Summer 2015
United Trustees Association
Featured Article
When Adjudication on the Merits Isn’t
Really: The Trap of Hardy v. America’s Best
Home Loans
By Kate Heidbrink, Esq., Bergstrom Law, Ltd.
T
rustees know that enterprising borrowers will try a vabreach of contract, and breach of the implied covenant of good
riety of legal tactics to stall foreclosure, or rescind it affaith and fair dealing.
ter the fact. However, servicers usually cannot be sued
In the federal action, America’s Best moved to dismiss some of
twice for the same foreclosure under the twin doctrines of claim
Hardy’s claims. The district court then granted America’s Best’s
preclusion and issue preclusion, which prevent parties to a lawmotion to dismiss as to Hardy’s claims for breach of contract
suit from relitigating the same issues. “Res judicata, or claim
and breach of the implied covenant of good
preclusion, prevents relitigation of the same
faith and fair dealing, but denied dismissal of
cause of action in a second suit between the
the claims alleging RESPA violations, fraud,
same parties…Collateral estoppel, or issue
Trustees and their lenderand UCL violations. The district court dispreclusion, precludes relitigation of issues
clients should be aware
missed the contract claims alleged against
argued and decided in prior proceedings.”
that a procedural dismissal America’s Best without prejudice, and orth
Mycogen Corp. v. Monsanto Co., 28 Cal.4
in federal court under
dered Hardy to file a second amended com888, 896 (2002), qtd. in Hardy v. America’s
Rule
41(b)
cannot
be
used
plaint no later than October 5, 2009.
Best Home Loans, et al., Super. Ct. No.
to prevent or dismiss
651557, F067389 (Cal. App., 5th Dist., Dec.
After Hardy failed to file a second amended
subsequent
borrower
22, 2014).
complaint by the deadline, America’s Best
lawsuits in state court.
moved for an entry of dismissal under Rule
In the recent case of Hardy v. America’s Best
41(b) of the Federal Rules of Civil Procedure.
Home Loans, et al., the California Court of
Hardy did not file a timely opposition to the
Appeal for the Fifth Appellate District permotion. The district court then dismissed
mitted a borrower to relitigate a foreclosure
America’s Best with prejudice based on Hardy’s failure to file
case through a creative interpretation of the plain language of
a second amended complaint. MERS was similarly dismissed
Rule 41(b) of the Federal Rules of Civil Procedure. By doing so,
with prejudice under Rule 41(b), and the district court issued
the court emphasized that only a prior judgment on the merits
an order to show cause why the remaining defendants should
prevents a borrower from relitigating a wrongful foreclosure in
not be dismissed.
California.
In response, Hardy filed an “untimely and unintelligible response” and notice of voluntary dismissal without prejudice.
Hardy v. IndyMac Federal Bank, 2009 WL 3871910, CV-F 09935, E.D.Cal. Nov. 13, 2009, unpub’d opinion. In response, the
district court entered a subsequent order reaffirming its prior
order dismissing America’s Best and MERS with prejudice. The
district court explained that, unlike a voluntary dismissal, a dismissal pursuant to Rule 41(b) “operates as an adjudication on
the merits” and that Hardy had no right to dismiss America’s
Best and MERS without prejudice “once the merits of his claims
against them have been considered by this Court.” Id. at p. 3.
The district court dismissed the remaining defendants without
In July 2009, borrower Knowledge Hardy, in pro per (without
counsel), filed suit in the United States District Court for the
Eastern District of California against a variety of servicerlenders, the trustee, MERS, and the real estate broker. Hardy
alleged that an unscrupulous real estate broker induced him to
refinance his loan in 2006, resulting in very poor loan terms
and an eventual foreclosure. The federal case asserted federal
question jurisdiction over America’s Best based on alleged RESPA violations. The case also brought a variety of California
state law claims, including negligence, breach of fiduciary duty,
fraud, violations of California’s Unfair Competition Law (UCL),
16
United Trustees Association
Summer 2015
Featured Article
prejudice pursuant to Hardy’s notice of voluntary dismissal and
closed the action. Id.
