New Default Rules Established for the Effect of a Dismissal of a Foreclosure Action with Prejudice on Subsequent Foreclosures

In Cenlar FSB v. Malenfant, 2016 VT 93 (August 26, 2016), the Vermont Supreme Court considered an issue of first impression and established the default rules that will be applied in subsequent foreclosure actions when the initial judgment and decree of foreclosure is dismissed with prejudice.

Issue: This case concerns the impact of a dismissal with prejudice of a lender’s claim for default on a promissory note and the accompanying foreclosure on the lender’s ability to bring a subsequent claim for default on the same note. The lender received a judgment and a decree for foreclosure. When the borrowers appealed, the trial court ordered the parties to comply with all applicable laws related to the federal Making Home Affordable Program, the case was suspended, and the parties entered a temporary forbearance and trial payment plan. When the lender failed to appear at a status conference, the matter was dismissed with prejudice. However, the dismissal order did not address what effect it would have on the judgment and decree of foreclosure that had already been entered. The lender did not appeal and later filed a second foreclosure action. The trial court addressed the procedural issues surrounding the successive foreclosure actions and dismissed the case.

Holding: The Court held that the only reasonable way to read the first dismissal order was that it effectively vacated the first judgment and decree of foreclosure. The Court refused to consider whether the trial court had the authority to do vacate that first judgment, since that argument was an impermissible collateral attack on a final judgment. The Court then reviewed the two unsatisfactory approaches taken by other states regarding the preclusive effect of that dismissal “with prejudice,” and chose to adopt a third approach. First, it held that any subsequent action cannot claim any arrearages that were due on or before the date of default in the first action. Second, it held that the first action suspended the borrower’s obligations to make monthly payments, so the borrow cannot be in default for failing to make those payments and no arrearage with respect to principal, interest, fees, or penalties could accrue during the pendency of the first case. Third, it held that no interest can accrue during the pendency of the first case. Fourth, the borrower is still obligated to make monthly payments and pay the balance of the principal (calculated as if all payments were timely made up to the date of default in the first action), but only after the lender provides certain notices and opportunity to reinstate the loan without penalty. Fifth, the lender may recover payments it made for real estate taxes. The Court held that these rules will only apply if the mortgage note fails to provide an alternative procedure.

Dissent: Dooley, J., dissented. He agreed that the first foreclosure judgment was vacated. Accordingly, he argued that any further analysis is simply dicta. If it must be addressed, he would state that such a subsequent claim was not permitted. If it must be addressed on the merit, he would adopt the reasoning of the Supreme Courts of Ohio and Maine.