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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 *** FOR PUBLICATION IN WEST’S HAWAI‘I REPORTS AND PACIFIC REPORTER ***
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
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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
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
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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,
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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.
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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
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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).
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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
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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
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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.
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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.
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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))
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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.
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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
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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
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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,
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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
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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.