February 01, 2016

Did I Forget to Turn Off the Stove? What Can Happen If You Forget to Dismiss a Settled Case

by Guest Blogger

With the willingness of lenders to enter into loan modifications after filing a foreclosure action, there are a growing number of orphan cases remaining open on courts' dockets. In Kentucky, CR 77.02(2) provides for the dismissal of pending actions, after notice, if no pretrial step has been taken within the last year. Still, that rule requires the court to be monitoring its dockets. It is often the case when the borrower defaults on the modified loan, foreclosure counsel will find that the previous case was never dismissed. The unreleased lis pendens, recorded with the previous case, could impact title post-foreclosure in the later action. See KRS 382.440. But the Sixth Circuit recently decided the failure to dismiss a settled case could lead to liability for the creditor.

In Lloyd v. Midland Funding, LLC, 2016 U.S. App. LEXIS 1300 (6th Cir. Tenn. Jan. 22, 2016) (unpublished), the Sixth Circuit affirmed the dismissal of the FCRA, FDCPA, abuse of process, and fraud claims, but it reversed to allow the borrower to pursue her breach of contract claim. In 2010, the creditor brought a collection action against the debtor which set a court date. Shortly before the court date, the parties settled the dispute for a reduced payoff and the creditor agreed to cease all legal actions. However, the collection action was never dismissed and, unbeknownst to both parties, the state court entered a default judgment against the debtor. Someone other than the creditor reported the default judgment to the credit reporting agencies (CRAs) and the debtor was allegedly damaged by having to pay increased interest and being denied credit. When she informed the creditor in 2012 of the entered default judgment, the creditor took immediate steps to correct the issue with both the state court and the CRAs. Still aggravated, the debtor brought an action in federal court for violation of FCRA, FDCPA, and additional state-law claims. Following discovery, the district court granted summary judgment to the creditor on all counts.

The Sixth Circuit agreed that the FCRA count failed because the debtor did not establish that the creditor was a furnisher. The creditor does not report judgments and had reported the account as "satisfied and paid in full." The FDCPA count failed because the one-year statute of limitations had run since it took the debtor more than 18 months to learn that the default judgment had been entered. The Sixth Circuit left the decision on a discovery rule to toll the limitations period for FDCPA claims because it found the debtor had not exercised reasonable diligence in discovering the judgment which was a matter of public record. Similarly, the abuse of process claim was brought more than a year after the judgment. However, the district court incorrectly dismissed the fraud and breach of contract claims based on preemption by FCRA. To prove these claims, the debtor did not need to establish that the creditor was the furnisher so there was no preemption. Her damages arose from the fact the judgment was entered, not from the fact that it was reported to the CRAs. Still, the debtor did not present any evidence of fraud. The Sixth Circuit, unfortunately, characterized the creditor's conduct in failing to dismiss the litigation as possibly negligent when it was at most a breach of the settlement agreement. That language could be problematic because the debtor could assume incorrectly that she has a negligence claim. That claim is subsumed by the breach of contract claim.

Since her alleged damages (increased interest) are related to the default judgment having been entered, the case has been remanded to consider the breach of contract issue (which should be dismissed for lack of subject-matter jurisdiction). This case is an important reminder to dismiss the litigation as part of the settlement. Allowing a settled case to remain on the docket can lead to many potential problems, including making a federal case out of a collection action. Recently, a state court entered a CR 77.02(2) dismissal without prejudice in a case which was removed to federal court and resolved. While I question the propriety of the state-court dismissal, it could have been worse if instead a judgment had been entered. So the question is, have you left any stoves on?