by Richard P Haber, Esq. and Brian P. Scibetta, Esq.
McCalla Raymer Leibert Pierce, LLC
USFN Member (AL, CA, CT, FL, GA, IL, MS, NJ, NV, NY, OR, TX, WA)

In a long-awaited decision providing some welcome news to servicers and investors, the Court of Appeals (New York’s highest court) issued a combined decision today relating to multiple foreclosure appeals involving statute of limitations issues. Most critically, the Court held that the voluntary discontinuance of a foreclosure action serves to revoke acceleration and de-accelerate the debt, where the filing of the foreclosure complaint was the act of acceleration.

A vast population of loans previously thought to be subject to a statute of limitations bar and total lien loss fit that fact pattern – a prior foreclosure complaint that served to accelerate the debt ultimately resulted in a voluntarily discontinuance. As a result, servicers now have a viable foreclosure path that did not exist yesterday on numerous loans. USFN played a key part as an amicus in connection with this aspect of the case, especially because the decision makes evident that themes and arguments advanced in USFN’s amicus brief were persuasive to the Court’s reasoning.

Additionally, the decision overturns two Appellate Division rulings concerning acceleration. The Court held that acceleration does not occur automatically after a servicer sends a default notice containing language that the servicer “will accelerate” the mortgage debt if the default is not cured by the specific date provided in the letter. And further, the Court held that a foreclosure complaint that fails to plead that the loan had been modified similarly does not serve to accelerate the mortgage debt. These aspects of today’s decision provide additional relief to servicers insofar as it further limits the population of loans potentially suffering from a statute of limitations bar.

Text of the decision may be downloaded here.

Copyright © 2021 USFN. All rights reserved.

February 2021 e-Update

by Brian Liebo, Esq. and Paul Weingarden, Esq.
Usset, Weingarden & Liebo, PLLP
USFN Member (MN)

Five Week Redemption Period for Abandoned Properties
It’s that time of year, yet again - wintertime in Minnesota.  Twenty below zero with another six-month period of time when pipes can freeze and burst causing damage to the property.  Your local property preservation team has just called you (hopefully long-distance for your sake) suggesting one of your mortgaged properties is vacant.   

So now what’s a Lender to do?  You’re in luck.  Under Minnesota Statutes § 582.031, if a mortgaged property is vacant, the mortgage holder can take the necessary steps to protect its security without becoming what is termed a “mortgagee in possession”.  These powers include authority to enter the property without a court order, secure the property, winterize the property, inspect the premises and take all other reasonable actions to prevent trespass, waste and damage to the premises.  The cost of such actions may be added to the principal balance of the mortgage, or added to the redemption price if incurred after the foreclosure sale and an affidavit of those posts-sale post-sale costs is timely provided to the sheriff’s office.

Keep in mind, however, that this statute also provides that, upon request, the servicer must deliver a key (rather than simply access) to the borrower or any person lawfully claiming through the borrower, which may include the owner, agent, tenant, or in the case of death, the heirs or personal representatives. These requests should be promptly honored, and we suggest your property preservation team be available to respond to such requests on short notice.

So now that you have secured and winterized the property, what’s next?  Minnesota law specifically contains a provision to shorten the foreclosure’s redemption period to just five weeks (down from the standard six-month redemption period or even the -month redemption period applicable to certain properties), thereby cutting delay costs considerably.  These properties must be both vacant and abandoned, rather than just vacant.  For example, if the vacant property is listed for sale, then the property is almost certainly not abandoned.

The mechanics of this process are found in Minnesota States § 582.032 which dovetails nicely with the securing powers available to lenders in § 582.031 for vacant properties.  In most cases, a mortgage servicer changing the locks and terminating a utility commences a showing of proof of abandonment.  Once secured, an affidavit by the servicer asserting no person with a right of possession to the property has requested a key within 10 days of securing constitutes a prima facie establishment of abandonment.   Procedurally, there is an abbreviated court action required to request a judicial determination of abandonment and reduction in the redemption period to five weeks.  If there is no opposing appearance at the hearing following proper service, such absence constitutes conclusive evidence of abandonment and the Order will issue.   

