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Nationstar Mortgage LLC v. Kanahele

Supreme Court of Hawai‘i

May 1, 2019

NATIONSTAR MORTGAGE LLC, Respondent/Plaintiff-Appellee,
v.
DANIEL KALEOALOHA KANAHELE and THE ESTATE OF MARCUS C. KANAHELE et al., Petitioner/Defendant-Appellant.

          CERTIORARI TO THE INTERMEDIATE COURT OF APPEALS (CAAP-16-0000319; CIV. NO. 14-1-0584(2))

          Lance D. Collins (Bianca K. Isaki with him on the briefs) for petitioner.

          David A. Nakashima for respondent.

          RECKTENWALD, C.J., NAKAYAMA, McKENNA, POLLACK, AND WILSON, JJ.

          OPINION

          RECKTENWALD, C.J.

         In 2006, Daniel Kaleoaloha Kanahele (Daniel) and his brother, Marcus C. Kanahele (Marcus), co-signed a mortgage on their property in order to obtain a $625, 000 loan. While both brothers executed the mortgage, Daniel was the promissory note's (Note) sole signatory. Daniel defaulted on the loan in 2008, and in 2014, Nationstar Mortgage, LLC (Nationstar) initiated this foreclosure action.

         After seventeen months of proceedings involving Daniel, Marcus's Estate, and Nationstar, the Circuit Court of the Second Circuit granted Nationstar's motion for summary judgment, and issued final judgment in favor of Nationstar.[1] On appeal, the Intermediate Court of Appeals (ICA) vacated the judgment and remanded the case for further proceedings. Although the ICA ruled in Daniel's favor by vacating the judgment, Daniel asks this court to review the following additional issues, which he contends were either incorrectly resolved or left unresolved by the ICA:[2]

(1) Whether summary judgment is precluded where contradictory declarations by [the] representatives of [a] foreclosing party undercut the trustworthiness of [its] offered business records; and
(2) Whether a foreclosing plaintiff[, ] who is not a holder in due course[, ] is subject to [a defendant's] affirmative defenses[.]

         We hold that the ICA erred with respect to both of those issues, and that Daniel would be prejudiced on remand absent this court's further review.

         Although the ICA correctly held that Nationstar had not demonstrated standing to enforce Daniel's Note under Bank of America, N.A. v. Reyes-Toledo, 139 Hawai'i 361, 390 P.3d 1248 (2017), and vacated the circuit court's judgment on this basis, we conclude that the ICA erred in holding that Nationstar's business records were trustworthy under the business records exception to hearsay. See Hawai'i Rules of Evidence (HRE) Rule 803(b)(6) (2002). In light of Nationstar's failure to adequately explain material discrepancies in its business records and its presentation of contradictory declarations regarding which of several versions of the Note was the "wet-ink" original, the ICA should have vacated the circuit court's order on this ground, as well.

         We also conclude that Daniel's affirmative defenses should have been addressed by the circuit court, given that Nationstar, which neither pled nor proved its status as the Note's "holder in due course," was simply the Note's "holder." The ICA did not clarify this, despite the circuit court's inaccurate conclusion that "holders" were not subject to obligors' affirmative defenses. See Hawai'i Revised Statutes (HRS) § 490:3-305 (2008).

         We therefore affirm the ICA's Judgment on Appeal, but correct its reasoning as set forth below, and remand the case for further proceedings consistent with this opinion.

         I. BACKGROUND

         A. Factual Background[3]

         In 2002, Daniel and his younger brother, Marcus, inherited their family home in Kīhei, Maui ("Kanahele home" or "the property"). Daniel resided in the home, while Marcus lived in Florida. Daniel agreed to provide Marcus with financial assistance in 2006. Accordingly, the brothers contacted Linda Austin (Austin), a mortgage broker with Maui Mortgage Professionals, to assist them in obtaining a loan and in using their home as collateral.

