               IN THE COURT OF APPEALS OF NORTH CAROLINA

                                    No. COA15-488

                                Filed: 19 January 2016

Sampson County, No. 14 SP 36

IN THE MATTER OF THE FORECLOSURE OF A DEED OF TRUST EXECUTED
BY RANDALL HERNDON AND NONA R. HERNDON AKA NONA RENEE
HERNDON DATED AUGUST 3, 2001 AND RECORDED IN BOOK 1403 AT PAGE
773 IN THE SAMPSON COUNTY PUBLIC REGISTRY, NORTH CAROLINA



        Appeal by Petitioner from order entered 30 December 2014 by Judge Gale M.

Adams in Sampson County Superior Court. Heard in the Court of Appeals 21 October

2015.


        Shapiro & Ingle, LLP, by Jason K. Purser, for Petitioner.

        Brent Adams & Associates, by Brenton D. Adams, for Respondents.


        STEPHENS, Judge.


                         Factual and Procedural Background

        On 3 August 2001, Respondent Randall Herndon (“Herndon”) executed a

promissory note in favor of Long Beach Mortgage Company (“Long Beach”) in

consideration for a $60,800 loan. The loan was payable over 30 years at a rate of

11.25% interest. Herndon and his wife, Respondent Nona R. Herndon, executed a

deed of trust to secure the debt with real property located at 1375 Union Church Road

in Dunn (“the home”). Herndon defaulted on the debt beginning with his failure to

make a payment due 1 November 2007 and never again made a payment on the loan.
                                     IN RE: HERNDON

                                    Opinion of the Court



         After the note was executed, Long Beach endorsed it such that it was payable

to “blank.” By November 2009, Petitioner U.S. Bank National Association (“the

bank”) was in possession of the note and was trustee of the deed of trust. On 4

November 2009, the substitute trustee, on behalf of the bank, filed in the Superior

Court in Sampson County a notice of hearing in support of its foreclosure petition in

file number 09 SP 246 (“the first foreclosure petition”). The notice of hearing stated

that the petition would be heard on 7 June 2010, noted that the debt had been

accelerated, and generally described a payment default.         The substitute trustee

obtained continuances for the hearing several times, with the last hearing date set

for 25 August 2011. However, on 19 August 2011, the substitute trustee took a

voluntary dismissal of the special proceeding pursuant to Rule of Civil Procedure

41(a).

         On 8 December 2011, the substitute trustee filed a notice of hearing in support

of a foreclosure petition in file number 11 SP 248 (“the second foreclosure petition”).

The notice set the hearing in the second foreclosure proceeding for 9 February 2012,

noted that the debt had been accelerated, and generally described a payment default.

Following a series of continuances, the second petition came on for hearing on 4

October 2012. At the hearing, evidence was presented, including an acceleration

warning letter dated 21 October 2011. At the conclusion of the hearing, the clerk

entered an order permitting foreclosure, which the Herndons appealed to the superior



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                                   Opinion of the Court



court the following day. However, before the appeal was heard, the substitute trustee

again took a voluntary dismissal of the special proceeding pursuant to Rule 41(a).

      On 21 February 2014, the substitute trustee filed a notice of hearing in support

of a foreclosure petition in file number 14 SP 36 (“the third foreclosure petition”). The

notice set the hearing in the third foreclosure proceeding for 27 March 2014 and noted

that the debt had been accelerated. The hearing was continued several times. At the

hearing on 21 August 2014, evidence was presented to the clerk, who entered an order

permitting foreclosure on the same day. The Herndons appealed that order to the

Sampson County Superior Court on 2 September 2014.             Following a hearing in

November 2014, the Honorable Gale M. Adams, Judge presiding, entered an order on

30 December 2014 reversing the clerk’s order and dismissing the proceeding (“the

dismissal order”). The dismissal order provided:

             It appearing to the [c]ourt that the Petitioner, U.S. Bank
             National Association, as Trustee, Successor in Interest to
             Wachovia Bank, National Association, (formerly known as
             First Union National Bank) as Trustee, for Long Beach
             Mortgage Loan Trust 2001-4, brought two previous special
             proceedings; 09 SP 246 and 11 SP 248. The only document
             of substance in file 09 SP 246 is a Notice of Hearing which
             contains no date or other information regarding default.
             Both 09 SP 246 and 11 SP 248 were voluntarily dismissed.

             On the basis of the record, evidence presented, and
             arguments of counsel, the [c]ourt is of the opinion the
             dismissal in 11 SP 248 acted as an adjudication on the
             merits pursuant to Rule 41(a)(1) of the North Carolina
             Rules of Civil Procedure.



