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Florida Court Reverses Foreclosure as to Note With Undated Indorsement, Other Evidentiary Issues

The District Court of Appeals of the State of Florida, Fourth District, recently reversed final judgment of foreclosure in favor of a mortgagee for entry of judgment in favor of the mortgagors, where the mortgagee failed to prove that it came into possession of the note containing an undated, blank endorsement before the foreclosure was filed.

In so ruling, the Fourth District confirmed that a trial court abuses its discretion in admitting business records if it is not established that the records were made at or near the time of the event.

In addition, the Fourth District held that a witness is not qualified to lay the necessary foundation for admitting a document into evidence under the business records exception when the witness is not familiar with the systems that generated the document.

A copy of the opinion in Sonia J. Sanchez and Hector L. Sanchez v. SunTrust Bank, et al. is available at: Link to Opinion.

The mortgagors executed a promissory note and mortgage, the servicing rights for which were retained by originating lender.  The loan was subsequently sold and assigned to the foreclosing mortgagee, for which the originating lender/servicer was a wholly owned subsidiary.

Following default, the mortgagee filed a foreclosure complaint, but failed to attach a copy of the note.  The mortgagee later filed the original note, which contained an undated, blank endorsement from the servicer.

At trial, the servicer’s employee was asked to authenticate several documents.  The witness stated he is required to review the mortgagee’s foreclosure files and internal systems, that he typically reviews the note, mortgage, breach letter, and payment history prior to trial, and that he was familiar with three separate record keeping systems used by the servicer and mortgagee.

The employee further stated the blank endorsement was placed on the note prior to filing the initial complaint because it was the mortgagee’s policy to endorse notes upon receiving them after execution.

In addition, the employee relied on a screenshot from “the system…used by our vault people to keep track of any original documents” to testify that the note was endorsed in blank three days after the promissory note and mortgage were executed, and three years prior to suit.

The trial court admitted the screenshot, payment history, default letters, collection notes, and payoff calculation under the business records exception, and over the mortgagors’ objection based on lack of foundation and hearsay.

The trial court entered final judgment of foreclosure in favor of the mortgagee.  The mortgagors appealed, arguing the trial court abused its discretion by admitting the records into evidence.

The Fourth District held that the trial court abused its discretion in admitting the records under the business records exception, as it was not established that the record was made at or near the time of the event, and the employee did not appear to be qualified to lay the proper foundation for introduction of the screenshot.

As you may recall, the business records exception allows a party to introduce evidence that would normally be inadmissible hearsay if (1) the record was made at or near the time of the event, (2) was made by or from information transmitted by a person with knowledge, (3) was kept in the ordinary course of a regularly conducted business activity, and (4) it was a regular practice of that business to make such a record.

The Fourth District found the employee was not questioned as to whether each record was made at or near the time of the event, and held that admitting the records was error because this element was not established.

In addition, as you may recall, to lay a foundation for the admission of a business record, it is not necessary for the proponent of the evidence to call the person who actually prepared the business records.  The records custodian or any qualified witness who has knowledge of the record maintenance process may testify as to how the record was made to lay the necessary foundation, and “the witness just need be well enough acquainted with the activity to provide testimony.”

The Court noted that, to the extent the individual making the record does not have personal knowledge of the information contained therein, the second prong of the predicate requires the information to have been supplied by an individual who does have personal knowledge of the information and who was acting in the course of a regularly conducted business activity.

The Fourth District also noted that a servicer’s representative testifying at trial is not required to have personal knowledge of the documents being authenticated, but must be familiar with and have knowledge of how the “company’s data [is] produced.”  If a servicer’s representative knows “how the data was produced,” and is “familiar with the bank’s record-keeping system and has knowledge of how the data was uploaded into the system,” the business records exception is satisfied, the Court noted.

Here, the Fourth District found the servicer’s employee testified he had seen similar screenshots to the one admitted into evidence, but that he did not know anything about the process by which the screenshots were created, that the screenshots were not generated by any of the three servicing systems with which he was acquainted, and that whether the screenshot accurately reflected the date the endorsement was placed on the note was based entirely on a conversation with another employee that the witness could identify only by first name.

The Fourth District cited Ensler v. Aurora Loan Servs., No. 4D14-351 (Fla. 4th DCA Oct. 28, 2015), which stated that general testimony that a prior note holder follows a standard record-keeping practice, without discussing details to show compliance with the business records exception, is not enough to establish a foundation for the exception.

Based on Ensler and the testimony of the servicer’s employee, the Fourth District held that the servicer’s employee did not have sufficient knowledge to lay the foundation for the screenshot under the business records exception

Moreover, the Fourth District held that even if properly admitted, the screenshot would have established only the servicer’s, and not the mortgagee’s, standing to foreclose as the employee did not testify when the mortgagee came into possession of the note.

As you may recall, possession of the original note, indorsed in blank, is sufficient under Florida’s Uniform Commercial Code to establish that a party is the lawful holder of the note, entitled to enforce its terms.  However, a party attempting to prove standing based on possession of a note reflecting an undated, blank endorsement must prove it had possession of the note at the time the initial complaint was filed, and a failure to provide sufficient proof of standing warrants reversal.

In Wright v. JPMorgan Chase Bank, N.A., 169 So. 3d 251 (Fla. 4th DCA 2015), the Fourth District previously stated that “[a] parent corporation and its wholly-owned subsidiary are separate and distinct legal entities…As a separate legal entity, a parent corporation…cannot exercise the rights of its subsidiary[,]” and held that ownership of a note by a subsidiary does not give the parent the right to enforce a note, absent evidence the parent acquired such a right through, for example, an authenticated purchase or servicing agreement admitted into evidence.

The Fourth District held that the fact that a subsidiary may have standing to foreclose does not automatically establish that its parent also has standing, absent evidence more substantial than testimony regarding the existence of a parent-subsidiary relationship and other evidence required under the Wright ruling.

Accordingly, the Fourth District reversed the final judgment of foreclosure for entry of judgment in favor of the mortgagors.

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The attorneys of Maurice Wutscher are seasoned business lawyers with substantial experience in business law, financial services litigation and regulatory compliance. They represent consumer and commercial financial services companies, including depository and non-depository mortgage lenders and servicers, as well as mortgage loan investors, financial asset buyers and sellers, loss mitigation companies, third-party debt collectors, and other financial services providers. They have defended scores of putative class actions, have substantial experience in federal appellate court litigation and bring substantial trial and complex bankruptcy experience. They are leaders and influencers in their highly specialized area of law. They serve in leadership positions in industry associations and regularly publish and speak before national audiences.

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