U.S. Bank Trust, N.A. v. Verhagen. ICA s.d.o., filed 07/20/2020, 148 Haw. 44. Motion for Reconsideration, filed 08/07/2020. ( 2021 )


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  • *** FOR PUBLICATION IN WEST’S HAWAI‘I REPORTS AND PACIFIC REPORTER ***
    Electronically Filed
    Supreme Court
    SCWC-XX-XXXXXXX
    21-JUN-2021
    09:00 AM
    Dkt. 25 OP
    IN THE SUPREME COURT OF THE STATE OF HAWAIʻI
    ---o0o---
    U.S. BANK TRUST, N.A.,
    AS TRUSTEE FOR LSF9 MASTER PARTICIPATION TRUST,
    Petitioner/Plaintiff-Appellee,
    vs.
    PATRICK LOWELL VERHAGEN; PATRICK LOWELL VERHAGEN, TRUSTEE OF THE
    PATRICK LOWELL VERHAGEN REVOCABLE TRUST DATED OCTOBER 29, 1999
    Respondent/Defendant-Appellant,
    and
    WELLS FARGO BANK, N.A.,
    Respondent/Defendant-Appellee.
    SCWC-XX-XXXXXXX
    CERTIORARI TO THE INTERMEDIATE COURT OF APPEALS
    (CAAP-XX-XXXXXXX; CIVIL NO. 16-1-0147(1))
    JUNE 21, 2021
    RECKTENWALD, C.J., NAKAYAMA, McKENNA, WILSON, AND EDDINS, JJ.
    OPINION OF THE COURT BY EDDINS, J.
    This case concerns the admissibility and evidentiary weight
    of documents and declarations at issue in a foreclosure
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    proceeding.   We consider: whether promissory notes are hearsay,
    admissible only if they fall within an exception to the hearsay
    rule; whether a copy of a promissory note is self-authenticating
    under Hawai‘i Rules of Evidence (“HRE”) Rule 902(9); the scope
    and limits of the business records exception to the hearsay
    rule; and the evidentiary burden mortgagees must meet to
    establish standing in the foreclosure context.
    We conclude that promissory notes are not hearsay, that
    copies of promissory notes are not self-authenticating under HRE
    Rule 902(9), and that, under the incorporated records doctrine,
    business records may, in certain circumstances, be admissible
    even absent testimony concerning the business practices or
    records of their creator.    We also clarify the evidentiary
    burden on mortgagees seeking to show their possession of a
    promissory note at the time a foreclosure complaint was filed.
    I.   BACKGROUND
    Patrick Verhagen (“Verhagen”) owned real estate in Lahaina
    (the “Property”).   In September 2007, Verhagen executed a
    $1,730,000.00 note (the “Note”) in favor of Washington Mutual
    Bank, FA (“Washington Mutual”).        Verhagen secured the Note with
    a mortgage on the Property.
    The mortgage was later assigned to U.S. Bank.       Caliber Home
    Loans, Inc. (“Caliber”) is U.S. Bank’s current loan servicer.
    JPMorgan Chase Bank, National Association (“JPMorgan Chase”)
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    previously serviced the loan.
    Verhagen defaulted on the Note in February 2012.      He was
    sent notice of the default in August 2014.     The notice provided
    Verhagen thirty-five days to cure the default.      Verhagen did not
    timely cure the default.
    On March 23, 2016, U.S. Bank filed a verified foreclosure
    complaint in the Circuit Court of the Second Circuit (the
    “circuit court”).
    The complaint was accompanied by a Verification to
    Foreclosure Complaint by Julia Jackson, a Caliber employee.
    Jackson said she was familiar with Caliber’s records and the
    manner in which Caliber maintains those records.      She “verified”
    and “confirmed” U.S. Bank’s possession of the original Note.
    On January 31, 2017, U.S. Bank filed a Motion for Summary
    Judgment and Interlocutory Decree of Foreclosure (“MSJ”) against
    Verhagen.
    In its MSJ, U.S. Bank argued it was entitled to summary
    judgment against Verhagen because: (1) A loan had been made to
    Verhagen; (2) Verhagen made, executed, and delivered the Note to
    the lender; (3) Verhagen secured the Note with a mortgage on the
    Property; (4) Verhagen is in default of the amounts due under
    the Note; and (5) U.S. Bank. holds the Note and has standing to
    foreclose against Verhagen.
    U.S. Bank supported its MSJ with a declaration (the
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    “Salyers Declaration”) from Alyssa Salyers.      Salyers is a
    foreclosure document specialist at Caliber.
    Salyers declared she was familiar with both Caliber’s
    business records concerning the Note and the manner in which
    Caliber maintains those records.       Salyers also declared she had
    inspected a copy of the Note maintained by Caliber.      She
    attached a “true and correct” copy of the Note to her
    declaration.   She further declared that Caliber’s records
    concerning the Note include records incorporated from the prior
    loan servicer, JPMorgan Chase.    The records obtained from
    JPMorgan Chase, Salyers declared, are “kept and maintained by
    Caliber in the ordinary course of its business for the purpose
    of maintaining an accounting of payments received, expenses
    incurred, and amounts advanced with regard to the Subject Loan,
    and such records are relied upon by Caliber in the regular
    course of its business.”
    Verhagen’s opposition to U.S. Bank’s MSJ focused on U.S.
    Bank’s failure to demonstrate its ownership and possession of
    the Note at the time it filed suit.      Verhagen argued that this
    evidentiary deficiency was fatal for U.S. Bank: without a
    showing that it possessed the Note at the time it filed its
    complaint, U.S. Bank could not establish standing under Bank of
    America, N.A. v. Reyes-Toledo, 139 Hawaiʻi 361, 
    390 P.3d 1248
    (2017).
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    We issued Reyes-Toledo on February 28, 2017: one month
    before Verhagen’s March 31, 2017 opposition and one month after
    U.S. Bank’s January 31, 2017 MSJ.         Reyes-Toledo held that in
    order to establish standing, a foreclosing plaintiff must prove
    “its entitlement to enforce the note at the commencement of the
    proceedings.”      Id. at 369, 390 P.3d at 1256.
