether a second action was based
upon the same transaction or occurrence as a first action,
we examine whether the claims in both actions were based
upon the same core of operative facts and whether all of the
claims could have been asserted in the same cause of
action.
In re Foreclosure by Rogers Townsend & Thomas, PC, __ N.C. App. __, __, 773 S.E.2d
101, 103-04 (2015) (citations, internal quotation marks, brackets, ellipses, and
footnote omitted) (hereinafter, “Rogers Townsend & Thomas”).
The Herndons cite Lifestore Bank in arguing that the voluntary dismissal of
the second foreclosure petition operated as an adjudication on the merits of the
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Opinion of the Court
substitute trustee’s claims such that Rule 41(a) required dismissal of the third
foreclosure petition. Our review reveals a critical factual distinction between that
case and the matter here that renders Lifestore Bank inapposite. In Lifestore Bank,
the lender first sought to recover on two promissory notes by an action for foreclosure
by power of sale which the lender later voluntarily dismissed. __ N.C. App. at __, 763
S.E.2d at 10. The lender also took a voluntary dismissal of its second action for
foreclosure by power of sale. Id. The lender then filed a complaint which included
claims for a money judgment on the two promissory notes, as well as for judicial
foreclosure. Id. at __, 763 S.E.2d at 8. The trial court applied the two dismissal rule
to dismiss the lender’s claim for judicial foreclosure, and the lender appealed. Id. at
__, 763 S.E.2d at 9. This Court reversed, noting that “a judicial foreclosure differs
from a foreclosure by power of sale in that a judicial foreclosure is not a type of special
proceeding and, as such, can be pursued by a creditor after a foreclosure by power of
sale has failed.” Id. at __, 763 S.E.2d at 12-13 (citations and internal quotation marks
omitted). This Court thus reasoned that, “the two dismissal rule . . . [was] not
applicable to [the lender’s] claim for judicial foreclosure as [the lender] could not have
brought a claim for judicial foreclosure in the same action as its claims for foreclosure
by power of sale.” Id. at __, 763 S.E.2d at 13 (citation omitted). Accordingly, the
Court held that “[t]he two dismissal rule of Rule 41 does not bar a creditor from
bringing an action for judicial foreclosure or for money judgment where the creditor
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IN RE: HERNDON
Opinion of the Court
has filed and then taken voluntary dismissals from two prior actions for foreclosure
by power of sale.” Id. at __, 763 S.E.2d at 7 (internal quotation marks omitted;
emphasis in original). The issue before the Court in Lifestore Bank was the
applicability of the two dismissal rule where an action for judicial foreclosure and a
money judgment is filed following the voluntary dismissal of two previous actions for
foreclosure by sale. By contrast, in the matter before us here, the issue is the
applicability of the two dismissal rule where a third action for foreclosure by sale is
brought following the voluntary dismissal of two previous actions for foreclosure by
sale. Accordingly, the holding of Lifestore Bank is wholly inapplicable to the present
appeal.
We acknowledge that the Court in Lifestore Bank remarked that “by taking
two sets of voluntary dismissals as to its claims for foreclosure by power of sale, the
second set of voluntary dismissals is an adjudication on the merits which bars [the
lender] from undertaking a third foreclosure by power of sale action . . . .” Id. at __,
763 S.E.2d at 12 (internal quotation marks omitted). However, because the lender
never brought a third action for foreclosure by power of sale, the issue of the two
dismissal rule’s effect on a third action for foreclosure by power of sale was not before
the Lifestore Bank Court. This observation, therefore, was mere dicta and does not
control the resolution of the issue presented by this case. Recently, however, the
appeal in Rogers Townsend & Thomas presented this Court with the opportunity to
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IN RE: HERNDON
Opinion of the Court
address as a matter of first impression the identical question before us here: whether
the two dismissal rule bars a third action for foreclosure by power of sale following
the voluntary dismissal of two previous actions for foreclosure by power of sale.
In Rogers Townsend & Thomas, the
petitioners twice voluntarily dismissed foreclosure by
power of sale actions against [the borrower] and they filed
both notices of dismissal prior to resting their case. In
addition, [the note holder] sought to accelerate [the
borrower’s] debt in both actions. Therefore, we must decide
whether [the note holder]’s decision to accelerate the debt
placed the entire balance of the note at issue and
eliminated any factual distinctions between the two
actions. If it did, the second action was based upon the
same transaction or occurrence as the first one, and Rule
41 as well as the principles of res judicata will bar
petitioners from bringing a third foreclosure by power of
sale action on the same note. The dispositive issue, as we
see it, is whether or not each failure to make a payment by
a borrower under the terms of a promissory note and deed
of trust constitutes a separate default, or separate period
of default, such that any successive acceleration and
foreclosure actions on the same note and deed of trust
involve claims based upon different transactions or
occurrences, thus exempting them from the two dismissal
rule contained in Rule 41(a).