         According to Daniel, the primary purpose of the loan was to provide financial assistance to Marcus in his business pursuits. Austin allegedly knew that Daniel, who had worked most of his life as an unskilled worker, was unemployed at the time he and his brother sought the loan. Despite this, Austin represented to Daniel and his brother that because Daniel was the owner-occupant of the property, he would qualify for the loan if he provided his credit score, "without having to provide any documentation regarding assets or income[.]"

         Daniel executed a Note to Lehman Brothers Bank, FSB (Lehman Brothers) for $625, 000 on December 4, 2006, and was told that the documents would be sent to Marcus in Florida. The Note was secured by a mortgage, executed by the two brothers as mortgagors, in favor of Mortgage Electronic Registration Systems, Inc. (MERS) for Lehman Brothers. The mortgage, which encumbered the Kanahele home, was recorded in the Bureau of Conveyances.

         The loan went into default in 2008. The mortgage was assigned from MERS to Aurora Loan Services (Aurora) in 2009, and in June of that year, Aurora mailed the brothers notices of default.

         On August 14, 2012, Daniel sent Nationstar, the loan's servicer at the time, a Fair Debt Collection Practices Act request. By letter dated August 27, 2012, Nationstar's customer care specialist, Joyce Lawrence (Lawrence), responded that Wells Fargo Bank owned the Note. She also sent Daniel a copy of the Note, which had two indorsements. The Note was first indorsed from Lehman Brothers to Lehman Brothers Holding, and second, indorsed from Lehman Brothers Holding to Aurora.[4]

         The mortgage was subsequently assigned from Aurora to Nationstar for unspecified "good and valuable consideration" on September 20, 2012. On an unspecified date, the Note was indorsed from Aurora to blank, by Nationstar as Aurora's attorney-in-fact.

         Marcus died in 2013, having never signed the Note. Daniel thus explained the unique circumstances of the loan and mortgage as follows:

It was only when the litigation began in this case [that] I learn[ed] that I was the only borrower - that my brother [had] never signed the [N]ote. As the mortgage stated us as "co-borrowers" on the signature lines of the mortgage, I had no idea that my brother was not a co-borrower. I was totally surprised and shocked to learn this.
Suffice it to say, it had always been our practice to be co-borrowers when our family house was used as collateral, and it was our stated intention with Ms. Austin and the bank that we were going to be co-borrowers. I would never have agreed to the loan had I known that I was the sole borrower and that I would have been responsible for any "deficiency judgment[, ]" the benefits of which went to my brother and his business and did not involve me.

         In other words, Daniel "would never have agreed" to obtain the loan had he known he would be the Note's sole borrower, because the purpose of the loan was to benefit Marcus.

         B. Procedural Background[5]

         1. Circuit Court Proceedings

         a. The Complaint

         Nationstar filed a Complaint to Foreclose against Daniel, and Marcus's Estate, on October 7, 2014, with the following attachments: (1) a copy of the Note; (2) a verification attesting that the Note was the original; and (3) an attorney affirmation attesting the same.

         Like the Note Nationstar had provided to Daniel in 2012, this Note also had two indorsements. While the first indorsement was identical to that of the Note that Daniel received in 2012 - from Lehman Brothers to Lehman Brothers Holding - the second was executed by Lehman Brothers Holding to in-blank, rather than to Aurora.[6]

         The verification, executed by Jesslyn Williams (Williams), Nationstar's assistant secretary, stated that: (1) Williams had personally reviewed the documents and records in Nationstar's possession related to the case for accuracy; (2) the records and files she had reviewed were kept by Nationstar in its ordinary course of business and were made at or near the time of such acts; and (3) Nationstar possessed the original Note, indorsed-in-blank. Lloyd T. Workman (Workman), Nationstar's counsel at that time, also attested that the documents Nationstar had submitted to the circuit court were accurate and that they "contained no false statements of fact or law."[7]

         b. Nationstar's First Motion for Summary Judgment and Related Proceedings

         Nationstar filed its first Motion for Summary Judgment on March 30, 2015, alleging that it had adequately established its ability to foreclose on the Kanahele home. Nationstar attached the same Note to its Motion as it attached to its Complaint, as well as a declaration by Demetrice Person (Person), one of Nationstar's document execution specialists.

