Contractor Invoices Not Hearsay Where Offered to Show “Effect On Recipient”

In In re 3RC Mechanical & Contracting Services, LLC v. Climatemp, Inc., 2013 WL 6172673 (N.D.Ill. 2013), the Debtor’s trustee sued the defendant for breach of a construction contract.

The defendant moved for summary judgment and supported the motion with its project manager’s affidavit and over 30 exhibits  – mainly invoices and bills.  The Trustee moved to strike about half of the exhibits on hearsay grounds.

Ruling: Motion denied.  

 

Key Rules:

summary judgment evidence (either for or against) must be admissible at trial;

– copies of documents can’t simply be “slapped on the back of a party’s statement of facts or its response” with a statement that the documents are “true and correct”;

– a summary judgment affidavit which refers to documents must lay the necessary foundation for those documents;

– ‘hearsay within hearsay’ is not admissible unless each layer of hearsay is properly admitted under a hearsay exception;

documents generated by third parties can sometimes qualify as admissible business records where they are integrated into the proponent’s own business records and the business relies on those third party records**;

– a statement is hearsay only if offered to prove the truth of the matter asserted;

– a statement isn’t hearsay if it’s offered to show its effect on the witness;

– out-of-court invoices are not hearsay where they are offered to show their amount only (not for their contents’ truth)

¶¶ 2-3; FRE 801(c)(2), 803(6).

Applying these rules, the Court found that the bills and invoices appended to the defendant’s affidavit were not offered for their truth.  That is, the contractor didn’t offer the invoices to prove to the court that the third party vendors and contractors actually performed the work contained on the invoices. 

Instead, the invoices were offered to show their effect on the project manager and to illustrate why he charged certain the amounts in question.

The invoices substantiated the affidavit testimony that the defendant had to hire substitute subcontractors after the Debtor failed to perform and went out of business.  ¶¶ 2-3.

The Court also emphasized that the project manager had hands-on involvement with the projects in question and spoke from personal knowledge about what work was was completed on the jobs.  ¶ 3.

Comments: The hearsay (offered for the truth) vs. non-hearsay (to show effect on listener/witness) distinction is a fine-line one.  The effect-on-the-listener/witness rule seems amorphous in that whenever someone attaches a third party’s records to an affidavit, all he has to argue is that the invoices are offered purely to show there impact on the listener/witness.  

The evidence rules laid out in this case should prove helpful to business litigants who are trying to get a third party’s records before a court or jury over a hearsay objection.

 

Single-Page Spreadsheet Doesn’t Satisfy Business Records Rule (Illinois 2nd Dist.)

In In Re Estate of Good, 2013 IL App (2d) 120875-U,  the Second District strictly construed the business records hearsay exception and held that a single-page spreadsheet (the “Spreadsheet”), prepared specifically for litigation by one of the parties from various print and electronic sources, didn’t satisfy the business records admissibility rules.

Facts: The plaintiff real estate auction company sued its deceased founder’s estate alleging the founder misappropriated company funds totalling about $1.5M over a multi-year period.  Good, ¶ 4.  The Plaintiff’s key piece of evidence – the Spreadsheet – was prepared specifically for the  litigation and supposedly summarized various company financial records and itemized the amounts decedent allegedly took from the  company.

The trial court granted the defendant estate’s summary judgment motion on all complaint counts.

Held: Affirmed.

Q: Why?

A: The Spreadsheet was inadmissible hearsay under the prevailing business records rules:

Evidence which is inadmissible at trial is not admissible in support of or opposition to summary judgment motion;

– Illinois Evidence Rule 803(6) provides that “records of regularly conducted activity” are exceptions to the hearsay rule as long as they consist of a record or data compilation in any form made at or near the time from information transmitted by someone with knowledge if (a) kept in course of regularly conducted business activity and (b) if it was the regular practice of that business activity to make the record or data compilation;

– A business records proponent must also lay a foundation for the records.  To authenticate a document, the party must offer evidence that shows the document is what the party claims it to be;

– A business record’s evidence foundation requires proof that the record (1) was made in regular course of business and (2) made at or near the time of the event or occurrence;

– The foundation for admitting business records can come via affidavit or trial testimony of a records custodian or other person familiar with the business and its mode of operation;

– A summary print-out prepared specifically for trial can satisfy business records rule (and be admissible) IF the underlying data on which the summary is based are (i) kept in regular course of business, (ii) the data was entered contemporaneous to the event, and (iii) there’s nothing to indicate the source of the information is untrustworthy.

