CONGRATULATIONS YOU NOW OWN THE LOAN! – CAN YOU ENFORCE IT?: A Recent Florida Court’s Potentially Huge Impact on Buyers of Commercial Loans

by Kenneth Miller

Perhaps nothing can be as frustrating for a purchaser of a commercial loan than being prohibited in court from enforcing the loan. It is well established law in both federal and state courts in California and throughout most of the nation that a prior oral or written statement, such as a ledger or other business record documenting the outstanding balance of a loan or other contract, may be hearsay and not admissible in court unless an exception to the hearsay rule applies. Although federal law, California law and the law in most states have adopted the “business records exception” to the hearsay rule, satisfying the requirements of this exception may be difficult for buyers of troubled loans. Satisfying the requirements of this exception may be difficult for buyers of the troubled loans. In particular, the business record exception requires that the party offering the business record establish, among other things, that the business record is “trustworthy.” If the person who prepared the business record at the time the loan closed was employed by the seller or assignor of the troubled loan and cannot be located or refuses to testify, how can the buyer or assignee of the loan provide this critical evidence in court to enforce the loan?

The case of Bank of New York v. Calloway, recently decided by a Florida appellate court, may help with this problem. Drawing from several prior decisions from both Florida courts and courts in other states, the Calloway court carefully analyzed the applicability of the business records exception to the hearsay rule and offered several very important suggestions for buyers of distressed debt to minimize future enforcement issues and satisfy the requirements of the business records exception.

Although the Calloway case only analyzed the business records exception found under Florida state law, the requirements of the business records exception to the hearsay rule adopted by the State of Florida are quite similar to those of the business records exception found under California and federal law. As a result, the reasoning of the Calloway decision would seem applicable to the business records exception to the hearsay rule found under both California and federal law, although the Calloway case is not binding on California courts. Perhaps equally as important, the points raised by the Calloway court are far reaching. Rather than limiting its focus to just academic issues regarding the Florida business records exception, the Calloway court addressed many of the practical concerns facing purchasers of distressed debt throughout the country. The Calloway court also suggested language that buyers of troubled loans may wish to add to their form purchase agreements that could be crucial to the later enforcement of the purchased loans, especially if the loan was in default prior to the buyer’s purchase of the loan. Because there is not much California case law discussing how purchasers of distressed debt can overcome the obstacles caused by the hearsay rule, please do not hesitate to contact me if you wish to discuss how best you may benefit from the suggestions offered by the Calloway court before your next purchase of distressed debt.

This publication is intended to present an overview of current legal trends in commercial lending and risk management issues; no article should be construed as representing advice on specific, individual legal matters, but rather as general commentary on the subject discussed. Your questions and comments are always welcome. Please do not hesitate to contact me at or (310)281-6321 to further discuss this article or to answer any questions.