In a case of first impression, an Allegheny County trial court has found that statements made by an assignor prior to an assignment of a mortgage are admissible under the party-opponent exception to the hearsay rule.

In Alaska Seaboard Partners Limited Partnership v. Kelly, Allegheny County Court of Common Pleas Judge Alan Hertzberg ruled that statements made by a PNC Bank representative before PNC assigned a mortgage to plaintiff Alaska Seaboard Partners were admissible because, under the 1997 state Superior Court ruling in Smith v. Cumberland Group, Pennsylvania law places an assignee “in the shoes of the assignor.”

According to Hertzberg, Pennsylvania Rule of Evidence No. 803(25) allows the admission of hearsay that is “(B) a statement of which the party has manifested an adoption or belief in its truth, or (C) a statement by a person authorized by the party to make a statement concerning the subject.”

“I was unable to locate any reported Pennsylvania case that addresses whether the statement of an assignor falls under these provisions. However, Pennsylvania law unambiguously makes ‘an assignee’s right against the obligor … subject to all of the limitations of the assignor’s right, to all defenses thereto, and to all set-offs and counterclaims which would have been available against the assignor had there been no assignment, provided that these defenses and set-offs are based on facts existing at the time of the assignment,’” Hertzberg said, quoting language from the Smith opinion.

In Alaska, according to Hertzberg, Keystone Hockey Inc. signed a judgment note in 1993 for $400,000 payable on demand to PNC Bank. Defendant Janelle Price Kelly, along with her husband, Geoffrey P. Kelly, who is not a party to the case, signed a guaranty agreement on Keystone’s debt with PNC Bank.

Janelle Kelly signed a $400,000 mortgage on property she owned in Pittsburgh as collateral for the loan to Keystone, Hertzberg said.

About eight years later, PNC Bank assigned the mortgage to Alaska, according to Hertzberg.

In 2004, Alaska filed mortgage foreclosure proceedings against Janelle Kelly, but Hertzberg said he eventually ruled in favor of the defense, finding that Geoffrey Kelly had provided PNC Bank with substitute collateral to replace the mortgage prior to the mortgage’s assignment to Alaska.

According to Hertzberg, Janelle and Geoffrey Kelly had both been asked during direct examination at trial if there had ever been discussions with PNC about whether the mortgage was temporary or permanent collateral.

Alaska had objected during the trial that such statements were hearsay, but Hertzberg said he overruled the objection, finding that the statements made by PNC were admissible under the party-opponent hearsay exception.

The Kellys testified that David Klasnick, head of private banking at PNC Bank, had told them the mortgage was only temporary collateral that would be replaced once Geoffrey Kelly provided substitute collateral, according to Hertzberg.

Geoffrey Kelly also entered into evidence three letters he had written to PNC Bank in June 1995, March 1998 and April 1999 asking the bank to remove the mortgage as Klasnick had agreed to do, according to Hertzberg.

Following the trial, Alaska appealed Hertzberg’s decision, arguing that testimony by the Kellys regarding PNC Bank’s agreement to accept substitute collateral was inadmissible hearsay, according to Hertzberg.

But Hertzberg reasoned that if PNC Bank had not assigned the mortgage to Alaska and had instead been the plaintiff in the suit, statements made by Klasnick “would, without question, be admissions by a party opponent.”

“To allow assignee Alaska to exclude these statements as hearsay would place Alaska in a better position than PNC Bank when Pennsylvania law places an assignee ‘in the shoes of the assignor,’” Hertzberg said, citing Smith.

Other jurisdictions have reached similar conclusions, Hertzberg said, pointing to rulings by the Supreme Court of Vermont and the Supreme Court of Nebraska that found statements made by assignors to be admissible.

“Therefore, by accepting PNC Bank’s assignment of the mortgage, Alaska ‘manifested an adoption or belief in’ the truth of Mr. Klasnick’s statement and authorized him ‘to make a statement concerning the subject’ within the meaning of Pennsylvania Rule of Evidence 803(25), ‘Admission by party opponent,’” Hertzberg said. “Accordingly, my determination that the statements by Mr. Klasnick of PNC Bank concerning substitute collateral were admissions by a party-opponent was correct.”

