by Santo Longo, Esq.
Bendett & McHugh, PC.
USFN Member (CT, MA, ME, NH, RI, VT)
Mike Wiery, Esq.
Reimer Law
USFN Member (OH, KY)
Sally Garrison, Esq.
The Mortgage Law Firm
USFN Member (HI, CA, AZ, OR, WA, OK)
To foreclose successfully in many
judicial states, a loan servicer must convince the court to admit into evidence
portions of the servicer’s loan records that were originally created by a prior
servicer of the loan and were later incorporated into the current servicer’s
records. Having the court admit these “integrated”
business records into evidence presents difficult proof issues in many
foreclosure cases that are dealt with differently in different jurisdictions.
Below is a summary of the evidentiary
issues presented when seeking judgment in cases where multiple entities have
serviced the loan and integrated business records must be presented to the
courts, followed by a review of how these issues are addressed in the courts of
Maine, Ohio, and Hawaii.
Summary of the Issues
Under the Federal Rules of Evidence (see Rule 803(6)) and analogous evidence
rules in most states, the Hearsay Rule generally bars statements made out-of-court to prove
the truth of the matter asserted from admission as evidence in legal
proceedings. This includes written
records and materials.
The Business Records Exception to the Hearsay Rule allows certain
records of third parties to be admitted into evidence notwithstanding the
Hearsay Rule under certain circumstances.
In short, a court may admit a business entity’s financial or other records
into evidence in a legal proceeding if the records were timely made and kept by
the entity’s employees in the ordinary course of business, provided the
information was logged by (or was transmitted by) someone with knowledge. The servicer must also show that the records
meet these criteria through the testimony of a qualified witness, and the
opponent must be afforded an opportunity to show that the records, or the
circumstances surrounding the records, indicate that the records are not
trustworthy.
In a foreclosure action, when the servicer seeks to have the court
admit into evidence portions of its business records that were not originally generated
by the servicer or its employees, but were first generated by a prior servicer
and later incorporated into the current servicer’s records, thorny evidentiary
issues arise: How much proof, and what
kind of proof, must the current servicer provide to show that the incorporated records
are trustworthy and should be admitted into evidence? And what type of knowledge must the current
servicer’s witness have about the prior servicer and its business practices to
qualify the witness to present the incorporated records to the court for
admission into evidence?
How the courts approach and answer these questions varies from
state-to-state, and has changed over time in many jurisdictions. Below is a review of how these evidentiary
issues have been handled to date by the courts in three judicial states –
Maine, Ohio, and Hawaii.
Analysis Under Maine Law:
As we reported separately through the USFN, on October 22, 2020,
in The Bank of New York Mellon v. Danielle Shone, et al., 2020 ME 122,
the Maine Law Court (“Law Court”), the highest court in Maine, resolved a split
in prior Maine legal authority and clarified the current legal rules
surrounding admission of integrated business records into evidence in
foreclosure trials. The Shone decision is a good one for
foreclosing parties, in that it eases the evidentiary burden on plaintiffs when
foreclosing on loans that have been serviced by multiple entities.
The Law Court had previously issued a string of decisions dating
back to 2011 that incrementally raised the evidentiary standard faced by
foreclosing parties. First, by requiring
that in addition to integrating the prior servicer’s records into its own records
and relying on them, the current servicer was also required to present a
witness with knowledge of the prior servicer’s practices to demonstrate the
reliability and trustworthiness of the information. See Beneficial Maine, Inc. v. Carter,
2011 ME 77. Significantly, in December
2017, the Law Court raised the bar again, ruling that to authenticate the loan
records of a prior servicer, direct testimony about the “regular business
practices” of the prior servicer was required.
See KeyBank National Association v. Estate of Eula W. Quint, 2017
ME 237.
