On Dec. 24, 2018, the day before Christmas, the Superior Court in MB Financial Bank v. Rao, 921 EDA 2018, provided borrowers throughout the commonwealth of Pennsylvania with a proverbial “lump of coal.”

Loan Transaction

Lawence J. Rao Jr. is the owner of record of a property located in Philadelphia. In 2006, Rao entered into a loan transaction with SunTrust Mortgage, Inc. As part of the loan transaction, Rao executed a promissory note in favor of SunTrust.

The loan transaction was secured by a mortgage encumbering Rao's property. The mortgagee under the written mortgage executed by Rao was Mortgage Electronic Registration Systems, Inc. (MERS) as nominee for SunTrust.

Lost Promissory Note

Years later, when Sun Trust discovered that the promissory note was missing from their vault, SunTrust had a lost note affidavit executed by one of its vice presidents.

Subsequently, MERS, as nominee for SunTrust, assigned the mortgage to MB Financial Bank.

Trial Court Proceedings

When Rao allegedly committed monetary defaults of the promissory note, MB Financial Bank then filed a mortgage foreclosure action against him in the Philadelphia County Court of Common Pleas.

In the complaint, MB Financial Bank averred that it was in possession of the lost note affidavit and has the right to foreclose on the mortgaged property.

In late 2017, a nonjury trial was held in this mortgage foreclosure action. At trial, Rao was represented by David Denenberg.

At the trial, MB Financial Bank presented the testimony of Nancy Johnson, assistant vice president and the default proceedings officer for SunTrust.

Through her testimony, Sun Trust, among other things, attempted to identify and introduce into evidence during its case-in-chief the original lost note affidavit with a copy of the promissory note attached.

When Rao objected to the admission of the lost note affidavit based on hearsay, the trial court sustained the objection and precluded its admission into evidence. Rao did not present any evidence and made an oral motion to dismiss the mortgage foreclosure action based upon a nonsuit.

The trial court granted the oral motion, finding in favor of Rao, and dismissed the mortgage foreclosure action in the process. MB Financial Bank subsequently appealed the trial court judge's ruling to the Superior Court.

Appellate Review

On appeal, the Superior Court considered whether the trial court abused its discretion in dismissing the mortgage foreclosure because MB Financial Bank did not have possession of the underlying promissory note executed by Rao.

The Superior Court in Rao initially addressed whether the lost note affidavit should have been admitted into evidence based upon the business record exception to the hearsay rule as well as pursuant to the Uniform Business Records as Evidence Act, 42 Pa. C.S. Section 6108.

Under Rule 803(6) of the Pennsylvania Rules of Evidence, which is commonly known as the business record exception to the hearsay rule, a recorded act is permitted for admission into evidence if: “the record was made at or near the time by—or from information transmitted by— someone with knowledge; the record was kept in the course of a regularly conducted activity of a business which term includes business, institution, association, profession, occupation and calling of every kind, whether or not conducted for profit; making the record was a regular practice of that activity; all these conditions are shown by the testimony of the custodian or another qualified witness, or by a certification that complies with Rule 902(11) or (12) of the Pennsylvania Rules of Evidence or with a statute permitting certification; and the opponent does not show that the source of information or other circumstances indicate a lack of trustworthiness.”

The Superior Court then cited to the relevant portion of the Uniform Business Records as Evidence Act: “a record of an act, condition or event shall, insofar as relevant, be competent evidence if the custodian or other qualified witness testifies to its identity and the mode of its preparation, and if it was made in the regular course of business at or near the time of the act, condition or event, and if, in the opinion of the tribunal, the sources of information, method and time of preparation were such as to justify its admission.”

Quoting a ruling issued by another panel of the Superior Court in Commonwealth Financial Systems, Inc. v. Smith, 15 A.3d 492 (Pa. Super. Ct. 2011), the Superior Court in Rao noted that “Rule 803(6) requires the proponent of documentary evidence to establish circumstantial trustworthiness.”

In doing so, the Superior Court in Rao stated that, “in evaluating the trustworthiness of business records, the court will look to the sources of the information therein, method and time of preparation, and the qualifications of the custodial witness.”

The Superior Court in Rao emphasized that, “for purposes of Rule 803(6), a qualified witness need not have personal knowledge, but the witness 'must be able to provide sufficient information relating to the preparation and maintenance of the records to justify a presumption of trustworthiness.'”

The Superior Court found that SunTrust established so-called “circumstantial trustworthiness,” qualifying the lost note affidavit as a business record under the Pennsylvania Rules of Evidence as well as the Uniform Business Records as Evidence Act, by presenting testimony from an authenticating witness, its assistant vice president and a default proceedings officer that “SunTrust created the lost note affidavit at or near the time that SunTrust discovered that the note was lost, SunTrust maintained the lost note affidavit in the course of regularly conducted activity, and creating a lost note affidavit was a regular practice upon discovery of a lost note.”

Having found that the lost note affidavit qualified as a business record, and an exception to the rule against hearsay, the Superior Court then determined whether its preclusion constituted reversible error, that is, was it harmful or prejudicial to MB Financial Bank.

Section 3309 of the Pennsylvania Uniform Commercial Code (PUCC) governs the enforcement of the lost promissory note.

Under subsection (a) of Section 3309, “a person not in possession of an instrument is entitled to enforce the instrument if: the person was in possession of the instrument and entitled to enforce it when loss of possession occurred; the loss of possession was not the result of a transfer by the person or a lawful seizure; and the person cannot reasonably obtain possession of the instrument because the instrument was destroyed, its whereabouts cannot be determined or it is in the wrongful possession of an unknown person or a person that cannot be found or is not amenable to service of process.”

Under subsection (b) of Section 3309, “a person seeking enforcement of an instrument … must prove the terms of the instrument and the person's right to enforce the instrument” and “if that proof is made, Section 3308 (relating to proof of signatures and status as holder in due course) applies to the case as if the person seeking enforcement had produced the instrument.”

At trial, the Superior Court pointed out MB Financial Bank identified and introduced the lost note affidavit under Section 3309 to prove that it was entitled to enforce the promissory note, a prerequisite to foreclose on the underlying mortgage.

When the trial court precluded the admission of the lost note affidavit into evidence, the Superior Court concluded that MB Financial Bank could no longer prove a prima facie case for mortgage foreclosure, as a person foreclosing on a mortgage must own or hold the promissory note, and, according to the Superior Court, “the trial court's preclusion of the lost note affidavit was undoubtedly harmful and prejudicial to MB Financial” Bank.

Due to the reversible error committed by the trial court in precluding the lost note affidavit into evidence, the Superior Court remanded the mortgage foreclosure action for a new trial.

Lessons Learned

The Superior Court in Rao may have just saved Christmas for years to come for mortgage lenders doing business in the commonwealth of Pennsylvania through its reversal of the trial court's ruling.

If the Superior Court had upheld the trial court's ruling in Rao, it would have created legal precedent allowing borrowers throughout the commonwealth to ignore any monetary obligations to their alleged mortgage lenders if the underlying promissory note is lost.

Alan Nochumson is the sole shareholder of Nochumson P.C., where his law firm's primary practice areas consist of real estate, litigation, land use and zoning, business formation and general counseling and appellate advocacy. He is also president of Bear Abstract Services, where his title insurance company offers comprehensive title insurance, title examination and closing services. He can be reached at 215-399-1346 or [email protected].