    The circuit court granted U.S. Bank’s motion.         Verhagen
    appealed.      The ICA remanded the case to the circuit court to
    allow U.S. Bank to supplement the record in light of Reyes-
    Toledo and another case, U.S. Bank N.A. v. Mattos, 140 Hawai‘i
    26, 
    398 P.3d 615
     (2017). 1 Mattos was issued after U.S. Bank
    submitted its proposed forms for the foreclosure judgment (May
    17, 2017) but before the court entered judgment (September 25,
    2017).      In Mattos, we held that the employee of a plaintiff
    1     U.S. Bank’s motion for remand came after it had, following a procedure
    described in Life of the Land v. Ariyoshi, 
    57 Haw. 249
    , 
    553 P.2d 464
     (1976),
    asked the circuit court to indicate how it was inclined to rule on a motion
    to ratify the foreclosure judgment. Verhagen neither opposed the substance
    of the motion U.S. Bank presented to the circuit court nor appeared at the
    related hearing. Verhagen did, however, file jurisdictional objections to
    U.S. Bank’s proposed order granting the motion to ratify.
    Notwithstanding Verhagen’s jurisdictional objections, on July 27, 2018,
    the circuit court indicated its inclination to grant U.S. Bank’s motion to
    ratify. Confusingly, though it lacked jurisdiction to adjudicate the motion,
    the circuit court styled itself as “granting” the motion to ratify. As the
    ICA noted in its order granting U.S. Bank’s motion for temporary remand, the
    circuit court should have indicated its inclination to grant the motion
    rather than purporting to actually grant it. See Life of the Land, 57 Haw.
    at 251, 
    553 P.2d at 466
     (“Accordingly, we consider that the procedure for
    motions under Rule 60(b), H.R.C.P., may and should be consistent with that
    for motions under Rule 33, H.R.Cr.P., where an appeal is pending in this
    court. Jurisdiction is in this court while the appeal is pending, in both
    instances. Nevertheless, the motion may be made and considered in the
    circuit court. If that court indicates that it will grant the motion, the
    appellant may then move in this court for a remand of the case.”)
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    bank’s loan servicer was not a “qualified witness” in relation
    to the bank’s records where the employee did not testify to
    familiarity with the bank’s record-keeping system or to the loan
    servicer’s incorporation of the bank’s records.           Id. at 33, 398
    P.3d at 622.
    On remand, U.S. Bank moved for ratification of the circuit
    court’s prior judgment.       Verhagen filed jurisdictional
    objections to the circuit court’s consideration of the motion
    but did not substantively oppose the motion to ratify.             U.S.
    Bank’s motion was accompanied by a supplemental declaration from
    Melinda Patterson (the “Patterson Declaration”).            Patterson
    stated she was a Caliber employee and was familiar with both
    Caliber’s books and records concerning the Note and the manner
    in which Caliber maintains its books and records.            Patterson’s
    declaration provided additional testimony concerning Caliber’s
    incorporation of prior loan servicers’ records.           Patterson
    declared:
    Caliber’s records include and incorporate records for the
    Loan obtained from [JPMorgan Chase] (“Prior Servicer”), the
    prior loan servicer for the Loan. The records obtained by
    Caliber from the Prior Servicer are kept and maintained by
    Caliber in the ordinary course of its business for the
    purpose of maintaining an accounting of payments received,
    expenses incurred, and amounts advanced with regard to the
    Loan, and such records are relied upon by Caliber in the
    regular course of its business. The information regarding
    the Loan transferred to Caliber from the Prior Servicer has
    been validated in many ways, including but not limited to,
    going through a due diligence phase, review of hard copy
    documents, and review of the payment history and accounting
    of other fees, costs, and expenses charged to the Loan by
    Prior Servicer. It is Caliber’s regular practice, after
    these phases are complete, to receive records from prior
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    servicers and integrate these records into Caliber’s
    business records at the time of acquisition. Once
    integrated, Caliber maintains and relies on these business
    records in the ordinary course of its mortgage loan
    servicing business.
    Patterson also declared that, based on her review of
    Caliber’s business records, U.S. Bank possessed the Note on
    March 23, 2016, when it filed its complaint against Verhagen:
    Plaintiff, or its agent on Plaintiff’s behalf, was in
    possession of the original wet-ink, indorsed in blank Note
    when the above-captioned foreclosure action was commenced
    on March 23, 2016 and since [that time]. . . .
    My personal knowledge of these statements is derived from
    my having inspected Caliber’s business records.
    Specifically, I researched Caliber’s business records,
    which includes “Certification” [sic] executed by Caliber
    employee, Jennifer Martin. The “Certification” contained
    in Caliber’s business records evidence [sic] that the
    original wet ink, indorsed in blank Note was in Caliber’s
    possession on Plaintiff’s behalf on February 9, 2016.
    Further, the “Certification” contained in Caliber’s
    business records indicates that the original wet-ink Note
    was indorsed in blank no later than February 9, 2016, as
    the original wet-ink Note was electronically scanned and
    uploaded to Caliber’s business records on or before
    February 9, 2016 and the scanned copy of the original wet-
    ink Note that was uploaded to Caliber’s business records on
    or before February 9, 2016 contains a blank indorsement on
    page 6 of the Note.
    Patterson attached a copy of Jennifer Martin’s Certification to
    her declaration.
    Patterson also declared that there was an attorney’s bailee
    letter agreement in Caliber’s business records.           The letter was
    dated December 9, 2016.      Patterson declared that Caliber sent
    the letter 2 to U.S. Bank’s legal counsel on or around that date
    2 The bailee letter attached to Patterson’s declaration documented
    transmission of the original Note from Caliber to U.S. Bank’s foreclosure
    counsel. At the bottom of the letter there was a signed December 16, 2016
    acknowledgement from a representative of U.S. Bank’s legal counsel
    recognizing receipt of the original Note.
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    along with the wet-ink indorsed-in-blank Note.         Verhagen did not
    object to the admission of Patterson’s testimony.
    On October 8, 2018, the circuit court filed amended
    findings of fact (“FOFs”) and conclusions of law (“COLs”).
