If a Clerk of Court authorizes a foreclosure sale and the trustee sells the property, can a borrower or other aggrieved party later sue to nullify the foreclosure sale or recover damages caused by the foreclosure? 

In the recent case of Gray v. Fannie Mae, the North Carolina Court of Appeals said "no."  The court held that the doctrine of collateral estoppel barred such lawsuits.  This is welcome news for lenders because the decision provides finality to foreclosures and limits the specter of post-foreclosure lawsuits. 

The Facts

In 2006, Mary and Jack Gray borrowed $300,240 from Wells Fargo as part of a reverse mortgage transaction.  The collateral in the Deed of Trust described a tract that encompassed the Grays' primary residence and the home of a relative – Grace Peele.  After Wells Fargo recorded the Deed of Trust, the Grays subdivided the land to separate their parcel from the Peele parcel.  The Peele parcel was not released from the Deed of Trust.  Mary Gray died in 2012 and Jack Gray died in 2013. 

After the Grays died, Wells Fargo accelerated the debt and directed a trustee to commence a non-judicial foreclosure proceeding.  The trustee served a notice of foreclosure hearing on the Grays' heirs (the Plaintiffs in the case).  At the hearing, the clerk entered an order authorizing a foreclosure sale.  The trustee then served Plaintiffs with a notice of foreclosure sale, which included the legal description of the property in the Deed of Trust.  Wells Fargo was the only bidder at the sale.  Wells Fargo assigned its bid to Fannie Mae and, after the upset-bid period expired, the trustee delivered a deed to Fannie Mae with the same legal description as the Deed of Trust.

After the foreclosure hearing, the Grays did not appeal to the trial court for a de novo hearing.  Nor did they sue to enjoin the foreclosure sale before the sale.  But almost a year after the sale, they sued the trustee and Fannie Mae in Dare County Superior Court.  They alleged the legal description in the Deed of Trust erroneously included the Peele parcel, and they were not provided proper notice that the Peele parcel was part of the foreclosure.  They sought to nullify the foreclosure and recover monetary damages from the trustee and Fannie Mae.  The lawsuit included claims for unjust enrichment, violations of the North Carolina Reverse Mortgage Act, breach of fiduciary duty, and unfair and deceptive trade practices.

The trustee moved for summary judgment on the ground that the clerk's order authorizing a foreclosure sale was a final judgment and Plaintiffs' claims were barred by the doctrine of collateral estoppel.  The trial court denied the trustee's motion, but the North Carolina Court of Appeals reversed.

Collateral Estoppel and Res Judicata

Collateral estoppel and res judicata are legal principles that prevent do-overs in court.  According to the collateral estoppel doctrine, the determination of an issue in a prior judicial proceeding precludes the re-litigation of that issue in a later action, provided the party against whom the estoppel is asserted had a full and fair opportunity to litigate that issue in the earlier proceeding.  Under the doctrine of res judicata, a final judgment on the merits in a prior action in a court of competent jurisdiction precludes a second suit involving the same claim between the same parties. 

In 2016, the North Carolina Supreme Court decided In re Lucks, which also considered the applicability of collateral estoppel and res judicata in foreclosures.  In In re Lucks, the facts were the opposite.  The clerk refused to authorize a foreclosure sale because the lender’s substitute trustee paperwork was faulty and dismissed the foreclosure.  The lender commenced a second non-judicial foreclosure, but the clerk ruled it was barred by res judicata. 

On appeal, the Supreme Court held that the clerk was wrong to apply res judicata to the foreclosure proceeding.  The Supreme Court held that the doctrines of res judicata and collateral estoppel do not apply in their "traditional" sense to non-judicial foreclosure actions.  The Supreme Court held that a lender cannot proceed with a non-judicial foreclosure on the same default in which the clerk refused to authorize foreclosure.  But a lender can proceed with a judicial foreclosure -- a civil lawsuit.  Or a lender can proceed with a non-judicial foreclosure on a different default.  (You can read my full article about In re Lucks here.)

Collateral Estoppel bars Plaintiffs' Claims

So the North Carolina Supreme Court has held that the doctrines of res judicata and collateral estoppel do not apply where the clerk does not authorizeforeclosure.  In deciding this case, the Court of Appeals had to determine if the Supreme Court would apply collateral estoppel and res judicata when a clerk enters an order authorizing foreclosure. The Court of Appeals determined that the principles had to apply.  Otherwise, a lender might be forced to re-litigate basic issues relating to the validity of the foreclosure already decided in its favor, which would be inimical to the goal of establishing with finality the rights of the parties.

Having decided that res judicata and collateral estoppel apply, the Court of Appeals turned to the crux of the Plaintiffs' lawsuit – their claim they did not receive adequate notice that the Peele parcel would be sold at foreclosure.  Chapter 45 of the North Carolina General Statutes requires the clerk to authorize a foreclosure sale if the lender establishes the existence of (1) a valid debt, (2) default, (3) the right to foreclose, (4) notice, (5) “home loan” classification and applicable pre-foreclosure notice, and (6) that the sale is not barred by the debtor’s military status.  At a foreclosure hearing, all affected parties can raise objections to these six findings. 

The Court of Appeals determined that the Plaintiffs received proper notice of the foreclosure hearing and the trustee's intent to sell the Peele parcel.  The Court of Appeals further held that determining which property is legally secured by a deed of trust is a proper issue and element of proof before the clerk.  Therefore, it was incumbent upon Plaintiffs to make their case on the Peele parcel before the clerk or to appeal the clerk's decision to the trial court.  Since the trustee properly notified them and they enjoyed a full and fair opportunity to litigate the issue, they were now collaterally estopped from raising this claim in their lawsuit.   And since all their other claims were based on this alleged error, those claims were estopped as well.

Conclusion

This decision is a victory for lenders.  Lenders can use it to prevent attempts by borrowers to nullify foreclosure sales or seek damages post-foreclosure.  The decision brings finality and certainty to foreclosure sales – so long as the trustee runs a proper foreclosure proceeding.  The decision forces buyers to raise issues before the clerk of court or on appeal to the trial court, or have those issues forever lost.