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                                    IN RE: HERNDON

                                    Opinion of the Court



On 27 January 2015, the substitute trustee gave notice of appeal from the dismissal

order.

                                       Discussion

         On appeal, the substitute trustee argues that the superior court erred in (1)

excluding an affidavit from Dana Crawford and (2) dismissing the third foreclosure

petition under the “two dismissal rule” of Rule 41(a). As discussed below, we reverse

the dismissal order.

I. The Crawford affidavit

         The substitute trustee first argues that the superior court erred in excluding

an affidavit from Dana Crawford, a document control officer employed by the

authorized servicer handling Herndon’s loan for the bank. However, on appeal, the

substitute trustee acknowledges that “neither party expressly sought to admit [the

Crawford affidavit]” at the hearing before the superior court, “although [the

substitute trustee’s] counsel did refer to it.” After reviewing the transcript of the 3

November 2014 proceeding in the superior court, we agree that the Crawford affidavit

was never offered for admission.

         Toward the end of the motion hearing, the Crawford affidavit was discussed by

Robert Hood, counsel for the substitute trustee:

               THE COURT:          Mr. Hood, can I see the affidavit that
               you have for the third [foreclosure petition]?




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                       Opinion of the Court



MR. HOOD:           Yes, your Honor. I have two new
affidavits. They are identical. May I approach? This
would be in addition to the affidavit that’s in the special
proceeding file already.

THE COURT:             Mr. Hood, I’ve gone through this entire
file. I see this affidavit in the file, but it’s not the one you’ve
handed up. It’s different.

MR. HOOD:             Yes.

THE COURT:            Y’all want to—go ahead.

MR. HOOD:              I was just going to ask, is that the
affidavit in the file of August 21st? I think that was clocked
in on August 21st, 2014?

THE COURT:            Let me go back to that.

MR. HOOD:           Yes, your Honor. The second—the two
affidavits that I tendered today are—they have more
information and they were executed specifically for this
proceeding today. I have another copy. I have the first one.

THE COURT:           So when you say that the affidavit that
you handed up is in the file, this affidavit that you handed
up is not actually in the file. It’s a different affidavit.

MR. HOOD:             No. No. A different affidavit. I’m
sorry. I may have misspoke, your Honor. There was an
affidavit at the original hearing that is in the file and that’s
the one that was clocked in on August 21st.

THE COURT:            Yes.

MR. HOOD:           The two affidavits that I handed up
today, they are not in the file. Those were specifically for
today’s proceeding.

THE COURT:            What’s the purpose of that?


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                                   Opinion of the Court




              MR. HOOD:           The purpose of the two affidavits, your
              Honor, were just to bolster the, again, the notion of the
              elements of default on behalf of the respondent[s].
              Personally, they are superfluous because the original
              affidavit that was clocked in at the hearing was sufficient.
              The clerk said it was sufficient. That’s why she entered the
              order. But, again, our client wanted to be crystal clear as
              to the nature of the default. A little bit of the history is
              there on the second page. They are identical, executed only
              three days apart from each other.

              It is not uncommon for our client to introduce another
              affidavit of default, especially when we are submitting both
              the original note and Deed of Trust.

(Emphasis added). There followed a brief discussion with the Herndons’ counsel

during which the affidavits were not mentioned, and the substitute trustee’s counsel

expressed concern about the original note and deed of trust which the trial court had

been reviewing. Judge Adams responded, “A copy of the note is in the file. Let me

hand back these affidavits also. The note is in the file.” That remark ends the hearing

transcript, and nothing in the transcript suggests that the substitute trustee’s

counsel ever asked that the affidavits be admitted or clarified for the court that he

did not want the affidavits to be returned along with the original note and deed of

trust.

         Further, even assuming arguendo that the affidavits were offered for

admission and that the trial court excluded them, as the substitute trustee notes,

              [w]e review a trial court’s decision to exclude evidence
              under Rule 403 for abuse of discretion. An abuse of


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                                  Opinion of the Court



             discretion results when the court’s ruling is manifestly
             unsupported by reason or is so arbitrary that it could not
             have been the result of a reasoned decision. In our review,
             we consider not whether we might disagree with the trial
             court, but whether the trial court’s actions are fairly
             supported by the record.