    These amended FOFs and COLs addressed U.S. Bank’s compliance
    with Reyes-Toledo.    The circuit court found U.S. Bank possessed
    the indorsed-in-blank Note at the time it sued Verhagen:
    [Amended FOF 8]   At the time the Complaint was filed,
    PLAINTIFF, or its agent on PLAINTIFF’s behalf, was in
    possession of the original indorsed in blank Note. As
    evidence of this, the Verification filed with the
    Complaint, which was executed by Julia Jackson (an employee
    of Caliber Home Loans, Inc.) (“Servicer”), PLAINTIFF’S loan
    servicer, stated that Jackson had “verified and hereby
    confirm[ed] possession of the original Note by Plaintiff .
    . . [and that] [t]he Note is indorsed in blank . . ..”
    Verification to Complaint, at ¶¶ 7-8; see Nationstar
    Mortgage, LLC v. Ruth C. Alejandro, et al., CAAP XX-XXXXXXX
    (March 23, 2017) (Summary Disposition Order) (discussing
    how similar verification established possession of note
    when case was commenced as required by Reyes-Toledo).
    Further, together with the Motion to Ratify, filed on June
    18, 2018, PLAINTIFF submitted a further Declaration of
    Melinda Patterson (who was also an employee of Servicer),
    which provided additional evidence that: (i) Servicer had
    authority to act on behalf of PLAINTIFF and had been
    servicing the subject loan since prior to the filing of the
    Complaint (see Patterson Decl. at ¶¶ 3 and 6); and (ii)
    Servicer had been in possession of the original indorsed in
    blank Note since at least February 9, 2016, and through
    approximately December 9, 2016, when the original indorsed
    in blank Note was transmitted to PLAINTIFF’S counsel of
    record in this case to hold on PLAINTIFF’S behalf while the
    foreclosure action was being prosecuted (see Patterson
    Decl. at ¶ 8; Prather Declaration submitted with
    PLAINTIFF’S Reply Memorandum in Support of its Motion for
    Summary Judgment, filed April 3, 2016).
    The circuit court further found that U.S. Bank had
    possessed the Note since the filing of the complaint:
    [Amended FOF 11]   As a result, PLAINTIFF, its agent on
    PLAINTIFF’s behalf, or PLAINTIFF’S counsel on PLAINTIFF’S
    behalf, has been and remains in possession of the original
    indorsed in blank Note since before this foreclosure action
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    was commenced on March 23, 2016, and through the present.
    No evidence to the contrary was presented to the Court.
    The circuit court’s amended FOFs also considered the
    admissibility of the loan documents U.S. Bank submitted in
    support of its MSJ:
    [Amended FOF 10]   Further, the evidence establishing
    PLAINTIFF’S standing is admissible because the various
    declarants established their personal knowledge of the
    statements made and/or that the statements made were
    derived from the business records of the declarant’s
    employer, and not some other entity. See U.S. Bank, N.A.
    v. Mattos, 
    140 Haw. 26
    , 32-33, 
    398 P.3d 615
    , 621-622 (S.
    Ct. 2017) (foreclosing plaintiff must establish standing
    through admissible evidence; servicer could not testify to
    records of plaintiff without establishing familiarity with
    plaintiff’s record keeping system) . . . .
    The circuit court also addressed U.S. Bank’s standing:
    [Amended COL 2]   PLAINTIFF had standing to bring this
    action and has standing at present because PLAINTIFF, its
    agent on PLAINTIFF’S behalf, or PLAINTIFF’S counsel on
    PLAINTIFF’S behalf, has been and remains in possession of
    the original indorsed in blank Note since before this
    foreclosure action was commenced on March 23, 2016, and
    through the present.
    Following the entry of the circuit court’s amended
    judgment, order, and FOFs and COLs, U.S. Bank filed an amended
    answering brief in the ICA.       In its brief, U.S. Bank argued
    that: (1) loan documents maintained by Caliber but created by
    prior loan servicers were admissible as “incorporated records”
    under the business records exception to the hearsay rule; and
    (2) declarations U.S. Bank submitted in support of its MSJ
    showed it possessed the Note at the time it filed the complaint
    and, in doing so, established U.S. Bank’s standing to sue
    Verhagen.
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    On October 2, 2020, the ICA issued an Amended SDO 3 vacating
    the circuit court’s October 8, 2018, Amended Judgment and the
    Amended Findings of Fact and Conclusions of Law; Amended Order
    Granting Plaintiff's Motion for Summary Judgment and for
    Interlocutory Decree of Foreclosure.         U.S. Bank v. Verhagen,
    CAAP-XX-XXXXXXX (App. Oct. 2, 2020) (SDO).
    The ICA ruled that U.S. Bank lacked standing because it had
    not established it possessed the Note at the time it filed the
    foreclosure action.       See Reyes-Toledo, 139 Hawaiʻi at 368, 390
    P.3d at 1255 (holding that to establish standing a foreclosing
    plaintiff must establish entitlement to enforce the subject note
    at the time the action was commenced).
    The ICA reached this conclusion after determining that the
    copies of the Note U.S. Bank submitted in support of its MSJ
    3     The ICA initially issued a summary disposition order (the “SDO”)
    vacating the circuit court’s September 25, 2017 Judgment and Findings of Fact
    and Conclusions of Law; Order Granting Plaintiff’s Motion for Summary
    Judgment and for Interlocutory Decree of Foreclosure Filed January 31, 2017.
    U.S. Bank moved the ICA to reconsider its SDO. In addition to making several
    legal arguments about why the ICA should reconsider the SDO, U.S. Bank’s
    motion for reconsideration highlighted the fact that the ICA’s SDO did not
    address or acknowledge the circuit court’s October 8, 2020 Amended Judgment
    and Amended Findings of Fact and Conclusions of Law; Order Granting
    Plaintiff’s Motion for Summary Judgment and for Interlocutory Decree of
    Foreclosure Filed January 31, 2017. On October 2, 2020, the ICA issued a
    two-paragraph order granting in part U.S. Bank’s motion for reconsideration.
