On May 20, the Pennsylvania Superior Court handed down an important decision concerning mortgage foreclosures. The court was tasked with determining whether a lender may pursue a second foreclosure where its first action was dismissed due to a procedural defect. As the court was cautious about extending the holding too broadly, a review of the facts in U.S. National Bank v. Davis, No. 614 EDA 2019, is necessary.

On July 31, 2006, mortgagor (the appellee; hereinafter Davis or borrower) borrowed $494,100, secured by a mortgage. As of March 1, 2013, Davis made no further payments on the loan; the mortgage was assigned on May 8, 2013. On Oct. 2, 2013, appellant U.S. National Bank (hereinafter the bank) filed its complaint in mortgage foreclosure. At trial in 2015, the bank presented evidence of default on the merits; however, the trial court refused to address the merits because the bank failed to prove that it complied with the Act 91 notice requirements pursuant to 35 P.S. Section 180.401c, et seq. The bank timely appealed the entry of the nonsuit and then withdrew the appeal.

On Sept. 9, 2016, the bank filed a subsequent action on the same mortgage, this time providing the Act 91 notice. The trial court granted Davis' motion for summary judgment in that second case, on the basis of res judicata, holding that the second action on the identical loan was barred by the nonsuit in the first case. On appeal, the bank contended that res judicata was not a bar because there was no decision on the merits and that the second complaint pertained to a different period of default than the first complaint.

The Davis court began its analysis with the hornbook law pertinent to res judicata. Res judicata ("a thing adjudged") applies on the following conditions: "Identity in the thing sued upon; Identity of the cause of action; Identity of persons and parties to the action; and, Identity of the quality or capacity of the parties suing or sued." See Stevenson v. Silverman, 208 A.2d 786, 787–88 (Pa. 1965). The Davis court also relied upon our state Supreme Court's decision in Beneficial Consumer Discount v. Vukman, 77 A.3d 547 (Pa. 2013). In Vukman, the Supreme Court concluded that "a cause of action in foreclosure does not include the mortgagee's compliance with Act 91. Rather the cause of action arises from the mortgagor's default." In the court's estimation, such compliance with Act 91 is not part of the substance of a mortgage foreclosure cause of action.

Compliance with Act 91 is a prerequisite for a lender to successfully secure a judgment in mortgage foreclosure. Act 91 provides the statutorily mandated notice by the lender to the borrower of the availability of state-funded emergency assistance. It applies when the property to be foreclosed on is the borrower's primary residence. A second statutory prerequisite is Act 6 which governs the required notice prior to accelerating the maturity date of a residential mortgage.

The Superior Court also found the trial court erred in entering a summary judgment against the bank for violating Rule 231(b) of Pennsylvania's Rules of Civil Procedure which reads: "After the entry of a compulsory nonsuit the plaintiff may not commence a second action on the same cause of action." The Superior Court found the trial court's reliance on Albright v. Wella, 359 A.2d 460, 465 (Pa. Super. 1976) was misplaced. In Albright the plaintiff failed to produce any witnesses at arbitration and appealed the entry of a nonsuit for a jury trial de novo. At the time Albright was decided a procedural rule, subsequently repealed, precluded a party from presenting new witnesses in a de novo trial. The plaintiff argued was that the nonsuit was grounded in a procedural rule, and not on the merits. The Albright court reasoned that the procedural rule did not preclude her from introducing evidence at the arbitration, and critically, she chose to introduce no evidence at arbitration. The matter was decided on the merits. But in Davis, the trial court never considered evidence on the merits of the case—the issue of whether the borrower defaulted.

In reviewing the question of whether the second foreclosure complaint involved the same cause of action as the first, the Davis court relied on the Supreme Court's recent decision in J.P. Morgan Chase Bank v. Taggart, 203 A.3d 187 (Pa. 2019), a case that examined the requirement to provide the Act 6 statutory notice in a second foreclosure complaint. In Taggart, the lender commenced suit with the required Act 6 notice but the complaint was dismissed for failure to respond to preliminary objections. When the bank refiled the complaint, it secured a judgment despite not filing a new Act 6 notice. The Supreme Court concluded that the "statutory purpose of Act 6 is to prevent foreclosures without adequate notice, Act 6 requires a new pre-foreclosure notice each time the lender initiates a mortgage foreclosure action." Taggart at 195, (emphasis added by the court)." Thus, under Taggart, a subsequent action on the same mortgage can be different from a previous one, especially because the amount to cure the default changes over time. According to Taggart, in the second suit a different period of default is at issue, and the borrower must be notified of the amount due. The Pennsylvania Supreme Court held that the trial court erred in failing to set aside the sheriff sale.

For the Davis court, a critical point is that, like Taggart, a different period of time is at issue; the default is continuing. The Davis court found that the trial court failed to realize that a later foreclosure action can be a different cause of action from the first foreclosure cause of action when there is a continuing default on the mortgage note. Finally, the court found that a dismissal with prejudice is a decision on the merits, but res judicata will not bar a subsequent claim when the "The subsequent and separate alleged default created a new and independent right in the mortgagee to accelerate payment on the note in a subsequent foreclosure action," citing Singleton v. Greymar Associates, 882 So.2d 1004, 1008 (Fla. 2004). Consequently, the Davis court concluded that the second complaint was distinct from the first complaint because it was based on a different period of default.

There are three important takeaways from the Davis case: first, when a foreclosure complaint is dismissed on procedural grounds and a borrower is still in default, the prior foreclosure action will not bar the second action. Second, the court stressed the limitations of its holding here, based on a relatively narrow set of factual circumstances. Third, the facts underlying the second action will be considered a different cause of action in the face of a continuing breach. If you are defending a foreclosure action and have the case dismissed on these procedural grounds—there is no bar to the bank continuing legal action if the borrower remains in default.

Harper J. Dimmerman is an adjunct professor at Temple University's Fox School of Business. He may be reached at [email protected] or 215-545-0600.

James M. Lammendola is an associate professor and deputy chair of the Legal Studies Department at Temple University's Fox School of Business. He was in private practice for 20 years. He may be reached at [email protected] or 215-204-4124.