Florida Supreme Court Resolves Conflict on Business Records Exception to the Hearsay Rule and Clarifies Standard for Qualified Witness Testimony

Wayne Streibich, Edward W. Chang, Nicole R. Topper, Anthony R. Yanez

On July 2, 2020, the Florida Supreme Court issued its written opinion[i] in Jackson v. Household Finance Corporation, III, 236 So. 3d 1170 (Fla. 2d DCA 2016) to resolve a conflict with a case decided by the Fourth District Court of Appeal (Maslak v. Wells Fargo Bank, N.A., 190 So. 3d 656 (Fla. 4th DCA 2016). Specifically, the issue concerned whether the predicates were met for admissions of records into evidence under the business records exception to the hearsay rule during the course of a bench trial in a residential foreclosure case. The Florida Supreme Court held that the proper predicate for admission can be laid by a qualified witness testifying to the foundation elements of the exception set forth in Section 90.803(6) of the Florida Evidence Code.

Background

On June 23, 2014, the originating lender, Household Finance Corporation III (“HFC”), filed a foreclosure complaint alleging a default under the note and mortgage. Before the loan was originated, HFC was purchased by HSBC Holdings (“HSBC”) and became a wholly-owned subsidiary of HSBC. The borrower did not challenge the default, but opted to challenge whether the lender could establish its case in chief at trial.

At trial, HFC called an assistant vice president at HSBC, with 25 years’ experience at the company, to establish the foundation for admission of records under the business records exception to the hearsay rule. The borrower objected to the witnesses’ testimony on hearsay grounds and the original note, mortgage, and payment history were received into evidence over the borrower’s objections. The borrower elected not to introduce any evidence of her own and the trial court entered final judgment of foreclosure. The borrower appealed to the Second District Court of Appeal, which affirmed the final judgment of foreclosure.

The Jackson case conflicted with the Maslak decision from the Fourth District Court of Appeal, which reached the opposite conclusion regarding the sufficiency of the bank witness’ testimony. In Maslak, despite the bank employee’s testimony describing her job duties and familiarity with the bank’s loan servicing practices, the court held that the witness was not qualified to lay a foundation for the admission of the loan servicing documents that were offered into evidence at that trial. As a direct conflict of two intermediate appellate court decisions on the same issue of law, the Florida Supreme Court had jurisdiction to resolve the issue.

Florida Supreme Court’s Decision

In examining the business records exception to the hearsay rule, the Florida Supreme Court noted that a party has three options to lay the foundation to meet that exception: (1) offering testimony of a records custodian, (2) presenting a certification that or declaration that the elements have been established, or (3) obtaining a stipulation of admissibility. If the party elects to present testimony, the applicable case law explains that it does not need to be the person who created the business records. The witness may be any qualified person with knowledge of each of the elements.

Patterned closely after the federal rule, Section 90.803 of the Florida Evidence Code[ii] lists the following foundational elements of the business records exception: (1) that the record was made at or near the time of the event, (2) that it was made by or from information transmitted by a person with knowledge, (3) that it was kept in the ordinary course of a regularly conducted business activity, and (4) that it was a regular practice of that business to make such a record.

Turning to the testimony of the HFC trial witness, the majority opinion determined that the foundational elements were met and that no additional foundation was required by the business records exception language of the Section 90.803(6). The majority rejected the notion that the witness was required to detail the basis for his or her familiarity with the relevant business practices of the company, or give additional details about those practices in order to lay the foundation for the admission of those records. Since no such requirements were in the statute, any requirement imposed by the trial court or the appellate court would be inconsistent with the plain language of the statute. The majority explained that once the proponent lays the predicate for admission, the burden shifts to the opposing party to prove that the records were untrustworthy or should not be admitted for some other reason. According to the majority, the Jackson borrower failed to do that in this case and only waited until after the documents were received into evidence to question the witness about the basis for his knowledge.

The dissenting opinion posited that the majority’s ruling “[took away] the proponent’s burden to lay a proper foundation for admission” and focused on whether the proper foundation was met in the Jackson case. The dissent argued that the testimony at the Jackson trial was merely “general statements” that recited the elements of the statute but did not explain how the business records at issue were generated, what they were used for, or how they were maintained. For that reason, the dissenting judges maintained that the burden never shifted to the borrower to prove the untrustworthiness of those records, and concluded that the majority’s treatment of the business records exception as a “magic words” test would only increase the likelihood of inadmissible documents being admitted into evidence.

