by Brian Goldberg, Esq.

Gross Polowy, LLC

USFN Member (NJ, NY)

            One of the most important issues in New York foreclosure litigation is the proper use of business records to help plaintiffs prove their cases. With the likelihood that the servicing of a given loan has transferred through the offices of multiple entities, it is essential that servicers maintain good working relationships with each other to avoid delays and dismissals. Without cooperation, teamwork, and the prompt exchange of information and records, a plaintiff will be unable to defeat hearsay objections, and, consequently, will be unable to prove its case.

Black’s Law Dictionary defines hearsay as “a term applied to that species of testimony given by a witness who relates, not what he knows personally, but what others have told him, or what he has heard said by others. Hearsay evidence is that which does not derive its value solely from the credibility of the witness, but rests mainly on the veracity and competency of other persons. The very nature of the evidence shows its weakness, and it is admitted only in specified cases from necessity.” The business records relied upon by the default servicing industry in the prosecution of foreclosure actions are perfect examples of the textbook definition of hearsay.

            Servicers rely upon numerous departments and individuals to create and maintain business records reflecting every transaction and communication related to each loan within a portfolio. There is no single person who could personally testify to every action taken on the account. Complicating the situation is the likelihood that loans will be acquired and service transferred numerous times throughout the term. How is it possible for one servicer to properly prosecute a foreclosure action when the business records were created by various people across different servicers, especially in New York where the courts and legislature have been notoriously pro-borrower?

            Fortunately, the New York Legislature enacted Section 4518 of the Civil Practice Law and Rules, which provides an exception to hearsay based upon proper creation and maintenance of business records. As long as a witness can testify that the organization’s records were created and maintained in the ordinary course of business, and that it was the regular course of such business to make such records at or near the time of the transaction or event, the business record will be excepted from a valid hearsay objection.

This exception applies to all documents created by employees of the servicer who are not testifying at the time of trial or executing an affidavit to be included with a motion or opposition to a motion. The impacted records include, but are not limited to, the servicing notes, proof of possession of the note, the payment history, the letter log, and judgment figures. Without the hearsay exception, none of these records would be admissible because they are being attested to by someone who does not have personal knowledge of the actual events. In order for these records to be admissible under the hearsay exception, the witness must provide foundational testimony about their knowledge, training, and experience with the recordkeeping systems. Additionally, the following questions must be answered affirmatively by the affiant/witness:

1. Was the document created in the ordinary course of business?
2. Is the document maintained in the ordinary course of business?
3. Was the document created at or near the time of the event reflected within the document?
4. Was the document created by someone who had firsthand knowledge of the event reflected within the document?
5. Was the document created by someone who had a duty to report honestly and accurately within the recordkeeping system(s)?

            A challenging issue arises when a new servicer testifies to servicing activities handled by a prior servicer or third-party. Since the witness does not have personal knowledge of the business practices and recordkeeping practices of the prior servicer, any such testimony would be considered hearsay, and any attempt to have the records admitted into evidence would require multiple witnesses or multiple affidavits, which is an undue timeline delay and increases the costs of a foreclosure action. However, with a proper onboarding process and a detailed review of the records, the New York courts allow the current servicer to testify and/or attest to the information contained within records created by a prior servicer or other entity.

            In Bank of N.Y. Mellon v. Gordon, 171 A.D.3d 197 (2^nd Dept. 2019), the Appellate Division, Second Department set forth the foundation that must be laid by the new entity so that the witness can rely upon, and testify to, the records of the other entity. In Gordon, the Court held that, “It is true that as a general rule, ‘the mere filing of papers received from other entities, even if they are retained in the regular course of business, is insufficient to qualify the documents as business records.’ However, such records may be admitted into evidence if the recipient can establish personal knowledge of the maker’s business practices and procedures, or establish that the records provided by the maker were incorporated into the recipient’s own records and routinely relied upon by the recipient in its own business.  The reports of an independent contractor regularly relied on by the business may qualify as the business’ record.”

            Based upon the Gordon ruling, there are two ways in which the current servicer can attest/testify to the records of a different entity:

1. Have personal knowledge of the business practices of the entity that created the records; OR

2. Establish that the subject records were incorporated into the current servicer’s system(s) of record and relied upon in the daily servicing of the loan.

Not only can the methods set forth in Gordon be used to testify to the records of a prior servicer, but the case law also applies to third-party mailing agents. While it is helpful to have personal knowledge of the mailing practices and procedures of the third-party mailing agents, it is unnecessary if the loan servicer incorporated the notices and the agent’s mailing logs into its own system and relied upon those documents in the servicing of the loan. Reliance can be proven by testifying that the loan servicer would not have commenced the subject action unless the records reflected that the notices were mailed to the borrower(s) at the proper addresses in compliance with the terms of the mortgage and New York Real Property Actions and Proceedings Law §1304.

            The Gordon decision, and its progeny, exhibit an increasing need for servicers and other entities to cooperate with each other so that a foreclosure case can be completed as quickly and as cost-effectively as possible. If servicers do not provide the records at the time of transfer or upon request, the plaintiff has no other option but to issue subpoenas for documents and testimony, and to request the execution of detailed affidavits. This is a timely, costly, and unnecessary process that can lead to extended foreclosure timelines and missed court deadlines. With the enactment of the Foreclosure Abuse Prevention Act, any missed deadlines can lead to the dismissal of foreclosure actions and leave the plaintiff unable to recommence a new action.

            It is more important than ever that servicers establish and follow a robust onboarding process and cooperate with each other in the exchange of documents and information, if needed post service transfer. The Gordon decision provides the default servicing industry a rare advantage in a state known for its lengthy and difficult foreclosure process, and servicers must make efficient use of that benefit to ensure successful and cost-effective outcomes for all.

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USFNews - July 12