In 2010, Hardy, in pro per, sued the same set of defendants in
state court in the Superior Court of Stanislaus County, adding
defendant OneWest Bank, which acquired the property at the
foreclosure sale. In the state court action, Hardy alleged the following causes of action: fraud, breach of contract or rescission,
negligence, breach of fiduciary duty, and violations of the UCL.
The case proceeded to trial against America’s Best only. Seven
days before trial, America’s Best filed an ex parte application
for an order granting leave to amend their answer to add res
judicata and collateral estoppel (claim and issue preclusion) as
affirmative defenses. The trial court denied the application, but
America’s Best filed a motion for judgment on pleadings based
on res judicata and collateral estoppel. The trial court heard oral
argument on that motion at the trial. America’s Best argued that
collateral estoppel barred the state court action because the issues had been “fully and fairly litigated” in the federal action.
Hardy argued America’s Best was raising issues about res judicata on a case that was dismissed for failure to prosecute and
never decided on its merits. The trial court found that the federal court proceeding resulted in a ruling “on the merits” and
granted the motion for judgment on the pleadings.
Hardy appealed the trial court judgment, arguing that the federal action was dismissed, not on the merits, but for failure to
prosecute, which does not have a res judicata or collateral estoppel effect under California law.
The court of appeals noted that, under the California doctrine of
collateral estoppel, a prior decision precludes relitigation of an
Continued on page 44
17
Summer 2015
United Trustees Association
Featured Article
THE TRAP — Continued from Page 17
issue only if five requirements are met: (1) The issue is identical
to that in the former case; (2) The issue was actually litigated in
the former case; (3) The issue was decided in the former case;
(4) The decision in the former case was final and on the merits;
and (5) The party against whom preclusion is sought must be
the same as the party to the former proceeding.
that a procedural dismissal in federal court under Rule 41(b)
cannot be used to prevent or dismiss subsequent borrower lawsuits in state court. Despite the plain language of Rule 41(b),
federal and state interpretation has made the phrase “operating
as an adjudication on the merits” a trap for the unwary when it
comes to defending against subsequent actions.
Hardy analogized the dismissal in the federal case under Rule
41(b) to a dismissal for failure to prosecute in state court, and
thus argued that collateral estoppel did not apply under California state law because the dismissal of the federal action was
not on the merits. The court thus agreed with Hardy’s theory
that collateral estoppel did not apply in the state court action.
Kate Heidbrink is an Associate Attorney and Foreclosure Manager at Bergstrom Law, Ltd. Her primary practice areas are foreclosure, bankruptcy,
and collections. Kate can be reached at
kheidbrink@jbergstromlaw.com.
However, America’s Best argued that the plain language of the
dismissal order and of Rule 41(b) indicated that the dismissal
in the federal action was a dismissal on the merits. Rule 41(b)
provides in part: “Unless the dismissal order states otherwise,
a dismissal under this subdivision…operates as an adjudication
on the merits.” However, the court of appeals noted that the
United States Supreme Court has determined that Rule 41(b) is
not a claim-preclusion rule, but merely a procedural rule, citing
Semtek Int’l Inc. v. Lockheed Martin Corp., 531 U.S. 497 (2001).
Semtek also dealt with a federal case arising under California
law and dismissed under similar circumstances, so the court
of appeals cited that case extensively to support Hardy’s right
to relitigate the same claims against America’s Best. In Semtek,
the United States Supreme Court held that Rule 41(b) “operating as an adjudication on the merits” only prevented refiling in
the same federal court, not refiling in a different federal or state
court.
After further discussion as to why Hardy was not precluded
from bringing his claims against America’s Best based on state
or federal law, the court of appeals ultimately reversed the trial
court’s judgment.
The court of appeals noted throughout its opinion that Hardy
was representing himself without an attorney. While not one of
its legal arguments, the court appears to be especially dismissive of the lender’s claim that the borrower shouldn’t be able to
relitigate in state court because of the procedural nature of the
federal dismissal.
In any case, trustees and their lender-clients should be aware
44