This redemption shortening process is only applicable to properties that are 10 acres or less, improved with a residential dwelling of four or less units, are not model homes or dwellings under construction, and are not used in agricultural production.  Also keep in mind that while an encumbering federal income tax lien may not prevent the shortening of the redemption period for the borrower, it may preclude reducing the redemption period for the federal interests under 120 days.

Five Week Redemption Period for Borrower-Initiated Postponements
In contrast, there is another five-week redemption period at play in Minnesota, which is Minnesota Statutes § 580.07, Subd. 2. While this statute does not actually shorten the timing of the overall foreclosure process (and instead actually adds one week to the overall process), it can be a formidable tool for borrowers working with servicers to extend the time before the foreclosure sale occurs to have more loss mitigation options available. 

In short, the borrower can unilaterally use a specific affidavit to delay the sheriff’s sale date by five months (for a six-month redemption period foreclosure) or 11 months (for a 12-month period foreclosure).  The borrower’s affidavit must be recorded and served on both the sheriff and foreclosing party’s counsel at least 15 days before the scheduled foreclosure sale.  In exchange, the borrower’s redemption period is automatically reduced to just five weeks.  This right to postpone unilaterally by the borrower can only be exercised once, regardless of whether the borrower reinstates the mortgage before the postponed foreclosure sale.  If the initial foreclosure is ultimately stopped by the mortgage servicer, rather than by the borrower reinstating or filing bankruptcy, it is common practice in Minnesota to accept the borrower’s subsequent postponement election.  Otherwise, mortgage servicers could simply stop and restart foreclosures as soon as a borrower’s postponement affidavit is received to avoid the statute’s intended effects.

This postponement process has the particular advantage of preserving available loss mitigation options for the lender and borrower.  Since the pre-sale foreclosure period is extended with this postponement procedure, the borrower and lender have more extensive loss mitigation tools available.  The borrower can still modify the mortgage, work out a forbearance, enter a repayment plan, or utilize any other loss mitigation options available.  Once the sheriff’s sale occurs though, the available loss mitigation options are typically just a short sale or short redemption.

The primary concern a lender may have is that the extension of the pre-sale foreclosure period also gives the borrower more time to file for bankruptcy relief enabling an endless loop of postponements and bankruptcy filings.  That assumption is somewhat correct, since bankruptcy filings after borrower postponements are a common practice.  However, the drafters of § 580.07 wisely anticipated this, and added a provision that if a borrower obtains a bankruptcy stay after electing postponement of the sheriff’s sale under the statute, then when the stay is no longer applicable, the five-week redemption period remains applicable to the foreclosure process.

Also keep in mind that a borrower-initiated postponement extends the time for dual-tracking protections for the borrower.  In Minnesota a qualifying borrower has the right to apply for loss mitigation up to seven business days before the original sheriff’s sale date or the new sale date resulting from the borrower’s postponement, whichever is later, to activate related dual-tracking protections.

As practice tips for mortgage servicers, these Minnesota statutes involving five-week redemption periods can be effective tools for avoiding potential losses or delay costs.  The first statutes mentioned (Sections 582. 031 and 582.032) are powerful tools for protecting abandoned properties and vastly shortening the redemption periods surrounding qualifying properties. 

On the other hand, the latter statute mentioned (Section 580.07, Subd. 2) is a great tool for borrowers and mortgage servicers looking for more time to work with a wider variety of loss mitigation options available before the sheriff’s sale than the more limited options after the sheriff’s sale occurs.  This benefit of having greater flexibility in loss mitigation options comes at the relatively small price of having the overall foreclosure process extended by just one week.

Copyright © 2021 USFN. All rights reserved.

February 2021 e-Update

by Benjamin Staskiewicz, Esq.

Bendett & McHugh, P.C.
USFN Member (CT, MA, ME, NH, RI, VT)

In OneWest Bank, N.A., v. Ceslik, Connecticut’s intermediary court of appellate jurisdiction, the Appellate Court, issued a decision on February 2, 2021, which affirmed the entry of judgment at the trial court level in a heavily contested residential foreclosure action based upon the defendant’s default on a reverse mortgage for failure to maintain insurance and pay property taxes as required by the note and mortgage.  The foreclosure defendant raised five issues on appeal: 1) rejection of his defense of laches; 2) plaintiff’s lack of standing; 3) plaintiff’s reliance on purported fraudulent and defective assignments; 4) denial of his motion to dismiss; and 5) lack of due process regarding his post-appeal motion for judgment. 