Conclusion

Compliance with the business records exception to the hearsay rule will almost always be a hotly contested issue at a foreclosure non-jury trial in Florida. The Jackson opinion, and the arguments raised in the dissenting opinion, will remind the trial courts to pay careful attention to the foundational requirements of the business records exception to the hearsay rule when timely objections are made to the evidence on those grounds. Despite competing opinions on the issue, the Florida Supreme Court agrees that the proponent’s witness should demonstrate personal knowledge and establish that the offered exhibits are reliable business records. To remove all doubt, a witness’ testimony should demonstrate a working knowledge of the company’s business record practices and systems. As a result of the Jackson opinion, it is important to effectively prepare the business records custodian witness to withstand any increased scrutiny as to the foundation requirements of the business records exception to the hearsay rule.

[i] The Florida Supreme Court decided the case by a 4 to 2 margin. Newly appointed justice, Renatha Francis, did not participate in the opinion. This decision is not final until the disposition of a timely-filed rehearing motion.

[ii] This section was last revised in 2003, adding language that a certification or declaration is an acceptable means of authenticating a business record under the business records exception to the hearsay rule. See ch. 2003–259, § 2, at 1299, Laws of Fla.; see also Fla. Stat. § 90.803(6) (2003) (providing for admission of business records upon testimony of the custodian of the records, “or as shown by a certification or declaration that complies with paragraph (c) and s. 90.902(11)”).

New Jersey Supreme Court Confirms Assignee’s Right to Enforce Note Lost by Predecessor in Interest

Wayne Streibich, Edward W. Chang, Jonathan F. Ball

On July 1, 2020, the Supreme Court of New Jersey issued its unanimous opinion in Investors Bank v. Torres confirming that an assignee of a note lost by a predecessor in interest can enforce the lost note.[1] The Supreme Court affirmed the Appellate Division, which had affirmed the trial court’s grant of summary judgment to the assignee.[2] The Supreme Court’s decision clarifies that an assignee seeking to enforce a note lost by its predecessor in interest must present: (1) an admissible and sufficient Lost Note Affidavit; and (2) competent proof of the terms of the lost note. The Supreme Court expressly declined to adopt the Appellate Division’s reasoning that the equitable principle of unjust enrichment required allowing the assignee to enforce the note lost by its predecessor in interest to prevent a borrower from keeping a home for which they are not paying the mortgage.

The borrower, Torres, executed a promissory note in favor of AMRO Mortgage Group, Inc. (“ABN”), which was secured by a residential mortgage in 2005. ABN subsequently merged into CitiMortgage, Inc. (“CitiMortgage”). Torres defaulted on the note in 2010. CitiMortgage instituted a foreclosure action, which it voluntarily dismissed without prejudice after discovering that it could not locate the original note.

In 2013, CitiMortgage executed a Lost Note Affidavit explaining that it was the “lawful owner of the note,” and had not “cancelled, altered, assigned, or hypothecated the note,” but was unable to locate the original note despite a “thorough and diligent search.” CitiMortgage attached a digital copy of the note to the Lost Note Affidavit. The digital copy was not endorsed, but CitiMortgage explained in the Lost Note Affidavit that the digital version was a true and correct copy of the original note that Torres had executed after the digital copy had been made.

CitiMortgage served a Notice of Default and Intention to Foreclose in 2014. After doing so, CitiMortgage assigned the mortgage to Investors Bank, thereby conveying to Investors Bank the right to enforce the note and mortgage executed by Torres. Investors Bank then brought the foreclosure action at issue in opposition to which Torres asserted that Investors Bank could not enforce the note due to the loss of the original.

The trial court granted summary judgment in favor of Investors Bank. The Appellate Division affirmed based upon its interpretation of N.J.S.A. 12A:3-309 (New Jersey’s version of Section 3-309 of the Uniform Commercial Code pertaining to enforcement of lost instruments) and based on the equitable doctrine of unjust enrichment. The Supreme Court granted Torres’ request for review on certification.

The Supreme Court concluded that N.J.S.A. 12A:3-309 does not limit the right to enforce a lost instrument exclusively to the possessor of the instrument at the time it is lost. Rather, Investors Bank’s right to enforce the assigned mortgage and the transferred lost note were supported by New Jersey’s statutes addressing assignments, N.J.S.A. 2A:25-1 and N.J.S.A. 46:9-9, as well as New Jersey’s common law principles regarding assignments. Because the Supreme Court concluded that New Jersey’s statutory and common law dictated the conclusion that Investors Bank could enforce the lost note, the Supreme Court expressly declined to rely on the equitable doctrine of unjust enrichment that the Appellate Division had invoked in support of its decision.

