DS News

71 » VISIT US ONLINE @ DSNEWS.COM NORTH CAROLINA RES JUDICATA: NORTH CAROLINA COURT MUDDIES THE JUDICIAL FORECLOSURE WATERS By: Kim Sheek, Shapiro & Ingle, LLP e North Carolina Court of Appeals recent decision in Lifestore Bank v. Mingo Tribal Preservation Trust 1 created a significant amount of controversy that left many commentators questioning whether lenders could proceed with a third non-judicial foreclosure. Many conclud- ed that lenders may have no other option but to proceed with a judicial foreclosure. Now, the Court of Appeals has shed light on its Lifestore decision by providing additional guidance in Basmas v. Wells Fargo Bank, N.A., 2 which may allow lenders to proceed with a third non- judicial foreclosure saving lenders considerable time and thousands of dollars while pursuing foreclosure. BASMAS V. WELLS FARGO BANK e North Carolina Court of Appeals recently ruled that res judicata did not pre- clude a lender from instituting new foreclosure proceedings, even though a prior foreclosure had been dismissed for failure to produce a properly endorsed note, because new or changed circum- stances existed when the lender was later able to produce a properly endorsed note. In Basmas, a prior foreclosure was dismissed after the lender failed to produce the duly endorsed promissory note necessary to prove standing. e lender later instituted a second non-judicial foreclosure proceeding. e bor- rower responded by filing a complaint seeking a declaratory judgment that the foreclosure was barred by res judicata. e lower court entered an order allowing the second foreclosure to proceed, and the borrower appealed. e North Carolina Court of Appeals held that the lender was not barred from instituting a new foreclosure proceeding and allowed the foreclosure to proceed because there were new or changed circumstances. Res judicata is a legal doctrine that ordinarily bars a litigant from retrying the merits of a case in a later action. e elements of res judicata are: (1) a final judgment on the merits in an earlier lawsuit; (2) an identity of the cause of action in the prior suit and the later suit; and (3) an identity of parties or their privities in both suits. e North Carolina Court of Appeals explained that a subsequent default on the loan or the production of the endorsed note constituted new facts sufficient to overcome a res judicata defense. Basmas sheds light on the Lifestore Bank v. Mingo Tribal Preservation Trust, holding that recently had caused some commenters concern. Lifestore Bank v. Mingo Tribal Preservation Trust In Lifestore, the North Carolina Court of Appeals held that Rule 41 of the North Carolina Rules of Civil Procedure was applicable to non- judicial power of sale foreclosures and poten- tially bars lenders from filing a third non-judicial proceeding after taking two prior dismissals. e Lifestore court, however, held Rule 41's two dismissal rule did not bar a judicial foreclosure. Under the Lifestore holding, some speculated a third non-judicial foreclosure would always be barred on the same debt obligation, regardless of the fact or circumstances, and could only proceed by way of judicial foreclosure. However, Basmas appears to affirm prior precedent established in Centura Bank v. Winters, 3 which held that there can be numerous actionable defaults under a debt obligation, which can be pursued consistently with Rule 41. Lifestore did not expressly overrule Cen- tura, and Basmas serves as a recent reminder that Centura remains good law. Nevertheless, lenders would be well advised not to dismiss foreclosure proceedings needlessly and should be able to pro- duce documentation in the first instance to avoid running into Rule 41 and res judicata arguments. 1 Lifestore Bank v. Mingo Tribal Preservation Trust, No. COA14-46 (N.C. App. Aug. 19, 2014). 2 Basmas v. Wells Fargo Bank, N.A., No. COA13-464 (N.C. App. Oct. 7, 2014). 3 Centura Bank v. Winters, 159 N.C. App. 456 (2003).

• Cover