September 3, 2015
by Graham H. Kidner
Hutchens Law Firm – USFN Member (North Carolina, South Carolina)
A foreclosure sale was authorized by the clerk, and the order authorizing sale was appealed to the superior court. On de novo review, the superior court judge entered an order authorizing the substitute trustee to proceed with the foreclosure sale. The borrowers did not appeal that order to the Court of Appeals. Instead, they proceeded with their separate civil action against the bank, alleging various causes of action — each of which was contingent upon there being no default under the terms of the promissory note, as well as under a subsequent agreement that had settled an earlier foreclosure proceeding. The trial court dismissed the complaint for failure to state a claim pursuant to N.C.R. Civ. P. 12(b)(6).
On appeal, the Court of Appeals observed that in Phil Mechanic Constr. Co. v. Haywood, 72 N.C. App. 318, 325 S.E.2d 1 (1985), it had held:
[T]hat when a mortgagee or trustee elects to proceed under [N.C. Gen. Stat. §§] 45-21.1, et seq., issues decided thereunder as to the validity of the debt and the trustee’s right to foreclose are res judicata and cannot be relitigated in an action for strict judicial foreclosure.” Id. at 322, 325 S.E.2d at 3. For that reason, “[s]ince [the] plaintiffs did not perfect an appeal of the order of the Clerk of Superior Court, the clerk’s order is binding and [the] plaintiffs [were] estopped from arguing those same issues in [a subsequent] case.”
Further, the appellate court noted that it had addressed “the preclusive effect of orders authorizing foreclosures on subsequent suits in a number of cases within the past year and a half, albeit in unpublished decisions [citations omitted]. In each of those cases, this Court affirmed the lower court’s dismissal pursuant to Rule 12(b)(6) upon determining [that] the plaintiffs were collaterally estopped from relitigating an issue decided in a prior foreclosure action that barred recovery in the plaintiffs’ subsequent cases.” [Funderburk v. JPMorgan Chase Bank, N.A., 2015 WL 3777353 (N.C. Ct. App., June 16, 2015).]
The Funderburk opinion makes clear that the borrower has a limited window of opportunity to challenge foreclosure efforts; and if a subsequent civil action relies on facts that were necessary components of one or more of the findings made in the foreclosure proceeding, the borrower does not get another occasion to argue about those facts. Important, too, the Funderburk opinion is published — meaning that it has precedential value and can be freely cited in state court proceedings. Finally of note, the Court of Appeals found that in a borrower’s post-foreclosure lawsuit against a lender, the court can, without converting the Rule 12(b)(6) motion into a summary judgment motion: (i) take judicial notice of pleadings filed in the foreclosure proceeding; and (ii) review the promissory note and deed of trust even if they were not attached to the borrower’s complaint, so long as they are the subject of (and referred to in) the borrower’s complaint.
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