The following is a case update written by Hon. Meredith Jury (United States Bankruptcy Judge, C.D. Cal. Ret.), analyzing a recent decision of interest:
The Supreme Court of Connecticut, addressing a matter of first impression, held that a record of an assignee of a lender regarding payment history was admissible under the business records exception to the hearsay rule despite the fact the assignee’s record began with a starting balance it obtained from the lender rather than a full debit/credit calculation from the inception of the note. In an equally significant matter of first impression, the court also ruled that the lender’s assignment of the promissory note also operated as assignment of a limited guarantee which was secured by residential property, giving the assignee standing to foreclose on the residential mortgage. Jenzack Partners, LLC v. Stoneridge Associates, LLC, 334 Conn. 374, 2020 WL 246428 (Conn. 2020).
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In 2006, Stoneridge Associates, LLC (Stoneridge) obtained a construction loan for $1,650,000 from Sovereign Bank (Sovereign). Stoneridge executed a promissory note (Note) that was secured by various personal guarantees, including one from Joseph Tine (Tine guarantee). In 2008 the Tine Guarantee was modified to be a nonrecourse limited guarantee secured by a mortgage in favor of Sovereign on the Tine’s residential real property (Tine mortgage.) In 2012, Sovereign assigned the Note and the Tine mortgage to Jenzack Partners, LLC (Jenzack), but did not specifically assign the guarantee underlying the Tine mortgage.
Later in 2012 Jenzack commenced an action to foreclose the Tine mortgage because Stoneridge had defaulted on the Note. A bench trial was held in 2016, during which Tine, as relevant here, asserted two defenses: (1) that Jenzack lacked standing to foreclose because the limited guarantee was not specifically assigned to Jenzack, and (2) that Jenzack failed to establish the amount of debt due on the Note because evidence of the computation of debt, which included a starting balance given to Jenzack by Sovereign, was inadmissible hearsay. The trial court issued a memorandum of decision which overruled both Tine objections and resulted in a judgment for foreclosure.
The Appellate Court agreed with the trial court that Jenzack had standing, as assignment of the guarantee was consistent with the underlying guarantee which inured to the benefit of the parties and “assigns” and the term Lender meant “all future holders of the Note and loan documents;” thus, the guarantee followed the Note assignment. However, the Appellate Court ruled the loan history was inadmissible because the starting balance had not been calculated by Jenzack, so it was “received” rather than “made” in the ordinary course of business.
The Connecticut Supreme Court accepted review and affirmed in part and reversed in part. It agreed with the Appellate Court that the Tine guarantee was assigned to Jenzack. However, contrary to the Appellate Court, it held that the payment history was admissible to establish the debt due. The judgment of foreclosure was reinstated.
On the question of standing to foreclose, the Connecticut Supreme Court looked to the language in the Tine guarantee, which established their contractual obligations and further illuminated the intent of the parties. Since the guarantee was for the “benefit of the parties and assigns,” the intent that the guarantee follow the Note was manifest. In addition, the guarantee “fully guarantee[d] to Lender that Borrower shall make due and punctual payment of the principal of the Note and the interest thereon…If Borrower shall at any time fail to make any such payments or performance, then…Guarantor shall make such payment or payments to Lender, this Guaranty being a guaranty of payment…” Since Lender was defined in the note to include “all future holders of the Note and Loan Documents”, Jenzack was intended to receive the benefit of the guarantee. The guarantee was assigned as a matter of law and Jenzack had standing.
On the admissibility of the payment history, the court first reviewed the elements necessary for admission of a business record: that the record was made in the regular course of business, that it was the regular course of business to make such a record, and that it was made at the time of the act described in the report or within a reasonable time thereafter. The court noted that when a party introduces a document that it did not create but that it received from a third party, the business records exception will apply only if the information in the document is based on the entrant’s observation or on information of others whose business duty it was to transmit it to the entrant. The court then found that Sovereign had a business duty to report the amount due on the note, which established the trustworthiness of the loan balance provided to the assignee. In making this ruling the Connecticut Supreme Court surveyed cases elsewhere which had addressed similar issues and found a persuasive one from the First Circuit Court of Appeals, U.S. Bank Trust, N.A. v. Jones 925 F. 3d 534 (1st Cir. 2019) with similar facts arising from the sale of a note and mortgage. It also observed that its ruling was only as to admissibility of the record and did not go to the weight which the trier of fact should give to the data in the record.
The court’s ruling on Jenzack’s standing seems unassailable given the language in the agreements between the original parties to the loan. When the Tines signed the guarantee, they promised the holder of the Note that they would make the payment if Stoneridge defaulted. They also agreed that the guarantee would inure to the benefit of assigns of the original lender. They were willing to secure that guarantee with a mortgage on their residence. It follows naturally that an assignment of the note would also be an assignment of the guarantee.
A Practice Note: make certain that if your clients are guarantors, they understand the full and lasting effect of their guarantee. If the note it guarantees is sold or assigned, as happens ubiquitously in our current economy, they will be liable to whomever acquires the obligation. Sale of the note does not cut off the guarantee.
As a former bankruptcy judge, I am aware how critical lender’s records are to many decisions the court must make which affect the ability of debtors to reorganize. I observed repeatedly that many servicers kept inaccurate records when compared to the debtors’ records of payments tendered and received. Moreover, the frequent assignments/sales of debt which dominate the residential lending market enhances the inaccuracy of the servicer’s record keeping because payments made by debtors often are initially directed to the old servicer’s address and must “catch up” to the note when it has been sold. The more hands that touch the loan history, the greater the likelihood it will not be accurate. Therefore, although a “business duty” to keep an accurate record sounds good in theory, in practice that duty does not ensure accuracy. The burden is on the lender to present accurate evidence on how much is owed on a loan. I disfavor lightening that burden, notwithstanding the inherent difficulty in tracing loan payments from a note’s inception, particularly when the loan has been serviced by multiple entities.
The saving grace, if there is one, is as the Connecticut Supreme Court noted: this ruling goes only to admission of the document. Attorneys should feel free to attack its credibility with any evidence available, in particular a debtor’s own records of payments.
These materials were written by Hon. Meredith Jury (United States Bankruptcy Judge, C.D. Cal. Ret.), a member of the ad hoc group, with editorial contributions by Corey R. Weber, a partner at Brutzkus Gubner Rozansky Seror Weber LLP, a member of the ad hoc group and the Chair of the CLA Business Law Section. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.