Application:

The Spreadsheet didn’t satisfy the  business records exception.  First, it was mathematically inaccurate: the numbers didn’t match up.  Also, plaintiff’s witnesses admitted in depositions that Spreadsheet was cobbled together from different electronic and printed sources – but they couldn’t specifically identify the sources.  ¶¶ 67-70.

Also, the Spreadsheet wasn’t itself a business record: it was a “one-shot” summary document prepared for the summary judgment motion at the direction of a plaintiff  and was “essentially created from scratch.” ¶ 70.

The Court also held that plaintiff failed to lay a proper foundation for the other financial documents (aside from the Spreadsheet) to support its claims.

The Court pointed to the records custodian’s deposition testimony where he couldn’t specifically identify any documents that supported plaintiff’s damage claims and offered only vague testimony about check requests and invoices that he supposedly reviewed. ¶ 74.

Take-aways:

Good illustrates that numerical accuracy is important when seeking summary judgment on damage claims.

A summary of damages document can meet the business records test – but only if the underlying data is regularly recorded and entered by someone with knowledge of the recorded event.

Good also shows that it’s vital for a deponent (or affiant) to sufficiently identify and explain the underlying data that underlies a damages summary.  It’s clear that the conflicting testimony from plaintiff’s agents concerning the underlying Spreadsheet information played an important rule in the Court excluding plaintiff’s evidence.

 

Illinois Business Records: Getting Them In at Trial

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I’ve learned from painful experience to always have evidentiary foundation and authenticity considerations at the forefront of my trial preparation plan. 

I’ve also found that having a working knowledge of Illinois Supreme Court Rule 236 (SCR 236), as well as Federal and Illinois Evidence Rules 803(6) and 902(11) (hearsay exception and self-authentication rules for business records, respectively) is essential to preparing for and proving my client’s breach of contract case at trial.

Bank of America v. Land, 2013 IL App (5th) 120283 serves as a good case law illustration of the business records rule.  

The plaintiff bank sued to foreclose a mortgage and later moved for summary judgment.  The bank supported its summary judgment motion with a bank officer’s affidavit who testified that she reviewed the bank’s books and records of the mortgage holders, reviewed the borrowers’ payment history and certified a payment history attached to the affidavit. Land, ¶ 5. 

The trial court granted the bank’s motion awarding it money damages of over $100,000 and a judgment of foreclosure.  Land, ¶ 6.  Defendant appealed.

Result: Trial Court affirmed.  The bank’s supporting affidavit meets the requirements of SCR 236.

Reasoning:  The defendant’s chief argument on appeal was that the bank officer’s supporting affidavit was inadmissible hearsay since the underlying mortgage didn’t originate with the plaintiff and because the affidavit relied on a third party’s (another mortgage company) loan records. 

The Court rejected the argument and held that the affidavit met the requirements of SCR 236, which codifies the hearsay exception for business records (a link to the Rule’s text follows this post).

SCR 236 provides that any record of a monetary transaction is admissible as evidence of that transaction if the record is made in the regular course of business and the business’s regular practice was to make a record of a transaction at or near the time of the transaction;

– The rationale for the rule is that business records exist to aid in the proper transaction of business and so records are “useless for that purpose unless accurate.” 

– Lack of personal knowledge by the maker may affect the evidence’s weight, but not its admissibility;

A third party’s records can also be admitted where that third party is authorized to generate the record on behalf of the offering party.

¶ 13.

Applying these rules, the Court found that plaintiff satisfied SCR 236 requirements where the affiant/bank officer testified

(i) that she was familiar with the bank’s business records creation and maintenance practices,

(ii) that the records pertaining to the defendants were made at or near the time of the occurrences giving rise to the records,

(iii) were made by individuals with personal knowledge of the information contained in the business record, and

(iv) the records were kept in the regular course of the bank’s business.  ¶ 13.

Take-aways: Illinois litigants now have a slew of evidence rules – SCR 236, IRE 803(6), IRE 902(11) – at their disposal that streamline the process of getting business records into evidence at trial and eliminate many of the logistical and hearsay headaches that trial practice formerly entailed.  

The case underscores the importance of knowing the rules for business record admissions at trial and on summary judgment.  A key holding of Land is that the business records relied on can be those of a third party; as long as the witness can testify to her familiarity with the records and can establish that the third party records were integral to the witness’s business.  This obviously obviates the need to subpoena a third party to testify concerning the third-party records.