Introduction

In the landmark case of U.S. Bank Trust, N.A. v. Patrick Lowell Verhagen, (489 P.3d 419, Supreme Court of the State of Hawai'i, 2021), the court addressed critical issues surrounding the admissibility of promissory notes in foreclosure proceedings. The dispute arose when U.S. Bank sought to foreclose on real estate owned by Patrick Verhagen, challenging the evidentiary foundations of the foreclosure action. Central to the case were questions about whether promissory notes qualify as hearsay, the self-authentication of note copies under Hawai'i Rules of Evidence (HRE), and the sufficiency of business records in establishing the bank's standing to foreclose.

Summary of the Judgment

The Supreme Court of Hawai'i ultimately ruled in favor of U.S. Bank Trust, affirming the circuit court's decision to grant summary judgment in the foreclosure action against Verhagen. The court concluded that:

• Promissory notes are not considered hearsay.
• Copies of promissory notes are not self-authenticating under HRE Rule 902(9).
• The business records exception, particularly the incorporated records doctrine, can render business records admissible even without direct testimony about their creation.
• U.S. Bank sufficiently demonstrated possession of the original note at the time of filing the foreclosure complaint, thereby establishing its standing.

Analysis

Precedents Cited

The court meticulously analyzed several precedents that shaped its decision:

• Reyes-Toledo v. Bank of America, N.A. (139 Hawai'i 361, 390 P.3d 1248, 2017) - Established that foreclosing plaintiffs must prove entitlement to enforce the promissory note at the commencement of proceedings.
• Mattos (140 Hawai'i 26, 398 P.3d 615, 2017) - Clarified that employees of loan servicers must establish familiarity with the lender's record-keeping to authenticate records under the business records exception.
• Behrendt (142 Hawai'i 45, 414 P.3d 97, 2019) - Expanded on the incorporated records doctrine, allowing records created by one entity and maintained by another to be admissible if certain conditions are met.
• STATE v. FITZWATER (122 Hawai'i 354, 227 P.3d 520, 2010) - Introduced the incorporated records doctrine, emphasizing the necessity of trustworthiness and business reliance on incorporated records.

Legal Reasoning

The court's reasoning unfolded through several key determinations:

• Promissory Notes as Non-Hearsay: The court identified promissory notes as written contracts with independent legal significance, categorically excluding them from hearsay definitions. This meant that such notes did not require the hearsay exceptions for admissibility.
• Authentication of Copies: While the original promissory note is self-authenticating under HRE Rule 902(9), the court held that copies do not automatically receive this status. Instead, they require authentication through extrinsic evidence, such as declarations from knowledgeable employees.
• Incorporated Records Doctrine: The court applied the incorporated records doctrine, determining that business records maintained by loan servicers and incorporating records from prior servicers could be admissible. This was contingent upon sufficient testimony establishing the incorporation, reliance, and trustworthiness of these records.
• Establishing Standing: U.S. Bank successfully demonstrated possession of the original indorsed-in-blank promissory note at the time of filing the foreclosure action. This was reinforced by timely certifications and declarations, meeting the evidentiary burden outlined in Reyes-Toledo.

Impact

This judgment has significant implications for future foreclosure proceedings and the handling of promissory notes:

• Clarification on Hearsay: Affirming that promissory notes are not hearsay provides clearer guidelines for their admissibility in court, streamlining foreclosure processes.
• Authentication Standards: By distinguishing between original documents and copies regarding self-authentication, courts will require more rigorous authentication processes for duplicates, potentially affecting how lenders present evidence.
• Reliance on Incorporated Records: The expanded understanding of the incorporated records doctrine allows for more flexibility in admitting business records, provided that trustworthiness and proper incorporation are demonstrated.
• Standing Requirements: The decision underscores the necessity for mortgagees to maintain clear and authenticated possession of promissory notes to establish standing, thereby influencing record-keeping practices among financial institutions.

Complex Concepts Simplified

Hearsay

Hearsay refers to an out-of-court statement offered to prove the truth of the matter asserted. It is generally inadmissible unless an exception applies. In this case, the court determined that promissory notes do not qualify as hearsay.

Self-Authentication

Self-Authentication means that certain documents are considered authentic without additional evidence. Under HRE Rule 902(9), original commercial papers like promissory notes are self-authenticating, but copies require further authentication.

Business Records Exception

The Business Records Exception allows records of regularly conducted business activities to be admissible even if they constitute hearsay. The incorporated records doctrine expands this by permitting records created by one entity and maintained by another to be admitted under specific conditions.

Standing

Standing is the legal right to bring a lawsuit. In foreclosure cases, the lender must demonstrate entitlement to enforce the promissory note, typically by proving possession of the original note at the time of filing the suit.

Conclusion

The Supreme Court of Hawai'i's decision in U.S. Bank Trust v. Verhagen provides pivotal clarifications in foreclosure law, particularly regarding the non-hearsay status of promissory notes and the stringent requirements for authenticating document copies. By affirming the business records exception through the incorporated records doctrine, the court has streamlined the admissibility of necessary documentation while ensuring that lenders maintain rigorous standards to establish standing. This judgment not only reinforces the procedural integrity of foreclosure actions but also sets a clear precedent for the handling and authentication of financial documents in future legal proceedings.