The defendant, in response to plaintiff’s complaint, filed numerous affirmative defenses, including the defense of laches.  The plaintiff filed a motion for summary judgment[i] to dispose of the defendant’s defenses and establish its prima facie case for foreclosure.  After briefing and argument, the trial court granted summary judgment finding that plaintiff established its prima facie case for foreclosure based upon the supporting affidavit and exhibits.  The trial court further determined that the special defenses raised by the defendant were legally insufficient and that the defense of laches lacked any specificity. 

The defendant thereafter filed a motion to dismiss claiming that the court lacked jurisdiction because plaintiff brought a prior foreclosure action that was subsequently withdrawn prior to the institution of the present case. The defendant’s motion was denied, and the plaintiff then moved for, and the trial court granted, a judgment of strict foreclosure.  The defendant’s appeal followed. Some five months after the appeal was filed, the defendant filed a motion for judgment with the trial court claiming that plaintiff lacked standing.  The trial court, after guidance from the Appellate Court, held a hearing on defendant’s motion for judgment and denied the motion.

The first appellate issue raised by the defendant related to the defense of laches.  The trial court, in granting plaintiff’s motion for summary judgment, found that the laches defense was legally insufficient, in that defendant failed to plead any facts that would satisfy the elements of laches.  The defendant failed to address the legal sufficiency of the defense in his appeal and instead focused his argument on the evidence that he believed supported the laches defense.  The Appellate Court did not accept defendant’s attempt to subvert the procedural rules of the court and instead held that the defendant failed to challenge the use of the summary judgment process to determine legal sufficiency of the laches defense and that defendant further failed to challenge the trial court’s legal conclusion that the defense was not properly pled.

The second appellate issue related to the trial court’s denial of the defendant’s post-appeal motion for judgment which was based on a claim that plaintiff lacked standing.  The defendant was unable to introduce any evidence at the hearing as to plaintiff’s lack of standing and attempted to rely on hearsay evidence which was not permitted by the trial court.  The defendant was unable to rebut the presumption that plaintiff had standing which arose after plaintiff had presented the original, endorsed note to the court.  The Appellate Court concluded the trial court properly determined plaintiff had standing to foreclose.

The third appellate issue related to defendant’s allegations that assignments of mortgage relied upon by plaintiff were fraudulent and/or defective.  The Appellate Court found that defendant failed to proffer any admissible evidence to support such a claim and found this claim without merit.

The fourth appellate issue related to the denial of defendant’s motion to dismiss based upon a prior foreclosure action being withdrawn.  The Appellate Court held that defendant failed to allege that plaintiff withdrew the first action for an improper purpose and thus plaintiff was entitled to withdraw the action, leading to the conclusion that the trial court did not make an error in disposing of the motion to dismiss.

The last appellate issue claimed a lack of due process relating to the post-appeal hearing on the motion for judgment.  The defendant’s argument was that he was unable to review plaintiff’s arguments and case law before the hearing.  The Appellate Court declined to review this issue as defendant never filed a timely appeal as to that ruling or amended the current appeal. 

This case illustrates the length to which a foreclosure defendant may attempt to challenge a foreclosure in Connecticut and further punctuates the importance of ensuring all evidence and documents are proper and fully reviewed by both the foreclosing plaintiff and counsel.  As a foreclosing plaintiff does not know in advance which case will be contested, every foreclosure in a judicial state must be prepared as if every step will be challenged.

2020 certainly presented its event challenges, but together USFN was able to launch new virtual educational programming, while maintaining and building on our successful monthly Briefings, and so much more. Here’s what we did with your help:

·         Kicked off the year with a successful first-time Bankruptcy Issues Seminar in Dallas. (Who knew it would be our last in-person gathering of 2020?)

·         Monthly Briefings continued with record registrations, and new special Briefings were added to the mix to address COVID and trending industry topics.

·         Legal Issues Seminar went to an online four-part series over the summer with 78 registrants, of which 61 received CLE credits.

