Court holds foreclosure statute of limitations had not expired and other claims were barred by res judicata

by HillaryR. McCormack, Esq.

Halliday,Watkins & Mann, P.C.*

USFN Member (UT, AK, AL, CO, ID, MN, MS, MT, ND, NE, SD, WY)

Utah Code § 57-1-34 requires anyone seeking to foreclose an obligation secured by a deed of trust by either commencing a judicial foreclosure action or initiating a nonjudicial foreclosure by recording a notice of default, within the “period prescribed by law.” The “period prescribed by law” is found in Utah Code § 70A-3-118(1), which prescribes a six-year statute of limitations running from the due date or dates stated in the note, or if a due date is accelerated, within six years after an accelerated due date. However, in Lewis v. U.S. Bank Trust, N.A., as Trustee for LSF9 Master Participation Trust, --- P.3d ---, 2024 WL 57521, 2024 UT App 3, the Utah Court of Appeals clarified that when notices of default are canceled, the statute of limitations is effectively paused, thus preserving a beneficiary’s right to foreclose at a later date. Prolific litigants should also be wary of claim preclusion barring future suits when they could have and should have brought those claims in a prior suit.

Brian Lewis (“Lewis”) purchased property in Mona, Utah in August 2014. However, when Lewis bought the property, it was already encumbered by a 2008 deed of trust in favor of U.S. Bank Trust, N.A., as Trustee for LSF9 Master Participation Trust (the “Trust”), which was in default. A notice of default had been recorded in April 2010, but then canceled on May 1, 2014. That same day, a new notice of default was recorded before eventually being canceled on April 30, 2020.

When Lewis learned of a pending foreclosure sale to be held in September 2016, he filed suit in state court against the foreclosing parties seeking to quiet title and prevent any future foreclosure, arguing the statute of limitations to foreclose had expired. The case was removed to the United States District Court for the District of Utah. See Lewis v. Caliber Home Loans, Inc., No. 2:16-cv-01252, 2018 WL 485967 (D. Utah Jan. 18, 2018). The federal district court granted summary judgment in favor of the foreclosing parties, holding that the statute of limitations began when the newest notice of default recorded on May 1, 2014, and had not expired when a foreclosure sale was scheduled in September 2016. Lewis appealed to the 10th Circuit Court of Appeals, but his appeal was dismissed for lack of prosecution. See Lewis v. Caliber Home Loans, Inc., No. 18-4020, 2018 WL 3996494, at *1 (10th Cir. May 3, 2018).

Continuing a tortured litigation history, days after his appeal’s dismissal, Lewis filed a new complaint in state court against the Trust, again seeking to quiet title in his favor and enjoin the Trust from claiming any interest in the property. The Trust removed the case to federal court, to which Lewis objected and amended his complaint in state court. The state court determined it did not have jurisdiction due to removal, but the federal court eventually remanded the case to state court based on lack of diversity jurisdiction.

After further maneuvering, including motions to dismiss, another amendment to the complaint to include claims for quiet title based on laches and unjust enrichment, an interlocutory appeal, and the Trust electing to pursue a judicial rather than nonjudicial foreclosure which was then consolidated into the already pending case, the Trust filed two separate motions for summary judgment and a Notice of Errata to address a watermark inadvertently filed with one of the motions. The Trust’s first motion argued that Lewis’ quiet title and unjust enrichment claims were barred by res judicata. The second motion argued the Trust was entitled to a foreclosure judgment and order of sale, and the statute of limitations had not expired. Lewis, through counsel, only responded to the quiet title motion, leaving the judicial foreclosure motion unopposed. Lewis’ counsel argued she had not realized there were two separate motions, but the court rejected the contention and granted both the Trust’s motions. The court entered judgment, and later declined to set it aside after Lewis filed a motion under Rule 60(b)(1) of Utah’s Rules of Civil Procedure. Lewis appealed.

On appeal, the Court of Appeals held the claim preclusion branch of res judicata barred Lewis from recovery on his quiet title and unjust enrichment claims. Lewis’ quiet title claim involved the same property and was a continuation of his yearslong efforts to avoid foreclosure. Although the legal theory behind his quiet title claim in the most recent suit was new (laches), the underlying claim and those in previous litigation arose from the same transaction. Similarly, his unjust enrichment claim, premised on the idea that his maintenance and improvement of the property benefited the Trust since he began improving the property in 2015, could have been raised in his prior 2016 suit. So, because the quiet title and unjust enrichment claims could have been raised in previous litigation, res judicata barred them in the current suit.

Lewis also argued on appeal that the district court incorrectly concluded the statute of limitations to foreclose had not run. Lewis contended that the default occurred when payments were missed in 2009, but foreclosure was not initiated until 2016, when he learned of a scheduled trustee’s sale. However, the Court of Appeals relied on its precedent in Deleeuw v. Nationstar Mortgage LLC, 2018 UT App 59, 424 P.3d 1075 holding that the “period prescribed by law” for commencing a foreclosure as required by Utah Code section 57-1-34 was the six-year statute of limitations found in Utah Code section 70A-3-118(1). This six-year statute of limitations runs from the due date or dates stated in the note, or if a due date is accelerated, from the accelerated due date. The Court of Appeals also cited its precedent in Daniels v. Deutsche Bank Nat’l Trust, 2021 UT App 105, ¶ 3, 500 P.3d 891 and Johnson v. Nationstar Mortgage LLC, 2020 UT App 127, ¶ 21, 475 P.3d 946 (Utah 2021) in holding that recording a notice of default is an act of acceleration, causing the statute of limitations to begin running. However, the Court of Appeals clarified that canceling a notice of default halts the statute of limitations, whereas recording a new notice re-accelerates the due date and thus restarts the limitations period. The 2010 notice of default recorded against the property was canceled on May 1, 2014, and a new notice recorded that same day before that new notice was itself canceled on April 30, 2020. Each cancellation halted the limitations period, whereas each notice recording started the period anew. Therefore, the limitations period had not run when the Trust filed its judicial foreclosure. Lewis also argued on appeal that the Trust’s judicial foreclosure claim was a compulsory counterclaim in his 2016 suit, which has yet to be addressed in Utah. However, the Court of Appeals declined to consider the argument because it was unpreserved, leaving the issue unsettled.

The Court of Appeals also rejected Lewis’ contention that it was an abuse of discretion for the lower court to have denied his Rule 60(b) motion because his counsel failed to understand there were two pending summary judgment motions requiring response. The Court of Appeals held that Lewis failed to establish the requisite due diligence necessary for relief from the judgment due to mistake or inadvertence under 60(b), because failing to read documents in full was unreasonable and made him ineligible for relief. Therefore, the lower court did not abuse its discretion in denying the 60(b) motion when there was no proper basis for relief from the judgment.

Going forward, mortgagees may feel more confident in foreclosures where there has been no acceleration, and that they may effectively pause the statute of limitations by canceling a notice of default. However, because the Court of Appeals declined to address whether judicial foreclosure was a compulsory counterclaim to earlier, borrower-initiated litigation, mortgagees and their counsel will want to keep a close eye on whether a Utah appellate court revisits and weighs in on this issue in a future case.

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USFNews - March 6

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