    The order granted the motion only to the extent it concerned the ICA’s
    failure to address the October 8, 2018 Amended Judgment and the Amended
    Findings of Fact and Conclusions of Law; Amended Order Granting Plaintiff's
    Motion for Summary Judgment and for Interlocutory Decree of Foreclosure. The
    ICA rejected all of U.S. Bank’s substantive legal arguments concerning the
    need for reconsideration. It issued its Amended SDO that same day, October
    2, 2020.
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    were inadmissible hearsay.     None of the declarations U.S. Bank
    submitted were from a declarant familiar with the record-keeping
    practices of Washington Mutual, the entity that purportedly
    created the Note.   As such, the ICA ruled, there was not an
    adequate foundation for the admission of the Note under the
    “business records” exception to the hearsay rule.
    In reaching this conclusion, the ICA cited Mattos’s
    quotation of State v. Fitzwater, 122 Hawaiʻi 354, 
    227 P.3d 520
    (2010), for the proposition that an employee of a business that
    received records from another business may be qualified to
    establish a foundation for their admission under HRE Rule
    803(b)(6):
    A person can be a “qualified witness” who can authenticate
    a document as a record of regularly conducted activity
    under HRE Rule 803(b)(6) or its federal counterpart even if
    he or she is not an employee of the business that created
    the document, or has no direct, personal knowledge of how
    the document was created. As one leading commentator has
    noted:
    The phrase “other qualified witness” is given a
    very broad interpretation. The witness need
    only have enough familiarity with the record-
    keeping system of the business in question to
    explain how the record came into existence in
    the ordinary course of business. The witness
    need not have personal knowledge of the actual
    creation of the documents or have personally
    assembled the records. In fact, the witness
    need not even be an employee of the record-
    keeping entity as long as the witness
    understands the entity's record-keeping system.
    There is no requirement that the records have
    been prepared by the entity that has custody of
    them, as long as they were created in the
    regular course of some entity's business.
    The sufficiency of the foundation evidence
    depends in part on the nature of the documents
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    at issue. Documents that are “standard records
    of the type regularly maintained by firms in a
    particular industry may require less by way of
    foundation testimony than less conventional
    documents proffered for admission as business
    records.”
    Verhagen, SDO at 7-8 (quoting Mattos, 140 Hawaiʻi at 32, 398 P.3d
    at 621) (cleaned up).
    The ICA also cited Behrendt’s discussion of the testimony
    necessary to support the admission of incorporated records:
    The court in Mattos held that a witness may be qualified to
    provide the testimony required by HRE Rule 803(b)(6) even
    if the witness is not employed by the business that created
    the document or lacks direct, personal knowledge of how the
    document was created. Id. “There is no requirement that
    the records have been prepared by the entity that has
    custody of them, as long as they were created in the
    regular course of some entity's business.” Id. (quoting
    State v. Fitzwater, 122 Hawaiʻi 354, 366, 
    227 P.3d 520
    , 532
    (2010)). The witness, however, must have enough
    familiarity with the record-keeping system of the business
    that created the record to explain how the record was
    generated in the ordinary course of business. 
    Id.
    Records received from another business and incorporated
    into the receiving business’ records may in some
    circumstances be regarded as “created” by the receiving
    business. 
    Id.
     Incorporated records are admissible under
    HRE Rule 803(b)(6) when a custodian or qualified witness
    testifies that the documents were incorporated and kept in
    the normal course of business, that the incorporating
    business typically relies upon the accuracy of the contents
    of the documents, and the circumstances otherwise indicate
    the trustworthiness of the document. See id.; Fitzwater,
    122 Hawaiʻi at 367-68, 227 P.3d at 533-34.
    Verhagen, SDO at 8 (quoting 142 Hawai‘i at 45-46, 414 P.3d at 97-
    98).
    The ICA then turned to explaining why the Jackson
    verification, Salyers declaration, and supplemental Patterson
    declaration each failed to establish the declarant’s
    qualifications to authenticate the Note as a business record
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    under HRE Rule 803(b)(6).
    Jackson’s verification — which described her familiarity
    with Caliber’s records and record-keeping system 4 — did not
    qualify her as an “other qualified witness” for purposes of
    admitting the Note under HRE Rule 803(b)(6) because it did not
    demonstrate that she had “enough familiarity with the record-
    keeping system of the business that created [the Note] to
    explain how [it] was generated in the ordinary course of
    business.”      Verhagen, SDO at 9 (alterations added) (quoting
    Behrendt, 142 Hawai‘i at 45, 414 P.3d at 97).
    Salyers’ declaration 5 was similarly deficient.          Because
    4       Specifically, Jackson stated:
    I have access to and am familiar with Caliber’s books and
    records regarding the Loan, including Caliber’s servicing
    records and copies of the applicable loan documents. I am
    familiar with the manner in which Caliber maintains its
    books and records, including computer records relating to
    the servicing of the Loan. Caliber’s records are made at
    or near the time of the occurrence of the matters set forth
    in such records, by an employee or representative with
    knowledge of the acts or events recorded. Such records are
    obtained, kept and maintained by Caliber in the regular
    course of Caliber’s business. Caliber relies on such
    records in the ordinary course of its business.
    5       Salyers declared, in relevant part:
    I have access to and am familiar with Caliber’s books and
    records regarding the Loan, including Caliber’s servicing
    records and copies of the applicable loan documents. I am
    familiar with the manner in which Caliber maintains its
    books and records, including computer records relating to
    the servicing of the Loan. Caliber’s records are made at
    or near the time of the occurrence of the matters set forth
    in such records, by an employee or representative with
    knowledge of the acts or events recorded. Such records are
    obtained, kept and maintained by Caliber in the regular
    course of Caliber's business. Caliber relies on such
    records in the ordinary course of its business. Caliber’s
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    Salyers did not attest to being familiar with “the record-
    keeping system of Washington Mutual or JPMorgan [Chase]” Salyers
    was not a “qualified witness” for the admission of the Note
    under HRE Rule 803(b)(6).