·         A first-of-its-kind core concepts training program, USFN Learning Labs, was launched in October with more than 600 registrations, 300-plus daily attendees, and a total of 2,500 views for the live modules over the course of the two-week, eight-module event.

·         And you didn’t miss it. Registration to gain access to all eight recorded modules is currently available through April 2021. So far, more than 165 people have registered, and the recordings have received more than 400 views.

·         In November, we celebrated our members with a full month of activities that started with the annual Member Meeting (albeit virtually this year), an exciting attorney ethics education session, and wrapped it up with volunteer orientations for our new committees, sections, and task forces.

·         Also, in November, USFN launched a new virtual opportunity to discuss the state of the industry and market outlook with Rick Sharga of RealtyTrac, Daren Blomquist of Auction.com, and USFN member peers, colleagues, and invited servicers.  More than 100 registered for the Virtual Executive Roundtable, including 42 servicers, 61 members and 5 associate members. (Oh, and Mark Rothstar debuted his new singing career!)

So, what is 2021 going to bring? We are still evaluating our in-person events, but we do hope to have some of our regularly scheduled events in the second quarter of 2021. In the meantime, our education team is assessing new virtual and hybrid opportunities, as well as building off the success of 2020’s new offerings.

Two brand new and FUN virtual networking events are already on the docket for this year, with our East Coast friends gathering on Feb. 18, and our West Coast friends on March 25. These networking events will include a fun mixology demonstration and a trivia competition to support charity. In addition, we will be bringing back our Bankruptcy Issues Seminar (online without the uncertainties of travel) from 12 to 3 pm CT on Feb. 25. Join our leading bankruptcy professionals for a deep dive into the bankruptcy challenges of a pandemic world with breaks for networking and Q&A.

Go ahead and mark your calendars now for our slate of monthly 2021 Briefings. Check out USFNevents.org for the complete Briefing schedule, details on our Re:United networking events, the online Bankruptcy Issues Seminar, and any updates to our 2021 calendar.

Interested in presenting for one of our 2021 offerings? Join our NEW Speaker Resource Group to be included in our roster of potential speakers for USFN events and to receive free resources, education, and training to further enhance your speaking skills, confidence, and experience. E-mail register@usfn.org to learn how you can join the Speaker Resource Group.

Copyright © 2021 USFN. All rights reserved.

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[1] 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.

[1] Haw. R. Civ. P., Rule 56, Summary Judgment, requires affidavits to be made on personal knowledge, setting forth facts as would be admissible in evidence, and showing affirmatively that the affiant is competent to testify.

Copyright © 2021 USFN. All rights reserved.

Winter 2021 USFN Report

by Jane E. Bond, Esq.

McCalla Raymer Leibert Pierce, LLC
USFN Member (AL, CA, CT, FL, GA, IL, MS, NV, NJ, NY, OR, TX, WA)

The Florida Supreme Court issued a ruling clearly setting forth the standard of admission of business records under the business records exception to the hearsay rule. In Jackson v. Household Fin. Corp. III, 298 So.3d 531 (Fla. 2020), the Court held “the proper predicate for admission of records into evidence under the business records exception to the hearsay rule can be laid by a qualified witness testifying to the foundational elements of the exception.”

A 25-year employee of the servicer, David Birsh, was the witness who laid the foundation for the admission of the business records including the note, mortgage, and pay history. Opposing counsel objected to the admission of the business records on hearsay grounds, stating the witness had not laid the proper foundation and failed to authenticate any of the documents based on personal knowledge. The Judge admitted the records into evidence over the objection. The trial court entered final judgment for HFC and the borrower appealed, but the Second District Court of Appeals affirmed the judgment. The Supreme Court accepted the case due to conflict within the Florida Appellate Courts as to the standard of admission of business records.

In analyzing the case, the Florida Supreme Court looked at the general hearsay rule that “hearsay” is not admissible except as provided by statute. The exceptions allow admission of records of regularly conducted business activity per FL Statute 90.803(6)(a), including:

A memorandum, report, record, or data compilation, in any form, of acts, events, conditions, opinion, or diagnosis, made at or near the time by, or from information transmitted by, a person with knowledge, if kept in the course of a regularly conducted business activity and if it was the regular practice of that business activity to make such memorandum, report, record, or data compilation, all as shown by the testimony of the custodian or other qualified witness, or as shown by a certification or declaration that complies with paragraph (c) and s. 90.902(11), unless the sources of information or other circumstances show lack of trustworthiness. The term “business” as used in this paragraph includes a business, institution, association, profession, occupation, and calling of every kind, whether or not conducted for profit.