State v. Whaley, 362 N.C. 156, 160, 655 S.E.2d 388, 390 (2008) (citations and internal

quotation marks omitted). Exclusion of evidence is proper “under Rule 403 if the trial

court determines its ‘probative value is substantially outweighed by the danger of

unfair prejudice, confusion of the issues, or misleading the jury, or by considerations

of undue delay, waste of time, or needless presentation of cumulative evidence.’ ” Id.

at 159-60, 655 S.E.2d at 390 (quoting N.C. Gen. Stat. § 8C-1, Rule 403) (emphasis

added). The substitute trustee’s counsel stated that the affidavits were being offered

“just to bolster the, again, the notion of the elements of default” and characterized

them as “superfluous” given that other evidence in the file “was sufficient.”

Considering that the proponent of the evidence explicitly described the affidavits as

unnecessary and cumulative, we would reject the argument that the trial court’s

decision not to admit them was “unsupported by reason or [was] so arbitrary that it

could not have been the result of a reasoned decision.” See id. at 160, 655 S.E.2d at

390 (citation and internal quotation marks omitted). Accordingly, even if we were to

hold that the affidavits had been offered into evidence, we would conclude that the

trial court did not abuse its discretion in declining to admit them. This argument is

overruled.


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                                  Opinion of the Court



II. The two dismissal rule

      The substitute trustee next argues that the superior court erred in dismissing

the third foreclosure petition under the two dismissal rule of Rule 41(a). We agree.

      We begin by addressing the substitute trustee’s assertion that the loan was not

accelerated until 21 August 2011, the date of the only acceleration warning letter

included in the record before us. The substitute trustee contends that the first

foreclosure petition was filed before the loan was accelerated and was thus based

upon Herndon’s default on the individual payments up to the time of filing, while the

second foreclosure petition was filed after the loan was accelerated and, thus, was

based on Herndon’s default on the total remaining balance owed. As a result, the

substitute trustee urges that, because the claim in the second foreclosure petition was

not based upon the same transaction or occurrence as the first foreclosure petition,

the two dismissal rule was not triggered by dismissal of the second foreclosure

petition. We must reject the factual premise of the substitute trustee’s argument on

this point. The 4 November 2009 notice of hearing in support of the first foreclosure

petition specifically states that the loan had been accelerated as of that date.

However, in light of recent precedent from this Court, this factual point makes no

difference in our resolution of the central question before us, to wit, whether the two

dismissal rule was applicable in this matter.




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                                   IN RE: HERNDON

                                   Opinion of the Court



      “A creditor can seek to enforce payment of a promissory note by pursuing

foreclosure by power of sale, judicial foreclosure, or by filing for a money judgment,

or all three options, until the debt has been satisfied.” Lifestore Bank v. Mingo Tribal

Pres. Trust, __ N.C. App. __, __, 763 S.E.2d 6, 7 (2014), disc. review denied, __ N.C.

__, 771 S.E.2d 306 (2015). “A foreclosure under power of sale is a type of special

proceeding, to which our Rules of Civil Procedure apply[,]” id. at __, 763 S.E.2d at 9

(citation omitted), including Rule 41(a) which

             provides that a notice of dismissal operates as an
             adjudication upon the merits when filed by a plaintiff who
             has once dismissed an action based on or including the
             same claim. This provision is commonly referred to as the
             two dismissal rule. According to Rule 41(a)’s two dismissal
             rule, a second dismissal of an action asserting claims based
             upon the same transaction or occurrence as a previously
             dismissed action operates as an adjudication on the merits
             and bars a third action based upon the same set of facts.
             In order to determine whether a second action was based
             upon the same transaction or occurrence as a first action,
             we examine whether the claims in both actions were based
             upon the same core of operative facts and whether all of the
             claims could have been asserted in the same cause of
             action.

In re Foreclosure by Rogers Townsend & Thomas, PC, __ N.C. App. __, __, 773 S.E.2d

101, 103-04 (2015) (citations, internal quotation marks, brackets, ellipses, and

footnote omitted) (hereinafter, “Rogers Townsend & Thomas”).

      The Herndons cite Lifestore Bank in arguing that the voluntary dismissal of

the second foreclosure petition operated as an adjudication on the merits of the



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                                    Opinion of the Court



substitute trustee’s claims such that Rule 41(a) required dismissal of the third

foreclosure petition. Our review reveals a critical factual distinction between that

case and the matter here that renders Lifestore Bank inapposite. In Lifestore Bank,

the lender first sought to recover on two promissory notes by an action for foreclosure

by power of sale which the lender later voluntarily dismissed. __ N.C. App. at __, 763