         Just like Williams had done in her verification, Person attested that: (1) she had personally reviewed the documents and records in Nationstar's possession related to Daniel's case for accuracy; (2) the records and files she had reviewed were kept by Nationstar in its ordinary course of business and were made at or near the time of such acts; and (3) Nationstar possessed the original Note, which had two indorsements, one of which was indorsed-in-blank.

         In his opposition memorandum, Daniel argued that summary judgment would be inappropriate because: (1) genuine issues of material fact existed as to who owned the Note, in light of Nationstar's presentation of two different versions of the Note; and (2) Nationstar, which had neither pled nor proven its status as a "holder in due course," had not yet addressed Daniel's affirmative defenses.

         c. Nationstar's Renewed Motion for Summary Judgment and Related Proceedings

         Nationstar withdrew its first Motion for Summary Judgment to "address [the] issues raised by Daniel," and filed its Renewed Motion for Summary Judgment on December 15, 2015. Attached to Nationstar's new motion was a Note with three indorsements, rather than two, as well as two more declarations affirming that this Note accurately reflected the original. Like the Note presented to Daniel in 2012, the Note's first indorsement was from Lehman Brothers to Lehman Brothers Holding and the second indorsement was from Lehman Brothers Holding to Aurora. The Note's third indorsement, however, had been indorsed in-blank from Aurora, by Nationstar as Aurora's attorney-in-fact.[8]

         To support this version of the Note, Nationstar submitted a declaration executed by Toni Vincent (Vincent), a document execution specialist, which stated that: (1) Vincent had personally reviewed the documents and records in Nationstar's possession related to Daniel's case including a "current copy of the original Note," which was indorsed-in-blank and attached to Nationstar's new motion; (2) the records and files were incorporated and kept by Nationstar in its ordinary course of business and verified for their accuracy; and (3) the Note was in the possession of and ha[d] been maintained by Nationstar since before the commencement of th[e] case."

         Vincent further declared that she had reviewed Person's declaration submitted with Nationstar's first Motion for Summary Judgment, had conferred with Person, and could confirm that Person's declaration was inaccurate because Person had not followed Nationstar's policies and procedures, had not personally reviewed the "original 'wet-ink' Note," and had attached an outdated copy of the Note to the first motion that "did not contain all of the indorsements currently set forth on the original Note."[9] David Rosen, Nationstar's counsel at the time, also attested via declaration that this Note, with its three indorsements, was the "original 'wet-ink' Note."

         Daniel then filed his own Motion for Summary Judgment, raising similar arguments to those raised before. Specifically, Daniel contended that Nationstar had not "produced admissible evidence establishing [the] elements of a remedy of foreclosure[, ]" and further, that it had not addressed Daniel's affirmative defenses.

         On March 14, 2016, the circuit court issued findings of fact and conclusions of law, entered an order granting Nationstar's Renewed Motion for Summary Judgment, and entered final judgment in Nationstar's favor. The circuit court concluded that Nationstar, as "holder" of Daniel's Note, had adequately proven its ability to foreclose on the mortgage.

         2. ICA Proceedings

         On appeal, Daniel argued that summary judgment was improper in light of the untrustworthiness of Nationstar's business records and Nationstar's failure to address Daniel's affirmative defenses when it was "holder" of the Note. Nationstar, on the other hand, despite conceding its status as "holder," rather than "holder in due course," denied that its business records were untrustworthy, and further claimed that Daniel's affirmative defenses lacked merit.[10] As such, Nationstar argued that summary judgment was proper.

         The ICA's memorandum opinion vacated the circuit court's final judgment and remanded the case for further proceedings. Despite rejecting Daniel's argument that the Note with three indorsements lacked indicia of trustworthiness for admissibility under HRE Rule 803(b)(6), the ICA concluded that Nationstar had not ...


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