The Second Department “Clarifies” Procedural, Substantive, and Evidentiary Law in Foreclosure CasesPrint Article
- Posted on: Apr 3 2019
This Blog has featured numerous treatments of the procedural, substantive and evidentiary law in residential mortgage foreclosure actions. [HERE], [HERE], [HERE], [HERE], [HERE], [HERE], [HERE], [HERE], [HERE], [HERE], [HERE], and [HERE]. The Supreme Court of the State of New York, Appellate Division, Second Department, recently issued a decision in Bank of New York Mellon v. Gordon (March 27, 2019), addressing and clarifying numerous issues frequently litigated in mortgage foreclosure actions – many of which are applicable to every litigation. The Court believed that a primer addressing such issues was necessary because the “challenges presented by [the] dramatic increase in [judicial foreclosure] litigation have been compounded by poor record-keeping practices, a changing regulatory environment, inordinate delays, and inadequate legal representation.” As a result of the “consistent and repeated confusion about some of the most fundamental aspects of the procedural, substantive, and evidentiary, law … routinely applied in a foreclosure context,” the Court thought it “appropriate to collect and reiterate some of these foundational principles in the hope that such clarity will eliminate many of the disputes that make up an ever-increasing proportion of the trial-level dockets.”
In Gordon, lender commenced a mortgage foreclosure action and borrower, Gordon, answered and, inter alia, asserted 55 affirmative defenses and 5 counterclaims against lender (“MERS”). Supreme Court granted lender’s motion for summary judgment, appointed a referee to compute and dismissed borrower’s defenses and counterclaims and, inter alia, denied borrower’s cross-motion to dismiss the complaint and to compel disclosure. On Gordon’s appeal, the Court modified Supreme Court’s order.
The Court began by analyzing the general standards for the granting of summary judgment motions. In the context of that discussion, the Court addressed certain evidentiary issues. Thus, the Court stated that “a motion for summary judgment will not be granted if it depends on proof that would be inadmissible at the trial under some exclusionary rule of evidence.” (Citations, internal quotation marks and brackets omitted.) The Court continued by noting that “[o]ut-of-court statements offered for the truth of the matters they assert are hearsay and may be received in evidence only if they fall within one of the recognized exceptions to the hearsay rule, and then only if the proponent demonstrates that the evidence is reliable.” (Citations and internal quotation marks omitted.) Finally, the Court cautioned that the admissibility of evidence should only be examined if “the nonmoving party has specifically raised that issue in its opposition to the motion” … because “inadmissible hearsay admitted without objection may be considered and given such probative value as, under the circumstances, it may possess.” (Citations and internal quotation marks omitted.)
An issue that frequently is raised in mortgage foreclosure actions is whether the plaintiff has standing. The Appellate Court in Gordon affirmed Supreme Court’s finding that BONY had standing to bring the foreclosure action. The Court explained that when “standing is not an essential element of the cause of action, under CPLR 3018(b) a defendant must affirmatively plead lack of standing as an affirmative defense in the answer in order to properly raise the issue in its responsive pleading.” (Citations and quotation marks omitted.) When standing is raised by a defendant in a mortgage foreclosure action, as was the case in Gordon, “a plaintiff must prove its standing in order to be entitled to relief against the defendant.” (Citations omitted.) Because BONY demonstrated that it was “in physical possession of the note, which had been endorsed in blank, at the time the action was commenced,” standing was established.
Standing was established through business records annexed to the affidavit of an employee of BONY’s law firm. The Court rejected Gordon’s assertion that the employee’s affidavit failed to lay a proper foundation for the admissibility of the records.
Without a proper foundation, “[r]ecords made in the regular course of business are hearsay when offered for the truth of their contents.” (Citations omitted.) CPLR 4518(a), the statutory business records rule, provides that a business record “shall be admissible in evidence in proof of the act, transaction, occurrence or event, if the judge finds that it was made in the regular course of any business and that it was the regular course of such business to make it, at the time of the act, transaction, occurrence or event, or within a reasonable time thereafter.” Notwithstanding the statutory requirements of CPLR 4518(a), “the Court of Appeals has held that unless some other hearsay exception is available, admission may only be granted where it is demonstrated that the informant has personal knowledge of the act, event or condition and he or she is under a business duty to report it to the entrant.” (Citations, internal quotation marks and brackets omitted.) The Court also noted that it is the business record itself, and not the foundational affidavit by which same is submitted, that “serves as proof of the matter asserted.” Thus, the underlying records must be introduced before “evidence of the contents of the records is admissible.” (Citations, internal quotation marks and brackets omitted.) Put another way, without the introduction of the underlying business records, “a witness’s testimony as to the contents of the records is inadmissible hearsay.” (Citations and internal quotation marks omitted.) Against this backdrop, the Court found that the affidavit of the law-firm’s employee sufficed to establish standing.
While Gordon argued that the employee’s affidavit was insufficient because it failed to demonstrate familiarity with the record keeping practices of the prior assignors along the way, the Court did not agree that that such knowledge was relevant on the standing issue. The employee, the Gordon Court found, sufficiently laid a foundation “for a business record maintained by her employer.” Thus, in her affidavit the employee explained, among other things, that her group is responsible, in the ordinary course of business, for receiving and electronically cataloguing original loan documents and that it was “the normal course of [her employer’s] business to store [the relevant records] as computer entries.” The copies of the records attached to the motion were compared to the original and were, according to the employee, “true and accurate.”
The Court, however, determined that the Supreme Court should not have granted summary judgment to BONY because it failed to meet its “burden of demonstrating that [Gordon] defaulted in the repayment of the subject note.” The Court reiterated that a lender in a foreclosure action meets its prima facie burden by producing a copy of the mortgage, the unpaid note, and evidence of default and that “[a] plaintiff may establish a payment default by an admission made in response to a notice to admit, by an affidavit from a person having personal knowledge of the facts, or by other evidence in admissible form.” (Citations, internal quotation marks and brackets omitted.)
BONY attempted to lay a foundation for the business records purporting to demonstrate Gordon’s payment default through the affidavit of an employee of the lender’s loan servicer. However, the affidavit merely indicated the affiant’s familiarity with the servicer’s business practices and summarized the business records allegedly reviewed. None of the servicer’s business records were attached to the affidavit. In determining that BONY’s submission was insufficient to establish Gordon’s payment default, the Court stated, “to the extent that [the servicer’s employee’s] purported knowledge of Gordon’s default was based upon her review of unidentified business records created and maintained by [the servicer], her affidavit constituted inadmissible hearsay and lacked probative value.” Further, the only document annexed to the servicer’s employee to “prove” Gordon’s default was created by the original lender and the employee’s affidavit does not indicate that she is familiar with the original lender’s record keeping practices. Because the employee did not have “personal knowledge of the maker’s business practices and procedures,” a proper foundation for the admissibility of the record was not laid. (Citation omitted, emphasis in original.) That a business record created by the original lender does not mean that the loan servicer’s employee was incompetent to lay a proper foundation to the document’s admissibility. “…[S]uch records may be admitted into evidence if the recipient can establish personal knowledge of the maker’s business practices and procedures, or establish that the records provided by the maker were incorporated into the recipient’s own records and routinely relied upon by the recipient in its own business.” The Gordon Court found that the affidavit of the servicer’s employee was inadequate.