S.E.2d at 10. The lender also took a voluntary dismissal of its second action for

foreclosure by power of sale. Id. The lender then filed a complaint which included

claims for a money judgment on the two promissory notes, as well as for judicial

foreclosure. Id. at __, 763 S.E.2d at 8. The trial court applied the two dismissal rule

to dismiss the lender’s claim for judicial foreclosure, and the lender appealed. Id. at

__, 763 S.E.2d at 9. This Court reversed, noting that “a judicial foreclosure differs

from a foreclosure by power of sale in that a judicial foreclosure is not a type of special

proceeding and, as such, can be pursued by a creditor after a foreclosure by power of

sale has failed.” Id. at __, 763 S.E.2d at 12-13 (citations and internal quotation marks

omitted). This Court thus reasoned that, “the two dismissal rule . . . [was] not

applicable to [the lender’s] claim for judicial foreclosure as [the lender] could not have

brought a claim for judicial foreclosure in the same action as its claims for foreclosure

by power of sale.” Id. at __, 763 S.E.2d at 13 (citation omitted). Accordingly, the

Court held that “[t]he two dismissal rule of Rule 41 does not bar a creditor from

bringing an action for judicial foreclosure or for money judgment where the creditor



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                                   Opinion of the Court



has filed and then taken voluntary dismissals from two prior actions for foreclosure

by power of sale.” Id. at __, 763 S.E.2d at 7 (internal quotation marks omitted;

emphasis in original).     The issue before the Court in Lifestore Bank was the

applicability of the two dismissal rule where an action for judicial foreclosure and a

money judgment is filed following the voluntary dismissal of two previous actions for

foreclosure by sale.   By contrast, in the matter before us here, the issue is the

applicability of the two dismissal rule where a third action for foreclosure by sale is

brought following the voluntary dismissal of two previous actions for foreclosure by

sale. Accordingly, the holding of Lifestore Bank is wholly inapplicable to the present

appeal.

      We acknowledge that the Court in Lifestore Bank remarked that “by taking

two sets of voluntary dismissals as to its claims for foreclosure by power of sale, the

second set of voluntary dismissals is an adjudication on the merits which bars [the

lender] from undertaking a third foreclosure by power of sale action . . . .” Id. at __,

763 S.E.2d at 12 (internal quotation marks omitted). However, because the lender

never brought a third action for foreclosure by power of sale, the issue of the two

dismissal rule’s effect on a third action for foreclosure by power of sale was not before

the Lifestore Bank Court. This observation, therefore, was mere dicta and does not

control the resolution of the issue presented by this case. Recently, however, the

appeal in Rogers Townsend & Thomas presented this Court with the opportunity to



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                                  Opinion of the Court



address as a matter of first impression the identical question before us here: whether

the two dismissal rule bars a third action for foreclosure by power of sale following

the voluntary dismissal of two previous actions for foreclosure by power of sale.

      In Rogers Townsend & Thomas, the

             petitioners twice voluntarily dismissed foreclosure by
             power of sale actions against [the borrower] and they filed
             both notices of dismissal prior to resting their case. In
             addition, [the note holder] sought to accelerate [the
             borrower’s] debt in both actions. Therefore, we must decide
             whether [the note holder]’s decision to accelerate the debt
             placed the entire balance of the note at issue and
             eliminated any factual distinctions between the two
             actions. If it did, the second action was based upon the
             same transaction or occurrence as the first one, and Rule
             41 as well as the principles of res judicata will bar
             petitioners from bringing a third foreclosure by power of
             sale action on the same note. The dispositive issue, as we
             see it, is whether or not each failure to make a payment by
             a borrower under the terms of a promissory note and deed
             of trust constitutes a separate default, or separate period
             of default, such that any successive acceleration and
             foreclosure actions on the same note and deed of trust
             involve claims based upon different transactions or
             occurrences, thus exempting them from the two dismissal
             rule contained in Rule 41(a).

__ N.C. App. at __, 773 S.E.2d at 104 (italics added). After noting that our State’s

appellate courts had not addressed the issue directly, this Court reviewed related

case law from North Carolina as well as the approaches to the two dismissal rule in

foreclosure matters in other jurisdictions before holding that “a lender’s election to

accelerate payment on a note and foreclose on a deed of trust does not necessarily



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                                   Opinion of the Court



place future payments at issue such that the lender is barred from filing subsequent

foreclosure actions based upon subsequent defaults, or periods of default, on the same

note.” Id. at __, 773 S.E.2d at 106.