    According to the ICA, even the supplemental Patterson
    declaration failed “to establish under Mattos and Behrendt that
    [Patterson] is a custodian of records or a qualified witness for
    purposes of admitting the Note as evidence pursuant to HRE Rule
    803(b)(6).”   Verhagen, SDO at 10.
    In its December 28, 2020 certiorari application, U.S. Bank
    presented the following questions:
    (1) “To obtain summary judgment, is a foreclosing creditor
    in possession of the original note required to authenticate the
    note through HRE 803(b)(6), or is the note admissible under HRE
    902?”;
    (2) “Is the issue of standing based on possession of the
    promissory note distinct from the issue of admissibility of loan
    records, such that a lender can satisfy the possession
    requirement with a declaration that affirms pre-filing
    records include and incorporate records for the Subject
    Loan obtained from JPMorgan Chase Bank, N.A. (“Prior
    Servicer”), the prior loan servicer for the Subject Loan.
    The records obtained by Caliber from the Prior Servicer are
    kept and maintained by Caliber in the ordinary course of
    its business for the purpose of maintaining an accounting
    of payments received, expenses incurred, and amounts
    advanced with regard to the Subject Loan, and such records
    are relied upon by Caliber in the regular course of its
    business.
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    possession of the note based upon personal knowledge and
    corroborating records of the custodian, irrespective of the
    declarant’s foundation to admit the note as a business record
    under HRE 803(b)(6)?”; and
    (3) “Did the debtor waive his right to dispute the Amended
    Judgment by failing to oppose Petitioner’s Motion to Ratify and
    the resulting Amended Order?”
    II.   DISCUSSION
    A.   The Note is not hearsay
    The Note is not hearsay.
    Out of court statements with independent legal
    significance, like verbal acts, are not hearsay since “[i]f the
    significance of an offered statement lies solely in the fact
    that it was made, no issue is raised as to the truth of anything
    asserted.”    Fed. R. Evid. 802(c) cmt.   See State v. Villena, 140
    Hawaiʻi 370, 378, 
    400 P.3d 571
    , 579 (2017) (“It is well-settled
    that statements of independent legal significance are not
    hearsay.”).
    Contractual documents have independent legal significance.
    See State v. Salavea, 147 Hawaiʻi 564, 577 n.13, 
    465 P.3d 1011
    ,
    1024 n.13 (2020) (citing Island Directory Co. v. Iva’s Kinimaka
    Enters., Inc., 
    10 Haw. App. 15
    , 21-22, 
    859 P.2d 935
    , 939 (1993),
    and describing it as “holding that statements that constitute
    the offer, acceptance, or terms of a contract are not hearsay
    15
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    because the making of such statements are in themselves
    relevant[.]”).
    Promissory notes are a subspecies of written contracts
    because they record the terms of an agreement between lender and
    borrower.   See Remington Investments, Inc. v. Hamedani, 
    64 Cal. Rptr. 2d 376
    , 382 (Cal. Ct. App. 1997) (explaining “[t]he
    Promissory Note document itself is not a business record as that
    term is used in the law of hearsay, but rather is an operative
    contractual document admissible merely upon adequate evidence of
    authenticity”).   Since the Note has independent legal
    significance as evidence of the written contract between
    Verhagen and the Note’s holder, it is not hearsay.      Because the
    Note is not hearsay, it does not need to meet the business
    records exception to be admissible.
    B.   Copies of the Note submitted by U.S. Bank are not self-
    authenticating under HRE Rule 902(9)
    Though the original Note is self-authenticating under HRE
    Rule 902(9), the copies of the Note U.S. Bank submitted in
    support of its MSJ are not.
    Even non-hearsay evidence must be authenticated.      “The
    requirement of authentication or identification as a condition
    precedent to admissibility is satisfied by evidence sufficient
    to support a finding that the matter in question is what its
    proponent claims.”   HRE Rule 901.    Under HRE Rule 902, however,
    16
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    “[e]xtrinsic evidence of authenticity as a condition precedent
    to admissibility” is not needed with respect to “[c]ommercial
    paper, signatures thereon, and documents relating thereto to the
    extent provided by general commercial law.”           HRE Rule 902(9).
    Hawai‘i’s generally applicable commercial law is the Hawaiʻi
    Uniform Commercial Code (the “U.C.C.”).          Under Article 3 of the
    U.C.C.:
    In an action with respect to an instrument, the
    authenticity of, and authority to make, each signature on
    the instrument is admitted unless specifically denied in
    the pleadings. If the validity of a signature is denied in
    the pleadings, the burden of establishing validity is on
    the person claiming validity, but the signature is
    presumed[6] to be authentic and authorized unless the action
    is to enforce the liability of the purported signer and the
    signer is dead or incompetent at the time of trial of the
    issue of validity of the signature.
    Hawai‘i Revised Statutes (“HRS”) § 490:3-308(a) (2008).
    Promissory notes like the one Verhagen signed are negotiable
    instruments under the U.C.C.        See HRS § 490:3-104; see also Bank
    of New York Mellon v. Spielman, 146 Hawaiʻi 205, 
    457 P.3d 844
    (App. 2020) (characterizing a promissory note as a “negotiable
    instrument” under Article 3 of Hawaiʻi’s U.C.C.).            As such, the
    original Note is self-authenticating commercial paper under HRE
    Rule 902(9).
    HRE 902(9) does not specify whether it applies to
    6     Article 3 of the U.C.C. provides that, “[w]henever this chapter creates
    a ‘presumption’ with respect to a fact, or provides that a fact is
    ‘presumed’, the trier of fact shall find the existence of the fact unless
    evidence is introduced that supports a finding of its nonexistence.” HRS §
    490:1-206.
    17
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    photocopies of commercial paper or only to original commercial
    paper.   At least one court has found that photocopies of
    commercial paper are not self-authenticating.     See United States
    v. Brandell, 
    35 M.J. 369
    , 371 (C.M.A. 1992) (holding that
    photocopies of checks are not “self-authenticating ‘commercial
    paper’ within the meaning of Mil.R.Evid. Rule 902(9),” which is
    identical to HRE Rule 902(9)).    We, however, have not addressed
    whether photocopies of commercial paper are self-authenticating
    under HRE Rule 902(9).
