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R.I. Supreme Court Holds Bankruptcy Court Orders Granting Relief From Stay Are Res Judicata Respecting Superior Court Action Challenging Foreclosure

The Rhode Island Supreme Court has held that orders entered in two bankruptcy  proceedings granting relief from stay to permit a foreclosure sale to proceed and then finding that the sale was valid were res judicata with respect to a subsequent action the mortgagor filed in Superior Court seeking a declaration that the sale was void and that he owned the property.

In 2006, Plaintiff signed a $320,000 promissory note in favor of defendant ("Finance Company'"). He granted a mortgage to defendant Mortgage Electronic Registration Systems ("MERS") acting as nominee for Finance Company and its assigns. The mortgage and promissory note were subsequently assigned to defendant Bank. Plaintiff defaulted on his mortgage and foreclosure proceedings commenced. Plaintiff filed a Chapter 7 bankruptcy petition. Bank moved for relief from the stay. The Bankruptcy Court ordered that Bank could "take possession" of the property, "foreclose on the mortgage thereon," and evict plaintiff, if necessary. Defendant Buyer purchased the property at the subsequent foreclosure auction. Plaintiff filed a second bankruptcy petition, this one under Chapter 13. Bank again moved for relief from stay. The Bankruptcy Court issued an order that the sale to Buyer was "valid...and remained in full force and effect." The Court said Bank could transfer the property, record a foreclosure deed and evict Plaintiff if necessary.

Plaintiff then filed a third proceeding in Superior Court seeking a declaration that the foreclosure deed was void and declaring that he owned the property in fee simple absolute. The Superior Court granted defendants' summary judgment motions based on res judicata. Plaintiff appealed.

The Court said res judicata or claim preclusion bars the relitigation of all issues that were tried or might have been tried in an earlier action. For the doctrine to apply there must be (1) an identity of parties, (2) an identity of issues, and (3) a final judgment in the earlier action. The Court said there was clearly an identity of parties in the bankruptcy proceedings and the Superior Court action. The issues were also the same. The Court said the orders in the adversary proceedings became final when Plaintiff did not appeal them.

Relying on Grella v. Salem Five Cent Savings Bank, 42 F.3d 26 (1st Cir. 1994), plaintiff argued that the Bankruptcy Court's decisions granting relief from stay were merely procedural in nature and did not have preclusive effect. The Supreme Court noted that in Plaintiff's bankruptcy the Bankruptcy Court not only granted relief from stay but it also entered orders that the foreclosure sale was valid, and that the bankruptcy proceedings had concluded.

The Supreme Court affirmed that Plaintiff's Superior Court claims were barred by res judicata.

Reynolds v. First NLC Financial Services, LLC, No. 2012-113 (R.I. Jan. 10, 2014)

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