Evidentiary Standard Relaxed for Power-Of-Sale Foreclosure

The Court of Appeals, in In re Lucks, 2016 WL 1321155 (N.C.App. April 5, 2015), affirmed that the evidentiary standards applicable to a secured creditor seeking to establish its right to foreclose a property secured by a deed of trust in a power-of-sale proceeding are less rigorous than they would otherwise be in ordinary civil litigation.  While the decision is unremarkable, the Court took the opportunity to address the evidentiary burden the creditor must meet, hence reviewing the decision is a valuable educational exercise.

The clerk of superior court dismissed the foreclosure proceeding brought by Deutsche Bank.  The Bank appealed and following a de novo hearing the superior court also dismissed the foreclosure proceeding, with prejudice.  The superior court agreed with the borrower’s objections that testimony offered by the Bank’s witness was hearsay, and refused to consider documents because they were not the originals.  The Court of Appeals correctly observed that, as the party seeking foreclosure, the Bank had the burden of proving the six elements described in N.C.G.S. § 45-21.16(d): 

  • “(i) the existence of a valid debt;
  • (ii) a default of that debt;
  • (iii) a right to foreclose under the deed of trust instrument;
  • (iv) that proper notice was given to the Debtor;
  • (v) that the notice complied with N.C. Gen.Stat. § 45–102, because the underlying debt was a home loan; and
  • (vi) the debtor was not in the military.”  

Lucks, at *2.  The superior court found the Bank had failed to prove elements (iii) through (vi).

The Court of Appeals addressed the sufficiency of the evidence presented at the hearing before the superior court with respect to each element to be proven under § 45-21.16(d), first remarking that “[a]t the foreclosure hearing, the clerk or superior court is allowed to consider not only forms of evidence otherwise permitted by law but also “affidavits and certified copies of documents[.]” [Citing § 45-21.16(d).]  In other words, the General Assembly has provided that the evidentiary rules are slightly more relaxed in the context of a foreclosure hearing than in normal litigation.”  Lucks, at *2 (emphasis in original).

(i)  The Bank presented the note, endorsed in blank, which is presumed valid (In re Bass, 366 N.C. 464, 468, 738 S.E.2d 173, 176 (2013)), and “[t]he law presumes that the holder of a note indorsed in blank is its holder in due course[.]” Gulf States Steel Co. v. Ford, 173 N.C. 195, 196, 91 S.E. 844, 844 (1917) (emphasis added).  Lucks, at *2.

(ii)  The Bank produced a business record from Ocwen Financial Corporation, the loan servicer, showing the default.  While not presented in the form of an affidavit, this document was authenticated by an Ocwen employee who testified without objection.

(iii)  The Bank produced a properly executed limited power of attorney authorizing Ocwen to substitute the trustee, and a recorded appointment of substitute trustee document appointing the substitute trustee, establishing the Bank’s right to foreclosure under the deed of trust.  The Court rejected the borrower’s objections to the production of copies, and found the superior court erred in rejecting these documents because of lack of proper foundation and hearsay, observing that documents are “deemed authenticated where opposing party fails to “object at trial to any lack of proper authentication””, citing State v. Terry, 329 N.C. 191, 196, 404 S.E.2d 658, 661 (1991).  Additionally, evidentiary rules allow duplicates into evidence “unless there is a “genuine issue” raised as to the authenticity of the original or if it would be unfair not to require the Bank to produce the originals.  N.C. Gen.Stat. § 8C–1, Rule 1003 (2014).”  Lucks, at *3.  Finally, the borrower’s ““bare statement” contesting the accuracy of the copies “does not serve as evidence that the copies are not exact reproductions.” Dobson v. Substitute Tr. Servs., Inc., 212 N.C.App. 45, 49, 711 S.E.2d 728, 731 (2011).”  Lucks, at *3.

(iv – vi)  The Court found that the superior court’s determination that the affidavits submitted by the Bank to prove the final three elements were inadmissible due to lack of foundation and inadmissible hearsay was erroneous.  The superior court was permitted to consider affidavits (N.C. Gen.Stat. § 45–21.16(d) (2014)), and “we have specifically held that such evidence, “while inherently weak as a method of proof[,]” is properly admitted where the weakness of the method is “deemed outweighed by the necessity for expeditious procedure [inherent in the setting of a foreclosure hearing].” In re Foreclosure of Brown, 156 N.C.App. 477, 486, 577 S.E.2d 398, 404 (2003). Finally, we note that the Debtor presented no argument or evidence to contradict the information in the affidavits.”  Lucks, at *3

While the Court of Appeals undoubtedly reached the right result here, the delay (15 months) and expense occasioned by the dismissal of the case and the subsequent appeal likely resulted in costs that will never be recovered from the borrower.  Rather than appeal, an alternative course of action might have been to re-breach and accelerate the loan and file a new foreclosure proceeding.  Given the strict evidentiary stance adopted by the superior court, a more robust approach to presenting the Bank’s evidence the second time around might have done the trick.  Obviously, these observations require speculation.  Parties must make their decisions on the facts before them, and Deutsche Bank has done a favor to creditors seeking to foreclose in North Carolina by virtue of this rather helpful, albeit unpublished, appellate opinion.

Published by Hutchens Law Firm on June 15, 2016