    HRE Rule 1003 is central to our analysis on this issue.       It
    provides: “[a] duplicate is admissible to the same extent as an
    original unless (1) a genuine question is raised as to the
    authenticity of the original, or (2) in the circumstances it
    would be unfair to admit the duplicate in lieu of the original.”
    HRE Rule 1003.
    Here, and indeed in all foreclosure cases where a mortgagee
    introduces a copy of a promissory note to establish standing, we
    conclude that it would be unfair to treat duplicates of
    promissory notes as self-authenticating under HRE Rule 902(9).
    The policy considerations that justify HRE Rule 902(9)’s
    special treatment of commercial paper do not apply in the
    context of duplicate promissory notes.     An original note is
    particularly trustworthy because it allows for the direct
    inspection of all its inscriptions.    But it is impossible to
    18
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    definitively match a copy of a given note’s frontside with a
    copy of the same note’s backside. 7          Moreover, limiting HRE Rule
    902(9) to original commercial papers makes sense given the
    mismatch between the significance of original commercial paper
    and copies thereof in everyday life: “[b]anks do not treat
    copies of checks and notes like originals,” and under the
    U.C.C., the “enforcement of a negotiable instrument by a person
    who does not possess the original instrument [is permitted] only
    under very limited circumstances.”           31 Charles Alan Wright,
    Arthur R. Miller & Victor J. Gold, Federal Practice and
    Procedure § 7143(9) (1st ed. 2000 & Supp. 2021).
    Accordingly, we hold that while original promissory notes
    are self-authenticating under HRE Rule 902(9), duplicates like
    those submitted by U.S. Bank in support of its MSJ are not self-
    authenticating and are only admissible if they are authenticated
    by extrinsic evidence.           See HRE Rule 901.
    7   As one treatise explained:
    [A] copy may not reveal all the information bearing on
    authenticity that is contained on an original. For example,
    a check that has been deposited and processed through the
    banking system has information that is contained on both its
    front and back. While both the front and back can be copied,
    often there is nothing about a copy of a given front and a
    given back that shows they match. Further, the bank imprints
    on the back of a check may not be clear on a copy.
    31 Charles Alan Wright, Arthur R. Miller & Victor J. Gold, Federal Practice
    and Procedure § 7143(9) (1st ed. 2000 & Supp. 2021).
    19
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    C.   U.S. Bank properly authenticated the copies of the Note it
    submitted in support of its MSJ
    The copies of the Note U.S. Bank submitted in support of
    its MSJ are not self-authenticating commercial paper.      They are
    still admissible, however, if there is “evidence sufficient to
    support a finding” that they are what U.S. Bank claims they are.
    See HRE Rule 901(a).   Testimony of a witness with personal
    knowledge of a document may establish the foundation necessary
    for its admission.   HRE Rule 901(b)(1).
    Salyers and Patterson’s testimony establishes an adequate
    foundation for the copies’ admission.     Both Salyers and
    Patterson declared under penalty of perjury that they had
    inspected a copy of the Note maintained by Caliber.      They both
    declared that “true and correct” copies of the Note they
    inspected were attached to their declarations.      U.S. Bank has
    thus adequately authenticated these copies of the Note.
    D.   The ICA erred in its application of the incorporated
    records doctrine
    In its Amended SDO, the ICA held that the Note was
    inadmissible because it was not authenticated by testimony from
    a witness with personal knowledge of the record-keeping systems
    of Washington Mutual or JPMorgan Chase.     Leaving aside the fact
    that the Note is not hearsay, the ICA’s holding relies on a
    conspicuous misreading of our incorporated records doctrine.
    Though hearsay is generally inadmissible, HRE Rule
    20
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    803(b)(6) establishes a hearsay exception for “records of
    regularly conducted activity.”      It provides:
    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.
    HRE Rule 803(b)(6).
    Our incorporated records doctrine clarifies the application
    of this exception to documents that were created by one entity
    but which are maintained in the records of another.          We
    introduced this rule in Fitzwater, 122 Hawaiʻi 354, 
    227 P.3d 520
    .
    In Fitzwater, we explained: “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 other indicia
    of reliability, and the requirements of HRE Rule 803(b)(6) are
    otherwise satisfied.”    
    Id.
     at 367–68, 227 P.3d at 533–34
    (emphasis added).
    We affirmed this holding in Behrendt, explaining that
    “[r]ecords received from another business and incorporated into
    the receiving business’ records may in some circumstances be
    regarded as ‘created’ by the receiving business.”          142 Hawaiʻi at
    45, 414 P.3d at 97.    The clear implication of this language is
    21
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    that when a record is treated as “created” by the receiving
    business, a person is qualified to authenticate it if the person
    has “enough familiarity with the record-keeping system of the
    business that ‘created’ the record,” i.e., the receiving or
    incorporating business.     Accordingly, a person may be qualified
    to authenticate an incorporated record even if the person lacks
    familiarity with the records or record-keeping practices of the
    entity that actually created the record.
    In Behrendt, we identified the circumstances in which it is
    appropriate to treat an incorporated record as “created” by the
    receiving business:
    Incorporated records are admissible under HRE Rule
    803(b)(6) when a custodian or qualified witness testifies
    that [1] the documents were incorporated and kept in the
    normal course of business, [2] that the incorporating
    business typically relies upon the accuracy of the contents
    of the documents, and [3] the circumstances otherwise
    indicate the trustworthiness of the document.
    142 Hawaiʻi at 45, 414 P.3d at 97.      If each of these three
    conditions is satisfied, an incorporated record is admissible
    even in the absence of testimony concerning its actual creation.
    This is because evidence that a business has incorporated and
    relied on a record created by another organization speaks
    directly to that record’s reliability.        When accompanied by
    testimony about other circumstances that also indicate the
    record’s trustworthiness, such evidence is an acceptable
    substitute for testimony concerning a record’s actual creation.