Hertzberg further noted that Klasnick’s statement was not entered as evidence in order to prove that either substitute collateral was received or that the mortgage was removed, but instead to show that PNC Bank had offered to remove the mortgage upon receipt of substitute collateral.

“An offer by PNC Bank to remove the mortgage has direct legal significance, and that was the purpose for Ms. Kelly putting the statement into evidence,” Hertzberg said. “The legal significance of the offer was that the offer could be accepted, which would result in the formation of an enforceable contract.”

Hertzberg also rejected Alaska’s argument that allowing the admission of the Kellys’ testimony and letters related to Klasnick’s statement violated the parol evidence rule, which renders inadmissible any oral or written agreements made prior to a writing that is determined to be the parties’ entire contract.

Hertzberg said Alaska never claimed there was a single writing that constituted the parties’ entire contract.

“Alaska offered into evidence three separate contractual writings, a judgment note signed by Keystone Hockey, a guaranty agreement signed by Ms. Kelly and Mr. Kelly and a mortgage signed by Ms. Kelly,” Hertzberg said.

According to Hertzberg, paragraph 4 of the guaranty agreement gave PNC Bank the right to “(a) deal in any manner it shall see fit with the indebtedness and with any security for the indebtedness; (b) accept partial payments on account of the indebtedness; (c) grant extensions or renewals of all or any part of the indebtedness; (d) demand or receive additional security for the indebtedness; and (e) accept substitutes for, or release, all or any security which it holds or may hold for the indebtedness.”

Hertzberg said the admission of Klasnick’s statements did not violate the parol evidence rule because it was not intended to explain or change the terms of the contract, but rather to show that PNC Bank had agreed to perform paragraph 4 by accepting substitute collateral in place of the mortgage.

Alaska also argued that PNC Bank’s agreement to substitute new collateral in place of the mortgage was unenforceable under the Statute of Frauds, which states that any conveyance of real property must be made in writing to be effective.

But Hertzberg again disagreed.
”Alaska’s argument is premised upon a misunderstanding of Ms. Kelly’s claim,” Hertzberg said. “Ms. Kelly agrees that there has been no effective written satisfaction or release of the mortgage. She does not claim that satisfaction or release of the mortgage has occurred without a writing. Instead, she asks this court to order Alaska to execute a written release or satisfaction of the mortgage, which she undoubtedly is entitled to do.”

Alaska’s final argument was that Hertzberg’s defense verdict was erroneous because Alaska had established a prima facie case and was favored by the weight of evidence.

But Hertzberg said Alaska did not establish a prima facie case because its only witness, William Fogleman, corporate counsel for Alaska’s servicing company, SN Servicing Corp., testified that the mortgage was in default but provided no accounting documentation to back up the claim.

“Even if the plaintiff established a prima facie case, there was credible and abundant evidence from the defendants that rebutted plaintiff’s foreclosure claim,” Hertzberg said. “Ms. Kelly and Mr. Kelly both testified credibly that PNC Bank agreed the mortgage was temporary and would be removed when substitute collateral was provided. Mr. Kelly then effectively documented that he, in fact, provided this substitute collateral to PNC Bank.”

Alaska’s attorney, Samuel H. Foreman of Weber Gallagher Simpson Stapleton Fires & Newby in Pittsburgh, could not be reached for comment at press time.

Counsel for Janelle Kelly, Pittsburgh solo attorney Robert O. Lampl, said that while the first impression issue was important, from his standpoint the case was about a lender’s assignee suing over a mortgage for which it had no evidence of indebtedness.

Lampl said that’s a common occurrence.

“We see a lot of it,” he said. “We get lenders or assignees of lenders that just decide they can sue people and tie their assets up without having any substantiation of what’s owed.”

(Copies of the eight-page opinion in Alaska Seaboard Partners Limited Partnership v. Kelly, PICS No. 12-1740, are available from Pennsylvania Law Weekly. Please call the Pennsylvania Instant Case Service at 800-276-PICS to order or for information.)

Zack Needles can be contacted at 215-557-2493 or zneedles@alm.com. Follow him on Twitter @ZNeedlesTLI.