I read a case last year where a bankruptcy judge in Oakland refused to dismiss or otherwise reject a third consecutive § 522(f) motion based on the two-dismissal rule. Airport Business Center v. Alfahel (In re Alfahel), 651 B.R. 381 (9th Cir. BAP 2023).
I had a profound thought – what in the world is the two-dismissal rule? I guess the 9th Circuit wondered the same thing because it affirmed, in a published decision, a bankruptcy court’s dismissal of a debtor’s declaratory relief complaint against a bank on the basis that the debtor had previously filed three other cases and then voluntarily dismissed them. Rose Court, LLC v. Select Portfolio Servicing, Inc. (In re Rose Court, LLC), —- F.4th —-, 2024 WL 4509723 (9th Cir. October 2024).
The two-dismissal rule comes from FRCP 41(a)(1)(B). FRCP 41(a)(1)(A) provides that a plaintiff may dismiss his “action” either unilaterally, if no answer or response has been filed, or by stipulation otherwise. FRCP 41(a)(1)(B) provides that the voluntary dismissal is without prejudice (unless otherwise provided). But the next sentence in that subsection adds “if the plaintiff previously dismissed any federal- or state-court action based on or including the same claim, a notice of dismissal operates as an adjudication on the merits.” So, the second dismissal is on the merits meaning claim preclusion or res judicata? Yes. The third case, if it is filed in federal court, must be dismissed.
The 9th Circuit explained in Rose Court, “There are four requirements that must be met to trigger the two-dismissal rule: (1) the plaintiff voluntarily dismissed an action in either state or federal court, (2) thereafter the plaintiff voluntarily dismissed a second action pending in federal court, (3) the two dismissals concerned the same claim, and (4) the plaintiff seeks to raise the twice-dismissed claim again in federal court.” Rose Court,2024 WL 4509723 at *3. In Rose Court, the debtor filed two state court and one federal court complaints over several years against various lenders based on alleged wrongful foreclosure, essentially that the loan had been transferred so many times, the bank claiming to own it now was lying. The debtor later voluntarily dismissed each of the complaints. When a bank finally foreclosed, the debtor filed a bankruptcy petition and another complaint asserting the same thing, fraud-based wrongful foreclosure. The bankruptcy court, Judge Dennis Montali, dismissed the new complaint and refused to permit the debtor to try to amend saying that no amendment could get past the two-dismissal rule.
The 9th Circuit agreed noting that “the two-dismissal rule is analogous to the res judicata inquiry,” adding that “the key question in determining whether the claims are the same ‘is whether the two suits arise out of the same transactional nucleus of facts.’” The debtor asserted of course that the new complaint it would have filed if permitted would have been a different claim. But the 9th Circuit clarified that it is the same claim “if it arises from the same set of facts as the first action and the claim could have been or was raised in the preceding action.” (citation omitted). In his concurrence in the judgment, Judge Daniel Collins argued that because federal jurisdiction in the last action was based on diversity, the analysis required a review through the lens of California preclusion law.
What about contested matters? In Alfahel, the debtor filed two consecutive § 522(f) motions and then voluntarily “withdrew” each. As to each motion, the creditor filed an objection to the motion but did not object or otherwise comment on the withdrawal of the then pending motion. The bankruptcy court, the BAP and the 9th Circuit all agreed that because the debtor did not “dismiss” the previous actions, FRCP 41(a)(1)(B) did not apply. As the BAP commented, the previous motions basically “disappeared” when the withdrawal was filed. It chided the parties that someone should have asked the court to rule on whether the withdrawal was with prejudice. Alfahel,651 B.R. at 391(fn 11). The BAP suggested the court consider a local rule similar to the Central District of California local rule 9013-1(k) which requires the movant to “in addition to complying with Civil Rule 41(a),” notify the court of the filing of a withdrawal of a motion. Id.
It should be noted that the 9th Circuit confirmed in Alfahel that an opposition “serves as the equivalent of an answer for purposes of applying Rule 41(a).” In re Alfahel,1:16-bk-10436, 2024 WL 2269279 (9th Cir, May 20, 2024).
I might also point out that FRCP 41(b) provides that if a matter is dismissed by the court for failure “to prosecute or to comply with these rules or a court order,” the dismissal “operates as an adjudication on the merits.” Thankfully for the debtors in Alfahel, they finally found Cathy Moran who was able to bring some sense to the process. Nice job Cathy!