    22
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    Immediately before our discussion of the incorporated
    records doctrine in Behrendt, we addressed a slightly different
    situation: the case where a business has custody of another
    entity’s records but has not actually incorporated those records
    into its own.   In that situation, we explained, a witness need
    not be employed by the entity that created the documents to
    provide the testimony required by HRE Rule 803(b)(6).      But the
    witness does need to have “enough familiarity with the record-
    keeping system of the business that created the record to
    explain how the record was generated in the ordinary course of
    business.”   Id. at 45, 414 P.3d at 97.
    In its SDO, the ICA incorrectly applied this standard to
    Caliber’s incorporated records.    It ignored the fact that the
    records created by JPMorgan Chase were incorporated into
    Caliber’s own records and were not merely in Caliber’s custody.
    In determining whether the records incorporated from JPMorgan
    Chase were admissible under HRE Rule 803(b)(6), the ICA should
    have considered whether there was testimony from a Caliber
    custodian or witness qualified to testify about Caliber’s
    records that: (1) Caliber incorporated and kept the documents in
    the normal course of business; (2) Caliber typically relies upon
    the accuracy of the contents of the documents; and (3) the
    circumstances otherwise indicate the trustworthiness of the
    documents.   See id. at 45, 414 P.3d at 97.
    23
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    Patterson and Salyers 8 both testified that JPMorgan Chase’s
    records were incorporated into Caliber’s own and kept and
    maintained by Caliber in the ordinary course of its business.
    They both further testified that Caliber used and relied on the
    incorporated records in the regular course of its loan servicing
    business.      The first two requirements for the admission of
    incorporated records are thus satisfied.
    Salyers’ testimony does not describe any circumstances that
    otherwise indicate the trustworthiness of the documents Caliber
    incorporated from JPMorgan Chase.           But Patterson’s does.
    Patterson declared that:
    The information regarding the Loan transferred to Caliber
    from the Prior Servicer has been validated in many ways,
    including, but not limited to, going through a due
    diligence phase, review of hard copy documents, and review
    of the payment history and accounting of other fees, costs,
    and expenses charged to the Loan by Prior Servicer.
    Though scant, this testimony establishes circumstances
    indicating the trustworthiness of Caliber’s incorporated
    records.      It is evidence that before incorporating JPMorgan
    Chase’s documents, Caliber reviewed hard copies of the
    8     Both Patterson and Salyers are knowledgeable about Caliber’s record
    keeping system and can describe Caliber’s incorporation of JPMorgan Chase’s
    documents. They are thus “other qualified witnesses” who can authenticate
    Caliber’s records of regularly conducted activity under HRE Rule 803(b)(6).
    See Fitzwater, 122 Hawai‘i at 366, 227 P.3d at 532 (2010) (“The phrase ‘other
    qualified witness’ is given a very broad interpretation. The witness need
    only have enough familiarity with the record-keeping system of the business
    in question to explain how the record came into existence in the ordinary
    course of business.” (cleaned up))
    24
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    documents, engaged in a “due diligence” process, and reviewed
    the payment history and accounting associated with the loan.
    JPMorgan Chase’s documents were not, in other words,
    uncritically incorporated into Caliber’s own.           They were vetted
    by Caliber.      This pre-incorporation vetting, however nebulously
    described by Patterson’s testimony, is a circumstance that
    indicates the trustworthiness of the documents.
    Patterson’s testimony thus satisfies each of the three
    criteria in Behrendt.       The ICA should have held that Caliber’s
    incorporated records, as authenticated by Salyers 9 and
    Patterson’s testimony, were admissible under HRE Rule 803(b)(6).
    E.      The evidence, taken together, shows U.S. Bank had standing
    at the time it filed suit
    Having addressed the admissibility of copies of the Note
    and Caliber’s incorporated records, we are left with an
    evidentiary issue: has U.S. Bank established its standing to sue
    Verhagen?
    In Reyes-Toledo, we held that a foreclosing plaintiff must
    establish its standing to bring a lawsuit at the commencement of
    the proceeding, not merely at the summary judgment stage.             139
    9 Salyers’ testimony contributes to the authentication of records Caliber
    incorporated from JPMorgan Chase by describing: (1) Caliber’s incorporation
    of those records in the normal course of its business; and (2) Caliber’s
    reliance on those records. Salyers’ testimony standing alone, however, would
    be insufficient to establish that Caliber’s incorporated records are
    admissible under HRE Rule 803(b)(6). This is because Salyers’ testimony does
    not describe any other circumstances, beyond mere incorporation and reliance,
    that indicate the incorporated records’ trustworthiness.
    25
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    Hawaiʻi 361, 369, 
    390 P.3d 1248
    , 1256.       In the mortgage
    foreclosure context, we noted, the requirement of standing
    overlaps with a plaintiff’s burden of proving its entitlement to
    enforce the subject promissory note.       Id. at 367, 390 P.3d at
    1254.
    Whether a party is entitled to enforce a promissory note is
    determined by application of HRS § 490:3-301, which provides:
    “Person entitled to enforce” an instrument means (i) the
    holder of the instrument, (ii) a nonholder in possession of
    the instrument who has the rights of a holder, or (iii) a
    person not in possession of the instrument who is entitled
    to enforce the instrument pursuant to section 490:3-309 or
    490:3-418(d). A person may be a person entitled to enforce
    the instrument even though the person is not the owner of
    the instrument or is in wrongful possession of the
    instrument.
    U.S. Bank maintains that, at the time it initiated suit, it
    was entitled to enforce the Note because it held the indorsed-
    in-blank Note.   U.S. Bank supports this claim with the following
    evidence: (1) Jennifer Martin’s February 9, 2016, certification
    certifying, under penalty of perjury, that at 12:51 p.m. on
    February 9, 2016, she personally verified Caliber’s possession
    of the original Note and attaching an indorsed-in-blank copy of
    the Note; (2) a bailee letter dated December 9, 2016,
    establishing that Caliber sent the Note to U.S. Bank’s counsel
    at that time; and (3) Patterson’s sworn testimony that, based on
    her review of Caliber’s records, and her knowledge of how those
    records are made and maintained in the ordinary course of
    business, “Plaintiff, or its agent on Plaintiff’s behalf, was in
    26
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    possession of the original wet-ink, indorsed in blank Note when
    the [Verhagen] foreclosure action was commenced on March 23,
    2016, and since.”