As a result of the Quint
decision, in recent years foreclosure plaintiffs in Maine have had to call
multiple witnesses at trial to ensure that at least one witness with
significant personal knowledge regarding each prior servicer’s business practices
was present to testify. This not only
placed a logistical burden on foreclosing parties, it also presented proof
problems in cases where a witness with significant knowledge of a prior
servicer’s practices was not available. In
fact, a substantial and growing number of properties that have been abandoned
by non-performing borrowers have sat vacant, the servicers and investors unwilling
or unable to proceed to foreclosure for fear that the trial court will rule
their witness testimony inadequate. Under
Maine law, such a ruling will not only cause the foreclosure action to fail but
will also render the mortgage and note unenforceable, which effectively means
the loss of the asset.
Fortunately for foreclosing parties, in Shone, the Law Court has now reversed
course and has established a less burdensome evidentiary standard that is more
in line with the approach taken in other jurisdictions as well as by the
federal courts. Specifically, the Law Court
in Shone modified and clarified the
current legal rules for admission of integrated business records into evidence
in Maine foreclosure actions, which are summarized as follows:
- It is
not required that the current servicer’s witness has personal knowledge
of the business practices of a prior servicer whose records have been
integrated into the current servicer’s records for the integrated records to be
admitted into evidence.
- If
the current servicer’s evidence, including witness testimony, demonstrates that
the current servicer has integrated the prior servicer’s records into its own, has
verified the accuracy and content of those records, and has relied on them in
the conduct of its operations, the integrated record will be admitted into
evidence, subject to the opponent’s opportunity to demonstrate that the record
is nonetheless not sufficiently trustworthy.
- Notwithstanding
the above, the witness will be required to have personal knowledge of the
current servicer’s record-keeping practices, including specifically how the
current servicer integrated the records of other businesses into its own, as
well as how those integrated records were verified and relied upon by the
current servicer to show that they are trustworthy.
Because these
rules for Maine foreclosures were adopted very recently (October 2020) and
since then there has been no interpretive case law, questions remain regarding what
specific information about the integration of a prior servicer’s business
records will be required by the courts. As
details emerge from future cases, requirements for witness and evidence
preparation should also start to come into focus.
Analysis Under Ohio Law
Ohio’s Evid.R. 803(6) business records exception to the hearsay
rule is substantially similar to the federal rule. When determining the admissibility of
business records created by prior loan servicers, courts throughout the State
of Ohio generally recognize Ohio’s “adoptive business records exception.” Pursuant to the adoptive business records
exception, Evid.R. 803(6) does not require the witness whose testimony
establishes the foundation for a business record to have personal knowledge of
the exact circumstances of preparation and production of the document or of the
transaction giving rise to the record. See Green Tree Servicing, LLC v.
Roberts, 12th Dist. Butler No. CA2013-03-039, 2013-Ohio-5362, ¶ 32. Rather, the adoptive business records
exception permits exhibits to be admitted as business records of an entity even
when the entity was not the maker of the records, so long as the other
requirements of Evid.R. 803(6) are met and circumstances indicate the records
are trustworthy.
Under Ohio’s adoptive business records exception, it is not enough
for borrowers defending foreclosures to simply point out the current servicer
was not the creator of the record seeking to be introduced. Borrowers defending
Ohio foreclosure cases are forced to challenge circumstances indicating the
records are trustworthy, particularly testimony, or lack thereof, contained
within affidavits supporting dispositive motions. Ohio courts have recognized
that one circumstance indicating the trustworthiness of documents proffered as
a business record might be the ongoing relationship between the business
creating the document and the incorporating business. See Secy. of Veterans
Affairs v. Leonhardt, 3rd Dist. No. 3-14-04, 2015-Ohio-931, 29 N.E.3d 1, ¶¶
59-60. The Leonhardt court relied
primarily on the lender-mortgage servicer relationship to establish that the
records of prior servicers being introduced by the current servicer were
trustworthy, stating:
Because of the nature of the mortgage
industry, many mortgage lenders rely on mortgage servicers to handle the daily
functions of mortgages. Similarly, the mortgage servicer may change throughout
the life of the loan. Considering the business relationship between the
mortgage lender and the mortgage servicer, as well as amongst successor
mortgage servicers, these entities rely on the underlying loan records for
accuracy in conducting ordinary business functions—that is, the mortgage
servicers are under a business duty to the mortgage lender to be accurate and
successor mortgage servicers rely on the records of prior mortgage servicers
for accuracy in servicing the loan. * * * Therefore, it is reasonable to
conclude that Plaintiff's Exhibits are trustworthy business records.