The Supreme Court found the witness testimony met the business records exception to the hearsay rule. Once the proponent lays the predicate for the admission of documents the court found “the burden shifts to the opposing party to prove that the records are untrustworthy, or that they should not be admitted for some other reason. No additional foundation is required by the statute or by any case from this Court, and we reject the notion that the witness must also detail the basis for his or her familiarity with the relevant business practices of the company or give additional details about those practices as part of the initial foundation because this would be inconsistent with the plain language of the statute.”

Additionally, the Florida Supreme Court held, “Birsh testified to his years of experience with the bank, he then testified that he was familiar with the company’s business practices. That testimony is direct evidence that Birsh was familiar with the relevant business practices, including how the bank records and tracks monetary transactions, and was sufficient to make a prima facie showing that Birsh was qualified to give the testimony that followed authenticating the documents and laying the foundation for their admission as business records pursuant to the express requirements of section 90.803(6)(a).”

Further the Court quoted Ehrhardt, Florida Evidence, “Evidence is authenticated when prima facie evidence is introduced to prove that the proffered evidence is what its proponent claims.” The records custodian is the party called to authenticate the documents and to lay the foundation for “confirming” the business records. Directly from an additional source, McCormick on Evidence, the Court continued, “The word ’confirming’ is appropriate because documents proffered at trial are what they purport to be “in 99 out of 100 cases.” 2 McCormick on Evidence § 221 (7th ed. 2013).

Ensuring clarity for the Circuit Judges in Florida, the Supreme Court specifically found in mortgage foreclosure cases; “it is extraordinarily unlikely in any mortgage foreclosure case that records meeting the business records exception to the hearsay rule will not exist or that the proffered records are not exactly what they purport to be.”

Based on the Jackson case, business records will be more easily admitted into evidence in Florida. Attorneys may still encounter the unnecessary objections from opposing counsel to delay the case and cause confusion; however, the strong language in favor of mortgage servicers in this case will be a powerful weapon to counter any objections and prevail.
 

Copyright © 2021 USFN. All rights reserved.

Winter 2021 USFN Report

by Randall Szabo, Esq.
The Wolf Firm
USFN Member (CA, ID, OR, WA)

The issue of “zombie homes” (abandoned residential properties in the pendency of a foreclosure process) is well known to those in the mortgage-default industry. The abandoned property, still owned by the absent borrower, often becomes a nuisance in the community by attracting squatters and criminal activity. Law enforcement is unable to enter to address these issues without permission of the owner, who is nowhere to be found, and the lender’s options are generally limited to contractual property-preservation measures.

Meanwhile, the property may be falling into disrepair and racking up code violations, which will generally take priority over the lender’s security interest. Recent numbers have been encouraging, though, with the number of zombie foreclosures in 2019 estimated to be half of those in 2016[1]. But, the COVID-19 pandemic has raised alarms of a potential new flood of foreclosures, and lenders would be wise to anticipate and plan for the unique problems presented by zombie homes. 

For their part, states and municipalities have adopted a variety of measures to address the issue. Last year, New York State passed the Zombie Property Remediation Act of 2019, which allows municipalities to commence proceedings regarding certified-abandoned properties, thereby forcing the mortgagee to either complete the foreclosure process within a specified timeframe or discharge the mortgage. In June 2018, HB 2057 went into effect in Washington state.  This legislation allows lenders to enter abandoned properties to abate nuisances and allows municipalities to require lenders to abate such nuisances within a specific time frame.  If they do not do so the municipality is authorized to abate the nuisance and recover its costs with assessments against the property. Last year in Oregon, the Portland City Council voted to streamline its process of foreclosing on abandoned properties for code violations by removing one of the reviewing agencies. In June 2018, the city of Philadelphia also enacted an accelerated foreclosure process for abandoned properties.

