Wednesday, July 17, 2013

Will the Real Creditor Please Stand Up?

The big issue confronting litigators representing homeowners in foreclosures and other related litigation matters, is that you can't get any credible factual information from a credible competent witness with personal knowledge of the loan or personal knowledge that can establish a foundation for the business records exception to the hearsay rule.  Actually all of the legal issues examined by this blog are intertwined. It starts off as an inquiry into the voir dire  or cross examination of a witness who is proffered by the attorney for the bank in preparation for laying the foundation for the introduction of documents into the court record as evidence. But the closer you look the more you end up also including jurisdictional issues, standing, and whether the necessary and indispensable parties to the action are present in court or even know that the court proceeding is in process.
 My conclusion is that if the judge is not open to a direct argument regarding jurisdiction and standing then you can reopen that same issue by pointing out the reason why it is important in  your case. Starting off with jurisdiction and standing sounds like you are trying to get out of the legitimate debt with a legal gimmick. If you really want traction, you must present your argument and evidence in a way that shows the judge that the issue is not whether the borrower should be off the hook for the loan, but whether the foreclosing party has any interest in the loan. I suggest working backwards from the foreclosure auction. Florida statutes are pretty clear. And so other statutes of other states. The court can order the auction to occur but only an actual creditor (on the loan that is the subject of the dispute) can submit a credit bid in lieu of cash.
 The unfortunate tendency of judges sitting on the bench to treat the business records exception as the rule can only be offset by demonstrating in a clear and convincing manner that the rule is that hearsay evidence is not admissible. The exception to the rule might be business records but only if they are cloaked in a presumption of credibility. The general use of business records as an exception to the hearsay rule is applied when the business records sought to be introduced are from the records custodian of an independent third-party who has no interest in the outcome of the case. Florida statutes allow for introduction of business records without the records custodian but only under restrictive circumstances.
The point is always to use evidence that has the highest degree of credibility so that the judge can make an informed decision.
I would argue that the business records of a litigant should never be used as an exception to the hearsay rule even if the judge thinks that it is convenient to do so. If a lender has a legitimate claim they can certainly ask for a stipulation from the borrower as to the legitimacy of documents, but if the borrower refuses I see no reason why the lender should be exempted from the requirement that would be imposed upon the borrower if the borrower was attempting to introduce documents as business records and an exception to the hearsay rule.
 In all the cases that I have reviewed I have yet to see testimony from a witness who actually knew anything about the loan or the documents. Why not?  if the foreclosing party actually was a legitimate party who had an interest in the loan or who had the authority to enforce the loan then they would easily have access to actual records custodians who had actual original records who could also testify as to the way the records were received and maintained and how the records were secured ---  which is all about credibility of the evidence again because if the records were accessible by a large group of people than the possibility of the records being amended, altered, fabricated, added, removed, etc.  is exponentially increased.
 The court might be correct in a technical sense that many different types of parties could initiate a foreclosure proceeding without possession or ownership of the note. You can arrive at this conclusion using the Uniform Commercial Code or common law. That is all on the contract side of the legal argument. When you get to the property law side of the legal argument, you find yourself in the position of a shadow boxer and losing by sheer exhaustion.
The creditor is clearly the party who owns 100% of the account receivable (whether you want to refer to it as a bond receivable or a note receivable is another story). The creditor is clearly the party who would lose money but for obtaining legal redress from the court. And that is only the creditor who has the right to make a credit bid at the foreclosure auction in lieu of bidding with cash, which is what everyone else has to do.
 So you end up with the court denying your motion to dismiss or motion for temporary injunction if it is based solely on standing, possession of the note or status of the holder or holder in due course. But what you don't have is the creditor identified nor the amount of the account receivable quantified as to that creditor as shown on the books and records of the creditor, which would include all payments and disbursements to or from all sources. The banks have thus far been successful in directing the attention of the court to solely the accounts of the sub servicer as though that was the account receivable of the creditor. It isn't. Just look at the bond and the securitization documents and you will see that the amounts accounted for by the sub servicer do not include any categories that are in the amounts to be accounted for in the books and records of the actual creditor(s).
 This leads to the absurd situation in which the court orders the foreclosure to go forward without specifying a creditor or an amount due (unless the court has approved discovery into the accounts receivable of the actual creditor, and taken evidence of same into consideration for the entry of the final judgment). This could lead to someone else buying the property for cash (and very little cash at that). In effect the judgment of the court will be to strip the creditor of the supposedly secured interest in the collateral (the property).
 It gets even more crazy when you consider what might happen next. The creditor now prevented from seizing the collateral by virtue of the era of the trial court, sues the borrower for the money due. But because of the prior action the borrower will defend using the doctrine of collateral estoppel among other things. If the borrower prevails on the issue of collateral estoppel, the court will have succeeded in first stripping the creditor of lien rights and then blocking the creditor from collecting on the legitimate debt (if any) upon which the court relied when it granted standing to a foreclosing party that was not a creditor.
 That analysis leads us inevitably to the issue of whether the real creditor as defined above is a necessary and indispensable party to the action. I can see very little to argue for the proposition that the creditor is anything but a necessary and indispensable party. And once you get to that point, why is it necessary to have before closing party who is not a creditor? So whether you call it standing or just common sense it seems impossible to analyze this issue without coming to the conclusion that in some manner, shape or form the creditor must be brought into the courtroom, or at least must be given notice that is proven in court, and that the books and records of the creditor must be introduced in the absence of a stipulation from the borrower as to the amount due.
 The books and records of the creditor could obviously be manipulated, fabricated, changed and falsified and the creditor would have an obvious reason for doing so. Therefore, the business records exception to the hearsay rule should never be applied to a litigant with an interest in the outcome of the case. They have both motive and opportunity to change the records to suit themselves.
And they do not need to use the business records exception in order to establish the unpaid debt because they have actual live witnesses with actual personal knowledge of various aspects of the loan transaction, credits and debits to the account, and activity between the creditor or the creditor's agents with respect to receipt and disbursement of insurance, credit default swap proceeds, investments by investors, and other matters that are addressed in the bond receivable but never mentioned specifically by the note receivable (which is why I question whether or not a contract was ever completed).


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