While the lender-mortgage servicer relationship is evidence of
trustworthiness, more often Ohio cases examine the actual testimony presented
to the court. In an appeal arguing that the trial court erred when it admitted
the business records from a prior servicer over the borrower’s hearsay
objection, an Ohio court of appeals found no such error. See Ben. Fin. I
Inc. v. Saunders, 4th Dist. Gallia No. 18CA5, 2019-Ohio-3577, ¶ 27. In the Saunders appeal, the borrower argued
that the testimony of the current servicer did not include familiarity with the
prior servicer's record-keeping system and did not lay a foundation for the
admissibility of the prior servicer’s business records. The
appellate court recognized that the current servicer’s affidavit expressly
stated that the affiant was comprehensively trained on how the current servicer
monitors and tracks loan transactions, and specifically, the way that the
current servicer receives, inputs, and maintains critical loan information. The
appellate court acknowledged the affidavit further contained language stating
"[t]o the extent such records related to the loan that is the subject of
this proceeding come from another entity, those records were received by [current
servicer] in the ordinary course of its business, have been incorporated into
and maintained as part of [current servicer]'s business records and have been
relied on by [current servicer]." The court of appeals found the testimony
within the servicer’s affidavit demonstrated its trustworthiness and affirmed
the trial court’s decision holding the records admissible.
In contrast, Ohio’s Ninth District Court of Appeals, in denying a
lender’s motion for summary judgment, found that that the servicer’s supporting
affidavit did not contain language sufficient to demonstrate the servicer’s
ability to testify to prior servicer records. The court held that a servicer seeking to
admit a prior servicer’s business records must provide the appropriate
foundation for admission which indicates the witness “possesses a working
knowledge of the specific record-keeping system that produced the document.'"
See Wells Fargo Bank, NA v. Russell, 9th Dist. Summit No. 29005,
2019-Ohio-776, ¶ 28-29. The Russell
court further held that the witness must be “familiar with the operation of the
business and with the circumstances of the preparation, maintenance, and
retrieval of the record in order to reasonably testify on the basis of this
knowledge that the record is what it purports to be, and was made in the
ordinary course of business.'" The court found that the servicer’s
affidavit did not contain adequate language establishing this evidence, stating
"[a] witness who merely receives and retains records produced by another
business does not necessarily have a 'working knowledge of the specific
record-keeping system that produced the document.” According to the court, the current
servicer’s affidavit additionally failed to demonstrate familiarity with the
circumstances of the preparation, maintenance, and retrieval of certain
business records in order to reasonably testify on the basis of this knowledge
that the record is what it purports to be, and was made in the ordinary course
of business. As a consequence, the court denied summary judgment, finding that
the servicer’s affidavit failed to provide conclusive evidence of the
borrower’s default and the amount due on the note.
While Ohio’s adoptive business records exception leans in favor of
loan servicers attempting to introduce records created by prior loan servicers,
the exception still requires that the current loan servicer demonstrate that
the circumstances indicate the records are trustworthy. As demonstrated in the
cases above, Ohio’s appellate districts will examine business relationships and
the actual testimony provided to the court in determining whether the
circumstances are trustworthy and the records are admitted. Accordingly, in
Ohio foreclosure cases, lenders and their loan servicers should ensure their
testimony concerning prior servicer records, whether in affidavits or in court,
includes that which adequately lays the foundation and establishes the current
servicer’s ability to testify to the prior servicer’s records.