__ N.C. App. at __, 773 S.E.2d at 104 (italics added). After noting that our State’s
appellate courts had not addressed the issue directly, this Court reviewed related
case law from North Carolina as well as the approaches to the two dismissal rule in
foreclosure matters in other jurisdictions before holding that “a lender’s election to
accelerate payment on a note and foreclose on a deed of trust does not necessarily
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Opinion of the Court
place future payments at issue such that the lender is barred from filing subsequent
foreclosure actions based upon subsequent defaults, or periods of default, on the same
note.” Id. at __, 773 S.E.2d at 106.
The Court went on to explain and apply its reasoning where two foreclosure
actions with accelerated loans are dismissed voluntarily:
In construing Rule 41(a)’s two dismissal rule, our courts
have required the strictest factual identity between the
original claim, and the new action, which must be based
upon the same claim as the original action. Therefore, Rule
41(a) applies when there is an identity of claims, the
determination of which depends upon a comparison of the
operative facts constituting the underlying transaction or
occurrence. If the same operative facts serve as the basis
for maintaining the same defaults in two successive
foreclosure actions, and the relief sought in each is based
on the same evidence, the voluntary dismissal of those
actions under Rule 41(a) bars the filing of a third such
action.
Id. at __, 773 S.E.2d at 107 (citation, internal quotation marks, brackets, and ellipsis
omitted). After comparing the operative facts at issue in the foreclosure by sale
actions brought by the lender, the Court concluded:
We find no strict factual identity between the two
foreclosure by sale actions filed in this case. [The note
holder]’s second action was not simply a continuation of its
original action and it was not an attempt to relitigate the
same alleged default. Certainly, in both foreclosure
actions, the Clerk of Court would have to determine
whether [the note holder] could establish that a default
occurred between July 2009 and January 2012. But in the
second foreclosure action, the Clerk would also have had to
determine whether [the borrower] defaulted between
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IN RE: HERNDON
Opinion of the Court
January 2012 and July 2013—this is a claim that [the note
holder] could not have brought in the first foreclosure
action. Consequently, the operative facts and transactions
necessary to the disposition of both actions gave rise to
separate and distinct claims of default, and some of the
particular default claims relevant to the second action
could not have been brought in the first one. As the claims
of default and particular facts at issue in each action
differed, Rule 41(a)’s two dismissal rule does not apply.
Accordingly, [the] petitioners’ second voluntary dismissal
did not operate as an adjudication on the merits and the
principles of res judicata do not bar a third power of sale
foreclosure action.
Id. at __, 773 S.E.2d at 108 (italics added). In so holding, the Court specifically
distinguished the factual circumstances and procedural posture in Rogers Townsend
& Thomas from those present in Lifestore Bank:
[In Lifestore Bank,] the pertinent issue was whether Rule
41 barred the lender’s claims for money judgments and
judicial foreclosure. This Court held that, because an
action for foreclosure by power of sale is a special
proceeding, limited in jurisdiction and scope, the lender’s
money judgment and judicial foreclosure claims—though
based upon the same core of operative facts—could not
have been brought in the previously dismissed actions and,
thus, were not barred by Rule 41(a)’s two dismissal rule. . . .
. . . [W]e find that Lifestore Bank is easily distinguished
from the instant case. Indeed, the Lifestore Bank Court did
not reveal the alleged dates or periods of default relevant
to the lenders’ foreclosure by sale actions, and there was no
mention that the debts were accelerated. Nor did the Court
address the question whether each failure to make a
payment by a borrower under the terms of a note secured
by a deed of trust constitutes a separate default.
Id. at __, 773 S.E.2d at 104-05.
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IN RE: HERNDON
Opinion of the Court
We perceive no difference between the relevant facts and procedural posture
in Rogers Townsend & Thomas and the case before us. Here, the promissory note for
$60,800.00 was executed on 3 August 2001 with payments due on the first day of each
month from October 2001 through September 2031. The first foreclosure petition was
filed on 4 November 2009 and thus covered defaults by Herndon between November
2007 and November 2009. The second foreclosure petition was filed on 8 December
2011, and therefore covered the additional defaults by Herndon each month from
December 2009 through December 2011. The third foreclosure petition was filed on
21 February 2014, covering the further defaults by Herndon between 1 January 2012
and February 2014.
Just as in Rogers Townsend & Thomas, during each of these time periods,
Herndon continued to default, and the “lender’s election to accelerate payment on a
note . . . [did] not necessarily place future payments at issue such that the lender
[was] barred from filing subsequent foreclosure actions based upon subsequent
defaults, or periods of default, on the same note.” Id. at __, 773 S.E.2d at 106.
Applying this precedent, we reach the same holding. Because the “claims of default
and particular facts at issue in each action differed, Rule 41(a)’s two dismissal rule
does not apply” here, and therefore the dismissal of the second foreclosure petition
“did not operate as an adjudication on the merits . . . .” See id. at __, 773 S.E.2d at
108. Accordingly, the substitute trustee is not barred from bringing a third action for
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Opinion of the Court
foreclosure by power of sale, and the superior court’s order dismissing the third
foreclosure petition must be
REVERSED.
Judges STROUD and DAVIS concur.
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