Business Law

US Bank Trust, N. A. v. Verhagen (HI)

The following is a case update written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, C.D. CA, ret.), analyzing a recent decision of interest:

Under the Hawaii Evidence Code (HRE), which is substantially similar to the Federal Rules of Evidence, a promissory note is not hearsay but a duplicate of a promissory note is not self-authenticating commercial paper, according to the Hawaii Supreme Court (the Court). The need for authentication, however, can be met under the incorporated records doctrine making certain business records admissible. The Court’s rulings reversed the conclusions of the Intermediate Court of Appeals (ICA) and impact the level of proof necessary for a mortgagee to establish standing to judicially foreclose. U.S. Bank Trust, N.A. v Verhagen, 2021 WL 2525025 (Hawaii Supreme, July 6, 2021).

To view the opinion, click here.

FACTS

Patrick Verhagen owned real estate encumbered by a $1.7 million promissory note (the “Note”) and mortgage in favor of Washington Mutual Bank. The mortgage was assigned to U.S. Bank (the “Bank”), which first used JPMorgan Chase Bank (“JPMorgan”) as its servicer, then replaced it with Caliber Home Loans (Caliber), the current servicer. Verhagen defaulted on the loan in 2012 and received notice of default in August 2014. He did not cure the default and in March 2016 the Bank filed a foreclosure complaint in the circuit court, verified by a Caliber employee who confirmed that she was familiar with Caliber’s records and also verified the Bank’s possession of the original Note.

In January 2017 the Bank filed a motion for summary judgment, asserting among other things that it held the original Note and had standing to foreclose. This motion was supported by a declaration from a different Caliber employee which stated her familiarity with Calber’s business records, which also included records incorporated from JPMorgan, the prior servicer, which were maintained by Caliber in the ordinary course of its business. Attached to her declaration was a “true and correct” copy of the Note.

Verhagen opposed the summary judgment motion, asserting that the Bank had not demonstrated is ownership and possession of the original Note at the time the complaint was filed, a requirement of recent Hawaii case law. After a complex procedural history not pertinent here, the ICA ruled that the Bank had not established standing to foreclose. The Bank petitioned for certiorari to the Court, which was granted. The Court vacated the ICA judgment, ruling that the Bank had established its possession of the original Note when the complaint was filed and that the Note had been authenticated; therefore, it had standing to foreclose.

REASONING

Interpreting the HRE, the Court made several discrete rulings. First, it held that a promissory note is not hearsay. Out of court statements with independent legal significance such as contractual documents are not hearsay. HRE 801(c). Promissory notes are a subspecies of written contracts because they record the terms of an agreement between the lender and borrower and are not hearsay. Since the Note is not hearsay, it does not need to meet the business records exception to be admissible.

Observing that the declarations and verification to the complaint attached copies of the Note, the Court then had to decide if copies of a note are self-authenticating since even non-hearsay evidence must be authenticated under HRE 901. It determined that under HRE Rules 902(9) and 1003, they are not. Rule 1003 provides that a “duplicate is admissible to the same extent as an original unless . . . (2) in the circumstances it would be unfair to admit the duplicate in lieu of the original.” The Court ruled, as a matter of first impression, that in foreclosure cases it would be unfair to treat duplicates of promissory notes as self-authenticating under HRE Rule 902(9). Since often the endorsement of a note is on the backside, allowing the use of a duplicate with all the evidentiary value of the original would not be trustworthy in the same way as many other commercial instruments. The Court observed that copies of checks, where the backside is also important, would have the same limitations.

The Court then ruled that the ICA erred in its application of the incorporated records doctrine. That doctrine as established by Hawaii case law provides “when an entity incorporates records prepared by another entity into its own records, they are admissible as business records of the incorporating entity provided that it relies on the records, there are indicia of reliability, and the requirements of [the business record exception to the hearsay rule] are otherwise satisfied.” The declarations of the Caliber employees were sufficient to allow the admissibility of the records from JPMorgan because they stated that those records were incorporated into Caliber’s own records. This allowed the copy of the Note to be authenticated.

Finally, the Court addressed whether the Bank had established that it held the original Note at the time the complaint was filed. Its review of the evidence presented, including circumstantial evidence, convinced it that the Bank had proved that it held the original Note at the time of the complaint filing. Therefore, it had standing to foreclose.

AUTHOR’S COMMENTS

The procedural history of this case is complex but the gems about evidence are useful for many. It is nice to have a clear statement that under rules of evidence similar to the federal rules a note is not hearsay. The qualms the Court had about a copy of a note being self-authenticating are well taken, since during the multiple transfers of loan servicing that have occurred over the last 15 years, notes have been copied multiple times, with and without the endorsements on backsides or attached as allonges, so some copies look very different than others of the same note. Requiring possession of the original note to foreclose with that backdrop is the only trustworthy way to proceed. Of greatest interest to me was the description and application of the incorporated records doctrine, which solves the question of whether a prior servicer’s records can be admitted as business records of a subsequent servicer. Meeting the described standard will be possible so long as the incorporated records have been adopted as the new servicer’s own.

Standing to foreclose has presented obstacles in Hawaii for several years. This decision should assist in making judicial foreclosures possible.

This submission was authored by the Hon. Meredith Jury (U.S. Bankruptcy Judge, C.D. CA, ret.), a member of the ad hoc group. 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.

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