By Melissa RobbinsCoutts, Esq.

McCarthy & Holthus,LLP*

USFN Member (AZ, AR, CA, CO, ID, NV, NM, OR, TX, WA)

In Rose Court LLC v. Select Portfolio Servicing, Inc.,[1] the 9th Circuit Court of Appeals addressed an issue that is common in the default servicing world – a defaulted borrower who resorts to filing serial lawsuits aimed at stopping or delaying foreclosure. For borrowers who know how to play the game well, foreclosure and eviction proceedings can be delayed for many years while their lawsuits, bankruptcy filings, and other challenges are knocked down by the servicer, one-by-one. In Rose Court, the borrower’s loan was in default for a decade before foreclosure was finally completed, and litigation over the foreclosure continued for many years thereafter in state, federal, and bankruptcy courts.

In its published opinion issued in October 2024, the 9th Circuit affirmed the dismissal of one such suit, and in doing so, the Court provided valuable clarification on the applicability of one tool in the servicer’s arsenal for combatting serial filers: the two-dismissal rule of Federal Rule of Civil Procedure 41(a)(1)(B).

The proceeding at issue before the 9th Circuit was an adversary proceeding filed by the borrower in bankruptcy court shortly after the foreclosure sale was finally completed. The borrower raised wrongful foreclosure claims based on allegations that the trustee’s sale was not actually held and instead was postponed by the auctioneer. Ruling on motions to dismiss filed by the defendants, the bankruptcy court held the plaintiff’s allegations were contradicted by the very evidence submitted in support of the complaint, and accordingly the borrower’s claims were all dismissed. The borrower, however, requested leave to amend the complaint to assert new claims that had not been previously raised in the case regarding the beneficiary’s standing to foreclose.  The bankruptcy court dismissed the adversary complaint without leave to amend, finding that amendment would be futile because the borrower had previously asserted and voluntarily dismissed the “new” claims in prior state court litigation, and accordingly the claims were barred by the two-dismissal rule.

Generally, a plaintiff is entitled to voluntarily dismiss its own complaint without prejudice to re-filing. But Rule 41(a)(1)(B) contains a notable exception: “[I]f the plaintiff previously dismissed any federal- or state-court action based on or including the same claim, a notice of dismissal operates as an adjudication on the merits.” The two-dismissal rule is similar to common law rules of res judicata and collateral estoppel, except that for res judicata principles to apply, the plaintiff’s claim must have been decided on its merits in the prior litigation in order for the claim to be barred in a new suit. The two-dismissal rule, on the other hand, treats a second dismissal as being equivalent to an adjudication on the merits, even though the case never resulted in a decision by the court.

For the two-dismissal rule to apply, four elements must be present: “(1) the plaintiff voluntarily dismissed an action in either state or federal court, (2) thereafter the plaintiff voluntarily dismissed a second action pending in federal court, (3) the two dismissals concerned the same claim, and (4) the plaintiff seeks to raise the twice-dismissed claim again in federal court.”[2] In Rose Court, the Court noted that neither the 9th Circuit nor the U.S. Supreme Court had previously addressed the meaning of the “same claim” element, although other courts including the 2nd and 10th Circuits had done so.

In those Circuits that have considered the question, the courts held that the “same claim” element for application of the two-dismissal rule should be analyzed under the same standards as the “same claim” element in a res judicata analysis. Under that framework, two claims will be deemed to be the “same claim” when “the two suits arise out of the same transactional nucleus of facts.”[3] In its published opinion in Rose Court, the 9th Circuit adopted the same standard for cases within its jurisdiction. The Court further confirmed that the “same claim” analysis is based on the federal standard rather than the res judicata standards of the state law where prior cases had been filed, because the two-dismissal rule of Rule 41 implicates federal interests in limiting a plaintiff’s right to repeatedly dismiss the same claims.

Applying these standards to the claims raised by Rose Court, the 9th Circuit found the borrower’s “new” claims it sought to raise in an amended adversary complaint were not new and were instead the same claims previously raised in at least two prior state court actions the borrower had brought against the same defendants and voluntarily dismissed. In each prior action, the borrower had challenged the validity of the deed of trust and claimed the original promissory note was never transferred to the foreclosing beneficiary. Because the borrower had twice dismissed claims based on the beneficiary’s alleged lack of standing to foreclose, the two-dismissal rule precluded the borrower from raising those claims a third time in the adversary action. As such, the Court affirmed the lower court’s denial of leave to amend.

Unfortunately for the parties involved, the saga of Rose Court may not be over. The borrower attempted to raise a new wrongful foreclosure theory on appeal, based on allegations that the servicer had interfered with her attempt to reinstate the loan, and she sought leave to file an amended adversary complaint asserting that new claim.  The 9th Circuit declined to consider the request because the Court generally will not consider new arguments on appeal that were not raised in the lower court. Thus, although a borrower is precluded from re-asserting wrongful foreclosure theories based on the “same claims” that were previously raised and dismissed, a truly “new” claim arising out of a different “transactional nucleus of facts” would not necessarily be barred under either Rule 41’s two-dismissal rule or common law principles of res judicata.

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USFNews - Dec. 4