N.C. Ct. of Appeal: Petri v. Bank of America- Res Judicata and Collateral Estoppel from Foreclosure Proceeding

Summary:

Petri originally had a mortgage with Luxury Mortgage Corp., but subsequently Bank of America (“BOA”) commenced foreclosure proceedings. Appealing the order allowing foreclosure, Petri argued that BOA was not the true holder of the note authorized to foreclose. The Superior Court found that the original note had been transferred to BOA and further held that it was a valid debt, that Petri was in default, that BOA had a right to foreclose under the note, and that all proper parties had received notice, thereby meeting the requirements of N.C.G.S. § 45-21.16 and allowing the foreclosure to proceed. Petri then filed a separate complaint seeking to enjoin the foreclosure and asserting, among other causes of action, various UDTPA violations by BOA in failing to comply with a federal consent judgment. On the motion of BOA, the complaint was dismissed due to a lack of subject matter jurisdiction and arguing that the complaint was barred by res judicata.

As Petri did not press the subject matter jurisdiction question, the Court of Appeals did not address this basis for dismissal. Regarding res judicata the Court of Appeals stated that BOA was required to show the following:

1. A final judgment on the merits in an earlier suit;
2. An identity of causes of action in both the earlier and later suits;
3. An identity of party in both the earlier and later suits.

The only issue raised in the appeal was whether the causes of action in the foreclosure and later complaint. The Court of Appeals held that the foreclosure only established the four criteria stated above under N.C.G.S. § 45-21.6, whereas Petri’s complaint raised substantially different issues, including under N.C.G.S. § 75-1 et seq. The Court of Appeals, however, continued, finding that the complaint was barred under the doctrine of collateral estoppel, which prohibits re-litigation of issues determined in a prior suit. The criteria for collateral estoppel are:

1. The earlier action resulted in a final judgment on the merits;
2. The issue in question is identical to an issue actually litigated in the earlier suit;
3. The judgment on the earlier suit was necessary to that case; and
4. Both parties are either identical to or in privity with a party or parties from the prior suit.

The Court of Appeals found that the foreclosure petition resulted in a final judgement and that it and the complaint involved identical parties. As to the issues presented in the petition and complaint, the Court of Appeals held that the finding in the foreclosure that BOA was the holder of a valid note with the right to foreclose collaterally estopped Petri from later arguing that lack of ownership of the note by BOA constituted a UDTPA violation.

Commentary:

Regarding collateral estoppel, the Court of Appeals held that the parties in the foreclosure petition and Petri’s complaint were identical. This is not nearly that clear. The parties in the complaint were Petri and BOA and the Substitute Trustee. In the foreclosure petition, the petitioner was the Substitute Trustee, Brock & Scott, P.L.L.C.. Under N.C.G.S. § 45-21.16, the debtor and any owners of the property are parties and under N.C.G.S. § 45-21.16A, tenants may also be parties. The note holder is not, however, a party to the foreclosure petition. That BOA is “the party seeking to foreclose” does not make it a party to the Substitute Trustee’s petition. Foreclosure under Power of Sale is a non-judicial foreclosure. The Notice and Hearing with the County Clerk of Court is to “authorize the mortgagee or trustee to proceed under the instrument,” not to have the Clerk conduct the foreclosure sale. N.C.G.S. § 45-21.16(d). While the Court of Appeals did not proceed further with the 4th requirement of collateral estoppel, it could not be argued that the Substitute Trustee and BOA are in privity, as the substitute trustee is a disinterested neutral party and not the representative of either the debtor or creditor. See Mills v. Mutual Building & Loan Ass’n, 216 N.C. 664, 6 S.E. 2d 549 (1940).

Further, although not accented in this case, collateral estoppel requires that an an issue be “actually litigated.” This means that a default judgment or an uncontested foreclosure would fail to meet this requirement.

For a copy of the opinion, please see:

Petri v. Bank of America- Res Judicata and Collateral Estoppel from Foreclosure Proceeding

About

1. Bachelor of Arts degree in English Literature from Washington University, 1993. 2. Juris Doctor degree from George Washington University, 1996. Admissions to Practice of Law: North Carolina Bar, 1996. Federal District Courts for the Eastern and Middle Districts of North Carolina. Specialty Certification: North Carolina State Bar: Certified as a Specialist in Consumer Bankruptcy. Areas of Practice: Practice limited to consumer and business debtor bankruptcy law, 1998 to present. Memberships: National Association of Consumer Bankruptcy Attorneys (NACBA). North Carolina Academy of Trial Lawyers (NCATL). North Carolina Bar Association, Bankruptcy Section. Lectures prepared and presented: North Carolina Academy of Trial Lawyers seminar on bankruptcy; Topic: Counseling the Consumer Debtor Prior to Court - C.Y.A. Forms to Help 'Gird They Loins'; 2001. Middle District Bankruptcy Seminar; Topic: Preparing Chapter 13 Plans; 2002. NACBA National Convention; Topic: Efficient Office Practices; 2003. NACBA National Convention; Topic: Chapter 7 vs. Chapter 13 Debates; 2004. Middle District Bankruptcy Seminar; Topic: Chapter 7 & 13 Hot Issues; 2004. Positions held: NACBA National Convention; Convention Chair; 2008. NACBA National Convention; Panel Moderator: Topic: Basic Bankruptcy Issues; 2008. NACBA National Convention; Panel Moderator; Topic: Chapter 13-Disposable Income and Other Issues; 2007. NACBA National Convention; Panel Moderator; Topic: Representing Members of the Military and Their Families; 2007. NACBA, Member of National Board of Directors, 2006 to present. NCATL, Chair of the Bankruptcy Section, 2003 to 2007. NACBA, Chair of the North Carolina Section, 2003 to 2007. NC Bar Association, Bankruptcy Section, Bankruptcy Council Member, 2004 to present.

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