September 1, 2015
by Ronald C. Scott and Reginald P. Corley
Scott & Corley, P.A. – USFN Member (South Carolina)
The South Carolina Court of Appeals recently held that the “business records” exception to the evidentiary rules on hearsay does not apply to testimony that relies solely upon the inspection of documents maintained by a third party. The court further ruled that when this testimony is the only source of evidence for determining the amount owed on a promissory note, the admission of such testimony is prejudicial error — requiring reversal if used to solely determine the amount of the foreclosure debt and of the underlying deficiency judgment.
In Deep Keel, LLC v. Atlantic Private Equity Group, LLC, Appellate Case No. 2013-002281, Opinion No. 5320 (June 17, 2015), Atlantic defaulted on a promissory note originally executed to Community First Bank (CFB) for a commercial loan of $2,000,000. The promissory note was secured by two parcels of land in Beaufort County. Atlantic defaulted on the note after two loan modifications, and CFB filed for foreclosure. (CFB later merged with Crescent Bank to become CresCom Bank, and the promissory note was eventually sold and assigned to Deep Keel.)
Prior to the sale and assignment, Deep Keel’s sole member, Scott Bynum, had reviewed CresCom Bank’s records, including a payment history. Bynum testified about the amounts owed by Atlantic based on this review; however, these documents were not introduced as evidence at the foreclosure hearing. In fact, Bynum’s testimony was the only evidence of the amount remaining due on the loan. Atlantic objected to Bynum’s testimony regarding the amounts owed on the basis that Bynum’s statements amounted to hearsay. Deep Keel maintained that the testimony should be admitted under the business records exception. The master in equity admitted the evidence and ordered the foreclosure, as well as a deficiency judgment against the two personal guarantors, based on Bynum’s testimony. Atlantic appealed.
The Court of Appeals agreed with Atlantic. First, the appellate court found that Bynum’s statements amounted to hearsay because his only basis for knowledge about amounts owed by Atlantic were the out-of-court statements reflected on the documents held and maintained by CresCom Bank, which he had reviewed prior to purchasing the note and mortgage. Next, the court determined that the business records exception does not protect his testimony from the evidentiary rule prohibiting hearsay. On appeal, the court reasoned that “[t]he plain language of Rule 803(6) allows for the admission of ‘[a] memorandum, report, record, or data compilation,’ not testimony describing such a document. We hold Rule 803(6) does not apply to admit live testimony offered to prove the contents of a record containing hearsay when that record is not offered in evidence.”
The appellate court also determined that the testimony was prejudicial to Atlantic, and that the deficiency judgment against the two personal guarantors must be reversed because “[w]ithout Bynum’s hearsay testimony concerning the unpaid balance, Deep Keel could not prove the amount remaining due on the debt, and the master had no basis for calculating the amount of the deficiency.”
The Deep Keel decision makes it clear that a mortgagee/assignee’s testimony alone concerning amounts owed on a loan will not be sufficient to establish the debt in a foreclosure action and to obtain a deficiency judgment against the personal guarantors. Assignees should demand and review copies of payment histories and other loan accounting information documentation in the files they purchase and be mindful to ensure that these documents remain available for litigation.
Note that this decision simultaneously upheld the master in equity’s order of foreclosure on the secured properties, as the court held that Deep Keel had properly authenticated the promissory note and mortgage, and Atlantic had admitted that payments had been untimely. Therefore, the appellate holding is limited to barring testimony, which solely relies on the review of documents maintained and under the control of a third party, as the lone source of evidence to determine the amount of the foreclosure debt and underlying deficiency judgment.
©Copyright 2015 USFN and Scott & Corley, P.A. All rights reserved.