Limited Application of Collateral Estoppel in NC Foreclosures: "Allonge" Way of Saying, Get Your Documents Straight

In an unpublished opinion, the NC Court of Appeals in Dawkins v Wilmington Trust Company had to determine whether certain issues raised in a lawsuit were collaterally estopped by a prior foreclosure order.  The substitute trustee filed a special proceeding to foreclose on Mr. and Mrs. Dawkins’ real estate.  Prior to the foreclosure hearing, the foreclosing lender faxed Mr. and Mrs. Dawkins a copy of their promissory note with an attached allonge.  At the foreclosure hearing, however, the substitute trustee presented a copy of the promissory note with a different allonge attached.  The Clerk of Court dismissed the foreclosure action, but on de novo appeal, the Superior Court entered an order allowing the foreclosure sale.  Importantly, the Superior Court did not specifically address the “different allonge” issue.

The substitute trustee then proceeded to sell the real estate at a foreclosure sale.  Shortly after the sale, however, Mr. and Mrs. Dawkins filed a separate lawsuit against the foreclosing lender asserting claims for negligent misrepresentation, fraud, breach of the implied covenant of good faith and fair dealing, violation of Unfair and Deceptive Trade Practices Act (UDTPA), and declaratory and injunctive relief to enjoin the foreclosure proceeding.  These claims arose from Mr. and Mrs. Dawkins’ assertion that the lender submitted a version of the allonge during the foreclosure hearing that was different from the one it had earlier provided to them. 

The lender filed a motion to dismiss claiming that Mr. and Mrs. Dawkins were collaterally estopped from raising issues in the lawsuit because those issues had already been litigated in the prior foreclosure action.  In short, the lender contended that the Superior Court already found in the foreclosure proceeding that the lender was the holder of the subject promissory note and that the promissory note constituted a valid debt— findings which went to the heart of the “different allonge” issue raised by Mr. and Mrs. Dawkins in the lawsuit.  The trial court dismissed all of Mr. and Mrs. Dawkins’ claims except for their claims under UDTPA and breach of the implied covenant of good faith and fair dealing.  The lender appealed to the Court of Appeals.

The North Carolina Court of Appeals noted that it previously determined, in Funderburk v. JPMorgan Chase Bank, N.A., 775 S.E.2d 1 (2015), that parties may be collaterally estopped from raising issues in a subsequent lawsuit that had been litigated in a prior foreclosure proceeding.  But, in a footnote, the Court of Appeals then seemed to question the viability of Funderburk.  Specifically, the Court of Appeals cited to the North Carolina Supreme Court’s recent holding in In re Foreclosure of Lucks which “has recently cast doubt upon the preclusive effect of determinations made at foreclosure proceedings.” 

The Court of Appeals then discussed the applicability of the collateral estoppel doctrine in general.  Citing to State ex rel. Tucker v. Frinzi, 344 N.C. 411 (1996), the Court stated that a party alleging collateral estoppel must demonstrate three things: (1) that the earlier suit resulted in a final judgment on the merits; (2) that the issue in question was identical to an issue actually litigated and necessary to the judgment; and (3) that both the party asserting collateral estoppel and the party against whom collateral estoppel is asserted were either parties to the earlier suit or were in privity with them.  Here, the Court held that Mr. and Mrs. Dawkins were not collaterally estopped from pursuing their UDTPA and breach of the implied covenant of good faith and fair dealing claims in the separate lawsuit because the “different allonge” issue was not raised at all—much less “actually litigated”—in the foreclosure proceeding.