While these measures may be sound public policy, the potential pitfalls for lenders are self-evident. In New York, a lender who does not pursue foreclosure within the designated timeframe could be forced to discharge the mortgage. And, where assessments have been levied against a property, or where a city foreclosure has in fact taken place, the lender’s security interest will be devalued—and in some cases lost altogether. As mentioned, city liens generally have priority over all other interests, and the amounts of the charges can quickly become immense. One way or another, the lender generally ends up on the hook.

There are steps lenders can take to avoid these harsh consequences. First, mortgage servicers need locality-specific systems in place to monitor for code violations and city liens. Once the problem is identified, a quick response can often avoid further issues. The earlier property preservation measures are taken (preferably before a violation is issued) the better. Something as simple as trimming weeds can hold off code enforcement, not to mention angry neighbors.

In many of these cases, an ounce of prevention is worth a pound of cure. While the actions of the borrower are out of the lender’s control, moving quickly through the foreclosure lessens the risk that a property will become abandoned during the process.

[1] https://www.housingwire.com/articles/49861-attom-number-of-zombie-foreclosures-has-been-cut-in-half-since-2016/

Copyright © 2021 USFN. All rights reserved.

Winter 2021 USFN Report

Firefly Legal (USFN Associate Member) celebrates its 25th anniversary on January 15, 2021.

Since taking flight in 1996, Firefly has opened offices and expanded its footprint to help clients across the nation. It has developed innovative technological solutions to optimize maximum results for its clients. Procedural changes have been implemented within clients' offices and also the courts. Its staff members have served on industry boards and committees while being recognized with numerous awards.

“Throughout all the years, one thing has always remained steadfast: our great clients. Our focus has always been to be a true partner to them and constantly improve their business and lives in every way possible. We continue to tenaciously pursue greatness for our clients well into the future. I want to thank all the people who have helped Firefly reach this tremendous milestone,” said Keith McMaster, Co-founder and CEO.

Firefly Legal is family-owned and was started by father-son duo Ken and Keith McMaster. It began as a small start-up in the Chicagoland area and now files and serves court documents throughout the United States. It also offers various services to the default and collections industries, such as process serving, e-Filing, skip tracing, and document retrieval. Along with expanding both its footprint and its offering of services over the years, Firefly continues to provide the highest level of customer service for its clients.

Copyright © 2021 USFN. All rights reserved.

by Ashley Torres, Esq. and Eva Massimino, Esq.

Bendett & McHugh, P.C.
USFN Member (CT, MA, ME, NH, RI, VT)

On February 8, 2019, the United States First Circuit Court of Appeals, in Thompson v. JPMorgan Chase Bank, ruled that a default and acceleration notice sent pursuant to the acceleration provision of a mortgage, was potentially deceptive when it advised that the subject loan could be reinstated after acceleration any time prior to sale when the mortgage, in a separate section, provided the right to reinstate only up to 5 days prior to the date of sale.  Specifically, in Thompson, the First Circuit ruled that Thompson’s mortgage laid out disclosures required prior to acceleration in Paragraph 22 of his mortgage.

With regard to reinstatement however, Paragraph 22 only required that the Lender advise Thompson of his “right to reinstate after acceleration.” The default and acceleration notice sent by the servicer advised of the right to reinstate after acceleration but then also advised that Thompson could, “still avoid foreclosure by paying the total past-due amount before a foreclosure sale takes place.” The only mortgage provision relating to reinstatement specifically was paragraph 19 of Thompson’s mortgage which only allowed for reinstatement up to 5 days prior to a foreclosure sale. The Court found the Lender’s statement in its notice was therefore misleading and potentially deceptive and remanded the case for further consideration regarding the validity of the resulting foreclosure sale. Interestingly, Paragraph 19 of Thompsons’ mortgage did not specify that the limitation on time for reinstatement be disclosed in a default letter.

Massachusetts title insurers’ views on how this decision affected current and past foreclosure sales continually evolved in the wake of Thompson.  Initially, title insurers differed on whether they were going to decline to insure foreclosure sales with potential Thompson issues.  In the interim, a motion for rehearing was filed and was supported by many amici briefs filed by industry leaders. Most importantly, and perhaps in response to some of the arguments raised in the motion for rehearing in Thompson, title insurers then took issue with language found not only in contractual demand letters but also the language servicers are required to use in their MGL Ch. 244 Sec. 35A statutory demand letters. The 35A demand letter template provided by 209 C.M.R. §56.04 allows for reinstatement up to the sale of the property.