With this threshold legal issue having been resolved in Investors Bank’s favor, the Supreme Court turned to Torres’ challenges to the admissibility of the Lost Note Affidavit. The Supreme Court, like the Appellate Division, concluded that the trial court did not abuse its discretion in admitting and relying on the Lost Note Affidavit. The Supreme Court reasoned that: (1) the Lost Note Affidavit was properly authenticated under N.J.R.E. 901, and it qualified as a business record, an exception to the hearsay rule, under N.J.R.E. 803(c)(6); (2) a business record is admissible even if it was not created by the proponent of the report at trial (i.e., Investors Bank could introduce the Lost Note Affidavit as a business record even though it had been prepared by CitiMortgage); (3) the passage of unknown amount of time between the loss of the original note and execution of the Lost Note Affidavit did not render the Affidavit inadmissible; and (4) the Lost Note Affidavit was not inherently untrustworthy because: (a) it had been prepared more than a year before CitiMortgage assigned the mortgage to Investors Bank; (b) there was no incentive for CitiMortgage to fabricate a claim that it lost the original note and could not locate it despite diligent efforts; and (c) the digital copy of the note set forth the terms that Investors Bank was seeking to enforce.

In summary, an assignee has the same rights to enforce a lost promissory note that the possessor of the note at the time of its loss would have had. However, the assignee must present a sufficient Lost Note Affidavit and competent proof of the terms of the lost note.

Wayne Streibich would like to thank Edward W. Chang and Jonathan F. Ball for their assistance in developing this alert.

[1] Investors Bank v. Torres, ___ N.J. ___ (July 1, 2020). The slip opinion is available on the Court’s website here.

[2] Investors Bank v. Torres, 457 N.J. Super. 23 (App. Div. 2018), certif. granted, 236 N.J. 594 (2019).

U.S. Supreme Court Rules Statute of Limitations for FDCPA Claim Runs One Year from Alleged Violation, Not Discovery

Wayne Streibich, Diana M. Eng, Jonathan M. Robbin, Scott E. Wortman, and William L. Purtell

The Supreme Court of the United States (“Supreme Court”) recently affirmed the Third Circuit’s decision holding Fair Debt Collection Practices Act (“FDCPA”) claims are subject to a one-year statute of limitations from the date of an alleged violation and rejecting the Fourth and Ninth Circuit’s adoption of a broad “discovery rule.” However, debt collectors should take note that equitable tolling principles may still apply in certain circumstances. 

On December 10, 2019, in Rotkiske v. Klemm, — S. Ct. — (2019), the Supreme Court issued an opinion holding that the one-year statute of limitations under the FDCPA accrues when a violation of the FDCPA occurs, not when that violation is discovered by the consumer. The Justices ruled 8-1 in the case, with Justice Thomas writing the opinion and Justice Sotomayor concurring. Justice Ginsburg filed a dissent, which would have remanded the case back to the district court to re-review the consumer’s separate allegations of equitable tolling of the statute of limitations.

Summary of Facts

In 2009, respondent Klemm & Associates (“Klemm”) sued petitioner Kevin Rotkiske (“Rotkiske”) in state court to enforce a credit card debt, which was allegedly beyond Pennsylvania’s statute of limitations for enforcement (“2009 Action”). Klemm issued service of process to an address where Rotkiske did not live, which Klemm allegedly had reason to know was inaccurate. An unknown individual accepted service on behalf of Rotkiske. Ultimately, Klemm obtained a default judgment against Rotkiske based on this return of service. Rotkiske was unaware of the default judgment against him until 2014, when his mortgage loan application was denied based on this default judgment.

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NY Appellate Court Holds Default Letter Stating Lender “Will Proceed to Automatically Accelerate” Did Not Accelerate the Debt and Thus Did Not Trigger the Statute of Limitations

Diana M. Eng and Alina Levi

In U.S. Bank N.A. v. Gordon, 176 A.D.3d 1006 (2d Dept. 2019), the New York Appellate Division, Second Department, held that a notice of default stating that if the loan was not made current, the lender “will automatically accelerate [the] loan,” was “merely an expression of future intent” and therefore did not accelerate the borrowers’ debt. As such, the Second Department held that the notice of default did not trigger the statute of limitations.

