An interesting case in Ohio shows how a lender can permanently lose its rights to foreclose on a mortgage when it voluntarily dismisses its case too many times.  After filing its third foreclosure case, the Ohio Supreme Court weighed in and said "its too late." 

In June 2003, Guiseppe Gullotta borrowed $164,000 from MILA, Inc., which subsequently assigned the note and mortgage to U.S. Bank.  In April 2004, U.S. Bank filed a foreclosure action, declared the entire debt due, and prayed for judgment in foreclosure in the entire amount of the principal.  In June 2004, U.S. Bank voluntarily dismissed its foreclosure.

In September 2004, U.S. Bank again filed for foreclosure, accelerating the debt and asking for the same relief.  In March 2005, U.S. Bank voluntarily dismissed the second foreclosure.

Ohio Rule of Civil Procedure 41 provides, in part, that "unless otherwise stated in the notice of dismissal or stipulation, the dismissal is without prejudice, except that a notice of dismissal operates as an adjudication upon the merits of any claim that the plaintiff has once dismissed in any court."

Still, in October 2005, U.S. Bank tried again.  In its THIRD foreclosure action it asked for the same relief.  Gullotta moved for a dismissal arguing that res judicata barred the claim pursuant to Civ. Rule 41(A), as the second dismissal constituted an adjudication on the merits.  The trial court denied the motion, and entered judgment in favor of U.S. Bank.

On appeal, the Fifth District Court of Appeals affirmed the judgment of the trial court.  It found that the third foreclosure action covered different dates of default and months not litigated in the first two complaints, thus the "two-dismissal rule" in Civ. R. 41(A) did not apply.

The Ohio Supreme Court reversed, however.  Usually with regard to an installment loan, each missed payment gives rise to separate cause of action, and breach by non-payment does not constitute a breach of the entire contract.  But an acceleration clause may avoid the operation of this rule. 

By agreeing to an acceleration clause, the parties in this case have avoided the operation of the general rule that nonpayment on an installment loan does not constitute a breach of the entire contract. In a contract with an acceleration clause, a breach constitutes a breach of the entire contract. Once Gullotta defaulted and U.S. Bank invoked the acceleration clause of the note, the contract became indivisible. The obligations to pay each installment merged into one obligation to pay the entire balance on the note.

Thus, the Court found that the "two-dismissal rule" applied, as it would to any other plaintiff.  This was particularly true because Gullotta's mortgage had never been modified or reinstated.  In essence, U.S. Bank sought to sue on the same claim each time it filed for foreclosure.

[T]here are examples from Ohio courts where successive foreclosure actions were indeed considered to be different claims. In those cases, however, the underlying agreement had significantly changed or the mortgage had been reinstated following the earlier default.

. . .

There are no such differences among U.S. Bank's claims in this case. Here, in an attempt to get around having its claim barred by res judicata, U.S. Bank amended its third complaint to include a prayer for interest from April 1, 2005. That amendment was merely a change to the complaint, not a change in the common nucleus of operative facts supporting the claim. The complaint still arose from Gullotta's original default, when the entire principal became due. Gullotta did not make a single payment after the debt was first declared due, the parties changed none of the terms of the note, and U.S. Bank asked for the same amount of principal in each of its complaints.

Although U.S. Bank's complaint changed, the operative facts remained the same. Plaintiffs cannot save their claims from the two-dismissal rule simply by changing the relief sought in their complaint. Allowing U.S. Bank to do so would be like allowing a plaintiff in a personal-injury case to save his claim from the two-dismissal rule by amending his complaint to forgo a couple of months of lost wages.

Undeterred, U.S. Bank filed a FOURTH foreclosure action.  This time, Gullotta filed a counterclaim to quiet title and for attorney fees for filing a frivolous suit.  U.S. Bank eventually dismissed its claims for payment on the note and foreclosure... and the case proceeded only on Gullotta's counterclaims.

The trial court granted judgment in favor of U.S. Bank and denied Gullotta's motion for summary judgment. Gullotta appealed and the Fifth District Court of Appeals reversed.

U.S. Bank's fourth cause of action arose from the same note, the same mortgage and the same default.  From the time of [Gullotta's] original default, the entire principal became due as a result of the acceleration clause in the note.  The terms of the note and/or mortgage were never changed.  As the Supreme Court held [previously], from the time of [Gullotta's] original breach, [he] owed the entire amount of the principal because of the acceleration clause.

Based on the forgoing, we find the two-dismissal rule of Civ. R. 41(A) applies and res judicata barred U.S. Bank's complaint in this case.  We find the practical effect of the same precludes U.S. Bank from pursuing any further action on the note.  Because the mortgage draws its essence from the note, we find it unenforceable.  We find the trial court erred in not granting [Gullotta's] motion for summary judgment to quiet title.

For whatever reason, Gullotta did not appeal the trial court's denial of attorney fees for alleged frivolous conduct.  But... hey... he got rid of a $164,000 note and mortgage.  That sure smells like victory to me.

This may seem like a harsh application of the two-dismissal rule and the appeals court mentioned the policy reason for not applying the rule on the first appeal.

In addition, the application of Rule 41(A) per the EMC  case would discourage a lender, such as appellant, from working with a borrower, such as appellee, when the borrower defaults on a mortgage. Frequently, after filing a foreclosure action, a lender will work with the buyer so that the buyer can retain his or her property. The lender will then dismiss the foreclosure action. A lender would not be inclined to do so if a dismissal precluded a bank from eventually foreclosing on a borrower's property after a default. As a result, the number of foreclosures would increase as would the number of individuals losing their homes.

This does seem to make some sense... but at this point in the foreclosure crisis, maybe the courts are less willing to continue to make exceptions for foreclosing lenders.  The message of the Ohio Supreme Court seems to be clear - banks have to follow the same rules as the rest of us.  Maybe banks have finally lost the "benefit of the doubt" with the courts after all of the problems with MERS, fraudulent affidavits, and some of the shenanigans pulled in HAMP modifications.

What do you think?  Should U.S. Bank's failure to follow the rules have resulted in such a windfall to Gullotta?  How many times should a bank be able to drag a homeowner into court and dismiss the action before someone says "enough already?"