    The ICA held that this evidence was insufficient to
    establish U.S. Bank’s standing on the day it filed suit since
    “the Certification does not certify possession of the original
    Note by U.S. Bank at the time the Verified Complaint was filed,
    and the Attorney Bailee Letter was executed approximately nine
    months after U.S. Bank commenced the foreclosure action.”        As
    U.S. Bank observes, the implication of this holding is that only
    evidence gathered on the day the complaint was filed would be
    sufficient to establish a foreclosing plaintiff possessed the
    subject promissory note at the time of filing.      This is not, and
    should not be, the standard.
    U.S. Bank’s briefing raises a compelling question: if the
    Note wasn’t in Caliber’s possession between February 9, 2016,
    and December 9th of the same year, where did it go?      Here,
    Patterson testified that based on her knowledge of Caliber’s
    records and record-keeping practices, U.S. Bank had actual or
    constructive possession of the Note at the time it filed the
    complaint.   Such testimony, standing alone and uncorroborated by
    documentary evidence, would be insufficient to establish U.S.
    Bank possessed the Note when it filed the complaint.      Here,
    however, there is admissible documentary evidence showing that
    27
    *** FOR PUBLICATION IN WEST’S HAWAI‘I REPORTS AND PACIFIC REPORTER ***
    U.S. Bank possessed the Note both a mere six weeks before the
    filing of the complaint and at the time of summary judgment.
    Collectively, the evidence presented by U.S. Bank thus
    establishes the bank’s possession of the Note on the day the
    complaint was filed. 10
    Of course, a defendant may counter this inference of
    possession at the time of filing with evidence setting forth
    “specific facts showing that there is a genuine issue” as to
    whether the plaintiff actually possessed the subject note at the
    time it filed suit.      See Hawaiʻi R. Civ. Pro. Rule 56(e).         But
    that has not happened here.       Verhagen has not offered any
    evidence undermining Patterson’s testimony that Caliber
    possessed the Note on March 23, 2016.          And he has not offered
    any evidence that the Note left U.S. Bank’s custody in the ten
    months between Martin’s certification and the bailee letter.
    Nor has he offered any evidence contradicting or calling into
    question Martin’s certification.          Accordingly, U.S. Bank’s
    evidence establishes that the bank possessed the Note, indorsed
    in blank, 11 at the time it initiated suit.         The bank thus has
    10    We reach this conclusion in part because Martin’s certification pre-
    dates the filing of the complaint by less than two months. An older
    certification, and a correspondingly larger gap between the certification’s
    date and that of the complaint, would leave more room for a “genuine issue”
    as to whether U.S. Bank actually possessed the Note when it sued Verhagen.
    11    Importantly, where, as here, standing is based on possession of a Note
    indorsed in blank, the admissible evidence must also show that the blank
    indorsement occurred before the initiation of the suit. See HSBC Bank USA,
    Nat’l Ass’n v. Moore, CAAP-XX-XXXXXXX, 
    2018 WL 1887197
     (Haw. App. Apr. 20,
    28
    *** FOR PUBLICATION IN WEST’S HAWAI‘I REPORTS AND PACIFIC REPORTER ***
    standing to foreclose against Verhagen under Reyes-Toledo.
    The evidence that the Note existed, that Verhagen was in
    default under its terms, and that Verhagen received the
    necessary notice of his default is undisputed.           There is no
    genuine issue as to the Note’s existence, Verhagen’s default
    under its terms, or Verhagen’s receipt of the necessary notice.
    U.S. Bank is entitled to summary judgment and the ICA erred in
    reversing the circuit court’s grant of summary judgment to U.S.
    Bank.
    F.    Verhagen waived his objections to U.S. Bank’s motion to
    ratify
    “Issues not properly raised on appeal will be deemed to be
    waived.”    Pele Defense Fund v. Paty, 
    73 Haw. 578
    , 613, 
    837 P.2d 1247
    , 1268 (1992).      Verhagen had an opportunity to oppose U.S.
    Bank’s motion to ratify but he did not do so.           As such, he has
    waived his objections to that motion.         Regardless, the ICA did
    not err in considering whether the Patterson declaration was
    admissible or sufficient to establish U.S. Bank’s entitlement to
    summary judgment. 12
    2018). Here, this requirement is satisfied because the copy of the Note
    attached to Martin’s certification and authenticated by Patterson’s testimony
    is indorsed in blank.
    12Even when a motion for summary judgment is wholly unopposed, the motion
    should only be granted when the moving party submits facts establishing there
    are no genuine issues of material fact and that it is entitled to summary
    judgment as a matter of law. See Arakaki v. SCD-Olanani Corp., 110 Hawai‘i 1,
    7-8, 
    129 P.3d 504
    , 510-11 (2006). As the ICA explained in its Amended SDO,
    its evaluation of whether or not U.S. Bank has met its burden on summary
    judgment is not constrained by Verhagen’s failure to object to certain
    29
    *** FOR PUBLICATION IN WEST’S HAWAI‘I REPORTS AND PACIFIC REPORTER ***
    III. CONCLUSION
    We vacate the ICA’s October 28, 2020, judgment on appeal
    and October 2, 2020, amended summary disposition order and
    affirm the circuit court’s October 8, 2018, amended judgment and
    amended order granting plaintiff’s motion for summary judgment
    and for interlocutory decree of foreclosure.
    Paul Alston,                                /s/ Mark E. Recktenwald
    (David B. Rosen, David E.
    McAllister, Justin S. Moyer,                /s/ Paula A. Nakayama
    and Madisson L. Heinze,
    /s/ Sabrina S. McKenna
    on the briefs)
    for petitioner                              /s/ Michael D. Wilson
    Keith M. Kiuchi,                            /s/ Todd W. Eddins
    for respondent
    Patricia J. McHenry,
    for Amicus Curiae
    Federal Housing Finance Agency
    evidence at the circuit court level.
    30
    

Document Info

Docket Number: SCWC-17-0000746

Filed Date: 6/21/2021

Precedential Status: Precedential

Modified Date: 6/21/2021