Analysis Under Hawai’i Law
Hawaiian Rules of Evidence, Rule 803(b)(6), restates the rule
regarding business records:
The following are not excluded by the hearsay rule, even though
the declarant is available as a witness … (r)ecords of regularly conducted
activity. A memorandum, report, record, or data compilation, in any form, of
acts, events, conditions, opinions, or diagnoses, made in the course of a
regularly conducted activity, at or near the time of the acts, events, conditions,
opinions, or diagnoses, as shown by the testimony of the custodian or other
qualified witness, or by certification that complies with rule 902(11) or a
statute permitting certification, unless the sources of information or other
circumstances indicate lack of trustworthiness.
The standard is set out in State
v. Fitzwater, 122 Hawai’i 354, 227 P.3d 520 (2010), which found that: (1)
business records created by a prior entity may become business records of the
current entity if the current entity (a)
relies on those records, (b) there is other indicia of reliability, and
(c) the requirements of HRE Rule 803(b)(6) are met; and (2) a qualified witness, whose testimony is
required by the rule, need not be an employee of the business that created the
record, but must be able to establish sufficient foundation for admission as
records of the receiving business. In determining whether records that were
created by one entity and incorporated into the records of another entity
exhibit indicia of trustworthiness and are admissible, some courts have found
it significant that the entity that created the documents did so in connection
with a contractual obligation owed to the second entity.
As it is applied to the mortgage industry, U.S. Bank v. Mattos, 140 Hawai’i 26, 398 P.3d 615 (2017), requires
a qualified witness offering a declaration in support of a summary judgment
motion
to affirm or declare that the documents at issue were created by a prior
entity, received by the current entity, and then incorporated into the current
entity’s business records. Additionally, Mattos
requires the qualified witness to be familiar with the record-keeping system of
the prior entity – not merely familiar with that variety of record.
Most recently, Nationstar
Mortgage LLC v. Kanahele, 144 Hawai’i 395, 443 P.3d 86 (2019), indicates
that if corrective declarations are made, using multiple different affiants may
erode the trustworthiness of the records in this analysis. The best practice is
to have the same affiant provide the correction, explain the origin of the
error, and why the correction is necessary. If the original affiant is
unavailable, the change in affiant should be explained.
Finally, a recent string of cases from the Intermediate Court of
Appeals indicates that a note is not admissible unless the declarant affirms
familiarity with the record-keeping system of the originating lender. See U.S. Bank National Association as
Trustee for SARM 05-19XS v. Thede, 146 Hawai’i 235, 460 P.3d 340 (2020); U.S. Bank National Association, as Trustee
for Harborview Mortgage Loan Trust 2005-16 v. Thede, 146 Hawai’i 235, 460
P.3d 340 (2020); Ally Bank v. Hochroth,
146 Hawai’i 240, 461 P.3d 31 (2020); U.S.
Bank Trust, N.A., as Trustee for LSF9 Master Participation Trust v. Verhagen,
148 Hawai’i 322, 473 P.3d 783 (2020); and U.S.
Bank National Association as Trustee for CSMC Mortgage Loan Trust 2006-7 v.
Compton, 148 Hawai’i 275, 472 P.3d 42 (2020). However, there is conflicting
authority that, under the HRE, Rule 902(9), commercial paper is self-authenticating.
Furthermore, “(i)t is well-settled that in a suit for breach of contract, the
contract allegedly breached is not hearsay and is thus admissible into
evidence.” Island Directory Co., Inc. v.
Iva’s Kinimaka Enterprises, Inc., 10 Haw.App. 15, 22, 859 P.2d 935, 939
(1993). This issue will continue to develop and will impact how integrated
records are presented to the court.
Going Forward
Servicers, investors, and attorneys
confronting these integrated records issues in judicial foreclosure states
should be aware of the applicable rules and should keep abreast of changes, as
there will inevitably be additional legal developments in this area.
Proper advance witness assignments and
thorough witness preparation are key to ensuring successful actions. As we have seen in some jurisdictions,
missteps can have a significant impact and at times dire consequences including
loss of the asset.
Contact the USFN member firms for the
relevant states for further information on this topic.
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reserved.
Winter 2021 USFN Report
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