Eventually, insurers began to require that “supplemental notices” be sent on loans where statutory and contractual demand language was combined, to clarify that any provision in the subject mortgage limiting the right to reinstate to a date earlier than the sale is waived and that reinstatement would be allowed up to the time of sale. Insurers also required that both the contractual and statutory demand letters be compliant with Thompson as well. Sales held in reliance on insurer’s prior opinions were then deemed uninsurable, causing an onslaught of sale rescissions to comply with the requirements of Thompson as interpreted by title insurers.

On July 29, 2019, the United States First Circuit Court of Appeals vacated their holding in Thompson. The Court held that due to the precise language contained in the relevant state banking regulation (209 C.M.R. §56.04), which required the “Right to Cure” notices to include the language at issue, together with the widespread industry support received by J.P. Morgan Chase Bank in subsequent filings in support of its petition for rehearing, the matter should be certified to the Massachusetts Supreme Judicial Court (SJC).

Despite the fact that the First Circuit vacated their holding, title insurers continued to apply the ruling and thus continued to require both the contractual and statutory demand letters be compliant with Thompson. Insurability of foreclosure sales in Massachusetts remained in flux for over a year while the SJC considered the question certified to it:

“Did the statement in the August 12, 2016, default and acceleration notice that ‘you can still avoid foreclosure by paying the total past-due amount before a foreclosure sale takes place’ render the notice inaccurate or deceptive in a manner that renders the subsequent foreclosure sale void under Massachusetts law?”             

On November 25, 2020, the SJC answered the question certified to it by the First Circuit with a firm “No.”

The Court examined the interplay of multiple provisions of the mortgage and the applicable state law. Paragraph 12 of the mortgage gave the mortgagee the contractual capacity to lengthen the timeframe to reinstate. Paragraph 16 of the mortgage stated that “[a]ll rights and obligations contained in this Security Instrument are subject to any requirements and limitations of Applicable Law”, which was defined by the mortgage to include state statutes. The terms of the mortgage therefore allow the reinstatement period to be extended either by the discretion of the mortgagee or relevant state law.

Paragraph 19 of the mortgage allowed the mortgagor to reinstate only up to 5 days prior to the foreclosure sale. However, this is contradictory to Massachusetts General Laws Chapter 244, Section 35A, which permits the mortgagor to reinstate any time prior to the foreclosure sale. Therefore, the Court reasoned Chapter 244, Section 35A “constitutes controlling and applicable law that supersedes the conflicting provisions in the mortgage contract.” Because Chapter 244, Section 35A, and the state banking regulation (209 C.M.R. §56.04), require mortgagees to allow reinstatement any time prior to a foreclose sale, and the notice stated just that, the Court determined that the notice was not deceptive or misleading.

The Court reasoned that in reading paragraphs 12 and 16 together, with Chapter 244, Section 35A and applicable regulation, it is evident that the mortgagee not only had the contractual option to allow reinstatement at any point prior to the foreclosure sale, but also was required to do so. The limitation on the reinstatement period imposed by paragraph 19 is superseded by the more generous reinstatement timeframe provided by Chapter 224, Section 35A.

The Court also ruled that a single “hybrid” notice may satisfy both the requirements of Chapter 244, Section 35A and paragraph 22 of a GSE Uniform Mortgage. The Court pointed out that paragraph 15 of a GSE Uniform Mortgage, which states “[i]f any notice required by this Security Instrument is also required under Applicable Law, the Applicable Law requirement will satisfy the corresponding requirement under this Security Instrument”, anticipates such a hybrid notice. This holding is significant as title insurers had previously interpreted prior case law in the state to require separate notices for the statutory and contractual pre-acceleration notice requirements.

On November 30, 2020, the Plaintiff filed a Motion for Reconsideration or Modification. Some title insurers, if not all, will not insure over a Thompson issue until a final decision on this motion is entered by the SJC.

Copyright © 2020 USFN. All rights reserved.

December 2020 e-Update