Wisconsin Court of Appeals Decision Upholds Admissibility of Financial Institution’s Business Records; Confirms Note and Mortgage Are Not Hearsay
Financial Institutions Law Update 07/03/13 David P. Muth
Recently, Wisconsin courts have placed rigorous standards on the admissibility of certain bank records. The "business records" exception to the hearsay rule, Wisconsin Stat. § 908.03(6), allows into evidence documents prepared in the course of regularly conducted activity even if the documents are otherwise excluded as hearsay. In Palisades Collection LLC v. Kalal, 2010 WI App 38, 324 Wis. 2d 180, 781 N.W.2d 503, the Court of Appeals narrowly interpreted the business records exception. A collection agency, Palisades, took assignment of a credit card debt from Chase Manhattan Bank and then sued to collect on the debt. To prove the outstanding balance, Palisades submitted an affidavit from its record custodian that attached the monthly statements from Chase. The Court of Appeals held that Palisades' record custodian lacked personal knowledge regarding Chase's business records. In order to introduce hearsay documents under the business records exclusion, the court held that "the witness must have personal knowledge of how the records were made so that the witness is qualified to testify that they were made 'at or near the time [of the event] by, or from information transmitted by, a person with knowledge' and 'in the course of a regularly conducted activity.'"
The Palisades decision placed Wisconsin in the minority position as to the admission of business records generated by a former lender or its servicer. The scope of the decision resulted in a flood of litigation - particularly in the foreclosure arena - over the admissibility of records, and created confusion at the trial court level as to the level of foundation and personal knowledge required for admissibility of information.
Quarles & Brady has been involved in litigation seeking to clarify these admissibility issues. With our recent victory in Bank of America, N.A. v. Neis, 2012AP1994 (Wis. Ct. App. June 20, 2013) (Recommended for publication), there is some potential clarity for financial institutions, borrowers, and the trial courts. In Neis, Bank of America sought a foreclosure judgment and submitted an affidavit from its record custodian that attached the note and mortgage, payment history, acceleration notice, and account summary. The borrower challenged this affidavit under Palisades, claiming that the custodian lacked the required personal knowledge of the documents. The trial court and appellate court both disagreed, finding that the custodian's affidavit and subsequent deposition testimony adequately detailed the custodian's knowledge of Bank of America's systems and procedures for preparing these documents. And unlike in Palisades, the records originated within Bank of America, not an outside lender or servicer.
Neis provides a binding decision for financial institutions on the following key points:
- Neis clarifies that "contracts, including promissory notes, are not hearsay when they are offered only for their legal effect, not 'to prove the truth of the matter asserted.'" This means that courts and parties can introduce promissory notes into evidence without satisfying the stringent requirements of Palisades for business records. It bears noting that, for authentication purposes, the original note and certified copies of the mortgage and any assignments are recommended.
- Neis reinforces the principle that a witness introducing business records must have personal knowledge of how the records were prepared, but there is no requirement that the witness either personally prepared the records or was present when the records were prepared.
- Neis also provides a roadmap for future litigants on how to introduce business records and for trial courts to accept such records into evidence. The decision quotes extensively from the custodian's affidavit. Provided that a similarly qualified record custodian can serve as the affiant, the affidavit quoted in Neis provides a convenient how-to guide for introducing a financial institution's business records.
Final Thoughts: Palisades remains the law in Wisconsin. If you are purchasing notes originated in Wisconsin, it is suggested that, to the extent possible, representations and warranties be included that require the seller to produce individual(s) with the requisite personal knowledge to authenticate the former business records (usually the prior payment history) for future litigation. Failure to do so may result in an inability to introduce adequate information for judgment in the event of a default.
For more information, please contact David Muth at (414) 277-5621 / [email protected] or your Quarles & Brady attorney.