Maine Supreme Court Revisits Reverses its Controversial 2017 One-and-Done Foreclosure Decision

A highly contested and controversial legal defense to residential foreclosures in Maine resurfaced earlier this month with the Maine Supreme Judicial Court's decision in Finch v. U.S. Bank, N.A.

Finch renewed the legal question of whether a mortgage lender is barred from pursuing a second judicial foreclosure action after a trial court dismissed the first action on the grounds that the lender's pre-foreclosure notice of right to cure failed to comply with Maine statutory law, specifically Section 6111.

Background

Just six years ago, in Pushard v. Bank of America, the Supreme Judicial Court concluded that a lender's failure to send the borrower a statutorily compliant notice of right to cure prior to commencing a judicial foreclosure lawsuit both refuted breach of the mortgage and the total amount due and that any judgment dismissing the complaint on these grounds rendered the note and mortgage unenforceable under the doctrine of claim preclusion.

Moreover, the judgment dismissing the judicial foreclosure complaint provided the borrower with a clear and unencumbered title to the property, securing the repayment of the loan: free and clear of the mortgage. The decision was premised on a legal theory that a lender's filing a judicial foreclosure lawsuit triggered the mortgage loan's acceleration, that acceleration could not be undone, and that the foreclosure lawsuit adjudicated the lender's full and final rights under the accelerated loan.

In Finch, the court elected to reconsider and revise the Pushard holding. The facts from Finch are nearly identical to Pushard. The borrower defaulted on a residential mortgage loan, at which time the bank sent the borrower a notice of right to cure pursuant to Title 14, §6111.

The trial court determined that the notice of right to cure did not meet the requirements of 6111 and entered judgment in favor of the borrower. After the mortgage lender refused to discharge the loan in accordance with Pushard, the borrower filed a lawsuit to require the lender to discharge the mortgage and to enjoin any subsequent foreclosure.

In response, the trial court entered judgment, finding that the borrower was entitled to a discharge of the mortgage under Pushard. On appeal, the Maine Supreme Judicial Court reversed the decision in Finch on reconsideration of its own holding in Pushard. Here is how and why it came to this conclusion.

Section 6111

The court found that if a mortgage lender fails to comply with the statutory notice of right to cure, the lender had no right to accelerate the loan balance or commence a foreclosure lawsuit in the first place.

Further, because the lender could not accelerate the loan balance or enforce the mortgage, the lender's claim for the full amount due on the loan and foreclosure of the mortgage was not and could not have been litigated in the judicial foreclosure lawsuit.

Claim Preclusion

If a trial court issues judgment in favor of a borrower on a finding the lender's notice of right to cure did not comply with 6111, that judgment will not preclude a subsequent foreclosure lawsuit predicated on a new and valid notice of default.

The reasoning here is driven in large part by a review of the Restatement of Judgments, comments, and interpreting case law, concluding that if a court finds that a party has no enforceable claim for failure to satisfy a precondition to suit, that finding does not bar a subsequent lawsuit.

Acceleration

Simply filing a judicial foreclosure lawsuit does not and cannot accelerate a mortgage loan, particularly where a defect in the notice of right to cure precludes a lender's right to accelerate.

Acceleration of the promissory note is a contractual remedy once the lender proves the loan terms, the borrower's breach, and the borrower's failure to cure following valid and enforceable notice. In other words, acceleration occurs not when the suit is filed but is instead a remedy once the foreclosure is adjudicated.

On the other hand, if a lender fails to prove a valid and enforceable notice of right to cure, the lender fails to prove an acceleration or breach of the mortgage loan so that dismissal of suit returns the parties to the positions they occupied before the lawsuit was filed.

Stare Decisis

The court recognized that their decision overrules Pushard and their most recent analysis of judicial foreclosure proceedings. Ultimately, there is substantial justification to revise the recent Maine foreclosure law. The court explained the premise of their decision in Pushard—"that filing a foreclosure complaint automatically accelerates the balance due on the note regardless of whether the lender has the statutory and contractual right to accelerate—" is contrary to Section 6111 and Maine's longstanding rule that whether claim preclusion applies does not turn solely on the contents of a complaint.

Another consideration was that "no other jurisdiction follows the rule established in Pushard that claim preclusion bars a second foreclosure attempt after a first mortgage foreclosure attempt has failed due to a defective notice of default."

Finally, the court was unwilling to continue a precedent of awarding a free house to any borrower in default because the mortgage lender issued just one defective notice.

What's Next?

There may be more to come from the Maine Supreme Judicial Court because whether a trial court's dismissal of a judicial foreclosure suit as a sanction for a mortgage lender's failure to mediate in good faith precludes any subsequent lawsuit remains an open question.

That holding in Federal National Mortgage Association v. Deschaine relied on the same theory and analysis from Pushard, which the court has not reconsidered and reversed.