Summary of Facts and Background

On or about November 3, 2005, Steve and Ashia Gordon (“Defendants”) executed a note (“Note”), which was secured by a mortgage (“Mortgage”) against a property in Queens, New York. On or about July 1, 2011, Defendants defaulted on the loan. As a result, America’s Servicing Co. (“ASC”) sent a letter to Defendants, dated September 21, 2008 (“Notice of Default”), advising them that the loan was in default, and that, “[u]nless the payments on your loan can be brought current by October 21, 2008, it will become necessary to accelerate your Mortgage Note and pursue the remedies provided for in your Mortgage or Deed of Trust.” Moreover, the Notice of Default warned that “failure to pay this delinquency, plus additional payments and fees that may become due, will result in the acceleration of your Mortgage Note. Once acceleration has occurred, a foreclosure action . . . may be initiated.” In addition, the Notice of Default stated that “[t]o avoid the possibility of acceleration,” Defendants were required to make certain payments by a specific time, or ASC “will proceed to automatically accelerate your loan.” (Emphasis added).

On June 29, 2017, plaintiff U.S. Bank N.A. (“U.S. Bank”) commenced a foreclosure action to enforce the Defendants’ Mortgage in the Queens County Supreme (the “Lower Court”). Defendants moved to dismiss the action pursuant to CPLR 3211(a)(5) alleging that the statute of limitations to foreclose had expired. Specifically, Defendants argued that the entire debt was accelerated on September 21, 2008, based on the Notice of Default. Continue reading

Second Circuit Holds No Need to Identify Components of Debt Where Collection Letter Provides Exact Amount Owed and Reaffirms Use of Safe Harbor in Holding Debt Collector’s Letter Did Not Violate the FDCPA

Jonathan M. Robbin, Diana M. Eng, and Namrata Loomba

In Kolbasyuk v. Capital Management Services, LP, No. 18-1260 (2d Cir. 2019), the Second Circuit recently held that a debt collector’s letters informing a consumer of the total present amount of debt owed satisfies Fair Debt Collection Practices Act (“FDCPA”) requirements. The Second Circuit’s decision clarified that, under the FDCPA, collection letters are not required to inform consumers of the debt’s constituent components, or the rates by which the debt may later increase.

Summary of Facts and Background

In July 27, 2017, Capital Management Services, LP (“CMS”) sent Plaintiff a collection letter stating “[a]s of the date of this letter, you owe $5918.69.” The letter further stated, “[b]ecause of interest, late charges, and other charges that may vary from day to day, the amount due on the day you pay may be greater.” Continue reading

U.S. Supreme Court Holds Foreclosure Firms Conducting Nonjudicial Foreclosures Are Not Debt Collectors Under the FDCPA

By: Wayne Streibich, Diana M. Eng, Cheryl S. Chang, Jonathan M. Robbin, and Namrata Loomba

The United States Supreme Court holds businesses conducting nonjudicial foreclosures are not “debt collectors” under the FDCPA, but lenders and foreclosure firms should take note that the Court specifically chose to leave open the question of whether businesses that conduct judicial foreclosures are “debt collectors” under the statute. 

On March 20, 2019, in Obduskey v. McCarthy, the Supreme Court of the United States issued an opinion holding businesses conducting nonjudicial foreclosures are not “debt collectors” under the Fair Debt Collection Practices Act (“FDCPA”). The Supreme Court limited its decision to nonjudicial foreclosures.1 The Justices ruled 9-0 in the case, with Justice Breyer writing the opinion and Justice Sotomayor concurring.

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New York Appellate Court Rejects Usage of a Mortgage’s Reinstatement Provision as a Defense to the Expiration of the Statute of Limitations

By: Wayne Streibich, Diana M. Eng, Jonathan M. Robbin, and Diana M. Eng

On March 13, 2019, in a case of first impression, New York’s Appellate Division, Second Department (“Second Department”) issued a decision holding the reinstatement provision of a mortgage does not prevent the acceleration of the loan prior to entry of a foreclosure judgment. In Bank of New York Mellon v. Dieudonne, 2019 WL 1141973 (2d Dept. Mar. 13, 2019), the Second Department affirmed the Kings County Supreme Court’s decision granting defendant Dieudonne’s (“Defendant”) motion to dismiss the complaint pursuant to CPLR 3211(a)(5) because the foreclosure action was barred by the expiration of the statute of limitations. Specifically, the Second Department held that “the extinguishment of the defendant’s contractual right to de-accelerate the maturity of the debt pursuant to the reinstatement provision of paragraph 19 of the mortgage was not a condition precedent to the plaintiff’s acceleration of the mortgage” and, therefore, acceleration occurred upon commencement of the prior foreclosure action.

