CHRISTOPHER LITTERIO
Evidentiary technicality
Banks that acquire loans through a merger or simply purchase them from the secondary market should have a much easier time collecting on a defaulted loan originated by another institution thanks to the results of a recent Massachusetts court case.
Earlier this month, the Massachusetts Supreme Judicial Court ruled that when a bank is trying to collect on a defaulted loan not originated by the bank, business records of the loan are enough evidence. The case, Beal Bank v. Eurich, gives banks the opportunity to show business records of the loan instead of calling in a witness from the former bank.
Christopher Litterio, attorney for Texas-based Beal Bank at the law firm Ruberto, Israel & Weiner in Boston, said that prior to the court’s decision, the law in Massachusetts had been that if a bank wanted to collect on a defaulted loan which that bank had not originated, it would have to produce a witness from each bank that previously owned or serviced the loan.
Litterio said the particular loan in the case involving Beal Bank was originated in the 1980s.
“We could never find someone [from the previous bank],” Litterio said, adding that cases can easily be lost by that type of evidentiary technicality.
‘A Huge Win’
In Beal Bank v. Eurich, the defendant, Richard R. Eurich, executed and delivered a five-year promissory note for $151,000 in July 1987 to Home Owners Federal Savings and Loan Association. The note was secured by a first mortgage on four condominium units in Springfield. In June 1992, the note was assigned to Bankers Trust Company of California as trustee. Four years later, Bankers assigned the note to the bank and at that time, the full principal of the note remained outstanding and no interest payments had been made after August 1992.
Electronic Payment Services, which services approximately 4,000 loans for Beal Bank, was hired by the bank to service Eurich’s loan. In November 1996, EPS recorded that Eurich made one interest payment of $733.63 and no other payments were made.
In June 1997, Beal Bank sent a notice of intent to foreclose and notice of acceleration of the note. At the foreclosure sale that following September, the bank was the only bidder and paid $18,000 for the four condo units. Subsequently, the bank brought action to recover the deficiency from the defaulted loan.
In order to prove the amount to the Appeals Court, Beal Bank provided two computer printouts dated Sept. 12, 1997. Despite an objection from the defendant, the judge admitted both documents because EPS was required to accurately report information and therefore were considered legitimate business records. The defendant argued that the printouts were records of EPS and the bank did not provide testimony concerning the business practices of EPS in maintaining records. The bank’s loan default manager did testify that EPS serviced the defendant’s note on the bank’s behalf, but the defendant argued the manager was not the preparer of the documents and did not testify on how the records were maintained or generated. However, the SJC decided that bank was not simply receiving information from another business. Because EPS was the bank’s servicing agent, its duty is to accurately report information to the bank and the bank regularly accesses and relies on the information. The defendant also argued that printouts could not be used as evidence because the bank did not establish the loan balance at the time it was acquired from its predecessors and the bank did not offer an explanation on how the figures in the business records were derived. The SJC agreed with the Appeals Court judge that the two business records were made in good faith and part of the regular course of business.
“[We recognize that] [t]he problem of proving debt that has been assigned several times is of great important to mortgage lenders and financial institutions,” the SJC stated. “Given the common practice of banks buying and selling loans, we conclude that it is normal business practice to maintain accurate business records regarding such loans and to provide them to those acquiring the loan. Therefore, the bank need not provide testimony from a witness with personal knowledge regarding the maintenance of the predecessors’ business records. The bank’s reliance on this type of record keeping by others renders the records the equivalent of the bank’s own records. To hold otherwise would severely impair the ability of assignees of debt to collect the debt due because the assignee’s business records of the debt are necessarily premised on the payment records of its predecessors.”
Litterio said the Beal Bank case was the first to clarify that issue, but he is convinced that similar types of arguments are made frequently in court.
“I think there are a lot of cases going on like this in the court system every day,” Litterio said. “It’s a huge win for the banking industry.”
Had the decision been different, Litterio said banks trying to collect on defaulted loans could have lost millions of dollars.
“Every bank [with defaulted loans] could be stiffed for millions and millions of dollars,” Litterio said.
In the past, he noted, courts were stressing that witnesses had to be brought in to vouch for the validity of such documents. The new decision will set an example.
“This sends a message to the trial courts,” Litterio said.
Not only is the decision good for the banks, but Litterio considers it a windfall for the consumer. If banks had to write off huge losses, he said, credit would be less available to borrowers.
Others in the business of purchasing loans also applaud the recent SJC decision. John Keough, principal and general counsel to Boston-based New England Phoenix Co., which purchases distressed commercial debt, followed the Beal Bank case from the beginning. He said an important aspect of the case was the rule involving business records.
“It brought the rule into conformity with the modern marketplace,” Keough said. “There had been changes in the marketplace.”
The trend, he said, is for banks to have smaller in-house loan servicing departments and therefore more banks are selling off loans that are not performing.
Loan purchasers would have to find witnesses to enforce the debt in court and Keough said that could stretch back five organizations, especially in today’s industry where mergers and acquisitions are so commonplace.
“It was a troubling trend,” he noted.
Keough agreed that requiring banks to bring in a witness from every loan servicer would have resulted in banks losing significant amounts of money.
“That would render most loans in the state unenforceable,” Keough said.
Keough said in scenarios where New England Phoenix Co. was looking to collect on a defaulted loan, the possibility of having to bring a witness into court was part of the negotiations.
“It was certainly an issue that was raised,” Keough said.
John Wortmann, partner at Boston-based law firm Kirkpatrick & Lockhart Nicholson Graham, said the court decision also serves as a reminder to banks that when buying bulk loans they should look into the loan documents and the circumstances surrounding a loan. Also, he said, banks should force the seller to document that the loans are real.
“You don’t want to have to rely on this case [in the future],” Wortmann said.
However, Keough said the SJC is an important court and expects the recent decision to hold weight in other court decisions.