      The Court went on to explain and apply its reasoning where two foreclosure

actions with accelerated loans are dismissed voluntarily:

             In construing Rule 41(a)’s two dismissal rule, our courts
             have required the strictest factual identity between the
             original claim, and the new action, which must be based
             upon the same claim as the original action. Therefore, Rule
             41(a) applies when there is an identity of claims, the
             determination of which depends upon a comparison of the
             operative facts constituting the underlying transaction or
             occurrence. If the same operative facts serve as the basis
             for maintaining the same defaults in two successive
             foreclosure actions, and the relief sought in each is based
             on the same evidence, the voluntary dismissal of those
             actions under Rule 41(a) bars the filing of a third such
             action.

Id. at __, 773 S.E.2d at 107 (citation, internal quotation marks, brackets, and ellipsis

omitted). After comparing the operative facts at issue in the foreclosure by sale

actions brought by the lender, the Court concluded:

             We find no strict factual identity between the two
             foreclosure by sale actions filed in this case. [The note
             holder]’s second action was not simply a continuation of its
             original action and it was not an attempt to relitigate the
             same alleged default. Certainly, in both foreclosure
             actions, the Clerk of Court would have to determine
             whether [the note holder] could establish that a default
             occurred between July 2009 and January 2012. But in the
             second foreclosure action, the Clerk would also have had to
             determine whether [the borrower] defaulted between


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                                   Opinion of the Court



             January 2012 and July 2013—this is a claim that [the note
             holder] could not have brought in the first foreclosure
             action. Consequently, the operative facts and transactions
             necessary to the disposition of both actions gave rise to
             separate and distinct claims of default, and some of the
             particular default claims relevant to the second action
             could not have been brought in the first one. As the claims
             of default and particular facts at issue in each action
             differed, Rule 41(a)’s two dismissal rule does not apply.
             Accordingly, [the] petitioners’ second voluntary dismissal
             did not operate as an adjudication on the merits and the
             principles of res judicata do not bar a third power of sale
             foreclosure action.

Id. at __, 773 S.E.2d at 108 (italics added). In so holding, the Court specifically

distinguished the factual circumstances and procedural posture in Rogers Townsend

& Thomas from those present in Lifestore Bank:

             [In Lifestore Bank,] the pertinent issue was whether Rule
             41 barred the lender’s claims for money judgments and
             judicial foreclosure. This Court held that, because an
             action for foreclosure by power of sale is a special
             proceeding, limited in jurisdiction and scope, the lender’s
             money judgment and judicial foreclosure claims—though
             based upon the same core of operative facts—could not
             have been brought in the previously dismissed actions and,
             thus, were not barred by Rule 41(a)’s two dismissal rule. . . .

             . . . [W]e find that Lifestore Bank is easily distinguished
             from the instant case. Indeed, the Lifestore Bank Court did
             not reveal the alleged dates or periods of default relevant
             to the lenders’ foreclosure by sale actions, and there was no
             mention that the debts were accelerated. Nor did the Court
             address the question whether each failure to make a
             payment by a borrower under the terms of a note secured
             by a deed of trust constitutes a separate default.

Id. at __, 773 S.E.2d at 104-05.


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                                   IN RE: HERNDON

                                  Opinion of the Court



      We perceive no difference between the relevant facts and procedural posture

in Rogers Townsend & Thomas and the case before us. Here, the promissory note for

$60,800.00 was executed on 3 August 2001 with payments due on the first day of each

month from October 2001 through September 2031. The first foreclosure petition was

filed on 4 November 2009 and thus covered defaults by Herndon between November

2007 and November 2009. The second foreclosure petition was filed on 8 December

2011, and therefore covered the additional defaults by Herndon each month from

December 2009 through December 2011. The third foreclosure petition was filed on

21 February 2014, covering the further defaults by Herndon between 1 January 2012

and February 2014.

      Just as in Rogers Townsend & Thomas, during each of these time periods,

Herndon continued to default, and the “lender’s election to accelerate payment on a

note . . . [did] not necessarily place future payments at issue such that the lender

[was] barred from filing subsequent foreclosure actions based upon subsequent

defaults, or periods of default, on the same note.” Id. at __, 773 S.E.2d at 106.

Applying this precedent, we reach the same holding. Because the “claims of default

and particular facts at issue in each action differed, Rule 41(a)’s two dismissal rule

does not apply” here, and therefore the dismissal of the second foreclosure petition

“did not operate as an adjudication on the merits . . . .” See id. at __, 773 S.E.2d at

108. Accordingly, the substitute trustee is not barred from bringing a third action for



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                                Opinion of the Court



foreclosure by power of sale, and the superior court’s order dismissing the third

foreclosure petition must be

      REVERSED.

      Judges STROUD and DAVIS concur.




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