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Third Circuit Broadens Definition of “Debt Collector” under FDCPA to Include Entities That Acquire Debt but Outsource Collection of That Debt

By: Jonathan M. Robbin, Diana M. Eng, and Maria K. Vigilante

In Barbato v. Greystone Alliance, LLC et al., a recent precedential decision, the Third Circuit Court of Appeals held an entity whose business is the purchasing of defaulted debts for the purpose of collecting on them falls squarely within the “principal purpose” definition of the Fair Debt Collection Practices Act (“FDCPA”), 15 U.S.C. § 1692(a), even where the entity does not collect the debt and a third party is retained to do so. No. 18-1042, __ F.3d __ (3d Cir. 2019).

Specifically, Barbato expanded the Supreme Court’s holding in Henson v. Santander Consumer USA, 137 S. Ct. 1718 (2017) and rejected the defendant’s argument that Henson renders it a creditor rather than a debt collector because “its principal purpose is the acquisition—not the collection” of debt. Thus, the Barbato court held that where an entity meets the “principal purpose” definition, it cannot avoid the FDCPA’s requirements by retaining a third party to collect the debt.

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Ninth Circuit Holds That Fannie Mae Is Not a Consumer Reporting Agency under FCRA

By: Wayne StreibichCheryl S. Chang, Diana M. Eng, and Christine Lee

On January 9, 2019, a divided Ninth Circuit panel ruled that the Federal National Mortgage Association, or Fannie Mae, was not a “consumer reporting agency” within the meaning of the Fair Credit Reporting Act (“FCRA”). In Zabriskie v. Federal National Mortgage Association, the Ninth Circuit reversed the Arizona District Court’s holding that Fannie Mae acts as a consumer reporting agency when it licenses its proprietary software, Desktop Underwriter (“DU”), to lenders and that it is therefore subject to the FCRA. Zabriskie v. Fed. Nat’l Mortgage Ass’n, Nos. 17-15807, 17-16000, 2019 WL 137931 (9th Cir. Jan. 9, 2019).

The FCRA defines a “consumer reporting agency” as “any person which, for monetary fees, dues, or on a cooperative nonprofit basis, regularly engages in whole or in part in the practice of assembling or evaluating consumer credit information or other information on consumers for the purpose of preparing or furnishing consumer reports.” 15 U.S.C. § 1681a(f). In reaching its conclusion, the Ninth Circuit specifically examined whether Fannie Mae’s licensing of its DU software constituted: (1) regularly engaging in the practice of assembling or evaluating consumer credit information and (2) for the purpose of preparing or furnishing consumer reports.

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Eleventh Circuit Clarifies Foreign Company’s Dual Citizenship Status but Leaves Room for Further Debate

By: Jonathan M. Robbin and Anthony Richard Yanez

A drunken tumble on a cruise ship may lead to resolving how alienage/jurisdiction is determined in the Eleventh Circuit. In Caron v. NCL (Bahamas), Ltd., — F.3d —, 2018 WL 6539178 (11th Cir. Dec. 13, 2018), the Eleventh Circuit, for the first time, held an alien corporation has dual citizenship, but limited its holding. Specifically, Caron held there is no diversity jurisdiction in a suit between a foreign incorporated corporation with its principal place of business in Florida and a citizen of Canada. Unfortunately, despite guidance from sister courts, Caron left unresolved the question of whether a domestic incorporated corporation with a principal place of business abroad can invoke alienage-dual citizenship diversity in a suit against an alien following the 2012 amendments to 28 U.S.C. § 1332(c).

Background

On July 14, 2016, Canadian citizen Olivier Caron sued Norwegian Cruise Lines (“NCL”) after he sustained personal injuries by falling down an escape hatch on a ship while he was inebriated. Mr. Caron filed suit in the Southern District of Florida asserting diversity of citizenship jurisdiction and admiralty jurisdiction.[1]

Caron argued that the alienage-diversity provision, governing suits between aliens and citizens of a State, applies, and the district court properly entertained jurisdiction under this provision. Caron is a Canadian citizen and NCL is a Bermuda corporation with its principal place of business in Florida. Thus, Caron argued that NCL is a Florida citizen for alienage-diversity jurisdiction purposes. Continue reading