Tag: FRE 803(6)

Summary of Business Records Allowed Into Evidence In Ponzi Scheme Claw-back Hearing – 11th Cir.

The interplay between Federal Rules of Evidence 1006 (summaries) and 803(6)(business records) is examined by the 11th Circuit Court of Appeals in In re International Management Associates, LLC, 2015 WL 1245503 (C.A.11 Ga.), a case where a trustee was able to admit a summary of bulky business records into evidence and avoid a $200K transfer from the debtor and Ponzi scheme operator (IMA) to the investor defendants.

(A Ponzi scheme typically involves a business entity that doesn’t really operate any legitimate business and that uses the principal investments of newer investors to pay older investors.  In reality though, the investors are being paid their own principal or that of other investors.)

The defendants in the IMA case received over $600K in payouts from IMA over a several-year period.  IMA’s trustee sought to avoid (recover) the most recent $200K payment to the defendants.

At the hearing, the trustee offered summaries of the debtor’s business records in evidence to support the avoidance claim.  The bankruptcy court allowed the summaries into evidence and entered judgment for the trustee.  The Georgia district court affirmed and the defendants appealed to the 11th Circuit on the basis that the summaries should have been excluded since the underlying records weren’t authenticated or offered into evidence at the hearing.

Held: affirmed

Q: Why?

A: Federal Rule of Evidence 1006 allows a “summary, chart or calculation” to be used in evidence to prove the content of voluminous writing (or photographs or recordings) that can’t be conveniently reviewed by the court.

The main qualification is that the actual records underlying the summary must be made available to the opponent for copying and examination.  The summary evidence proponent doesn’t have to offer the underlying documents into evidence but he must establish that those documents would have been admissible in evidence if he did offer them.  FRE 1006.

To make the requisite showing for admissibility under Rule 1006, the person offering the summary must establish that the underlying documents are authentic and meet the requirements for admissibility as business records under FRE 803(6) – the business records rule.

The authenticity burden is light.  All the proponent must show is that the documents are what they appear to be and he can do this through the testimony of a witness who is knowledgeable about the documents.

To meet the business record admissibility test under FRE 803(6), the offering party must show (1) that the record was made at or near the time by – or from information transmitted by someone with knowledge; and (2) the record was kept in the course of a regularly conducted activity, and (3) making the record was a regular practice of a given business.  FRE 803(6)(A)-(C).

A qualified witness to testify on business records is one who can explain the system of record keeping utilized by a business.  He does not have to have firsthand knowledge or be the author of the records, though. As long as the movant establishes enough circumstantial evidence to show the documents are trustworthy, the record can be admitted in evidence.

Here, the court found that the trustee’s evidence summary was supported by trustworthy business records.  While the trustee didn’t author or maintain IMA’s records in the first instance, he engaged in thorough examination and investigation into the records’ preparation and storage and interviewed multiple witnesses who played integral roles in the creation of the underlying records.  The trustee also cross-referenced IMA’s records with those of various financial institutions that did business with IMA.

Considered cumulatively, this was enough circumstantial evidence for the court’s avoidance judgment for the trustee.

Take-aways:

– Summaries of business records are admissible where the underlying documents are voluminous and are themselves admissible as business records under FRE 803(6);

– A witness testifying as to business records doesn’t have to be the creator of a given record.  It’s enough that the witness is familiar with a company’s process utilized to create and store the records in question;

– the more meticulous a third party’s (like a trustee or receiver) efforts are to verify the accuracy of business records, the more likely that third party can defeat a hearsay objection at trial or hearing.

 

Finance Company’s Affidavit In Summary Judgment Motion Fails Business Records Test – IL ND

In NRRM, LLC v. Mepco Finance Corp., 2013 WL 4537391 (N.D.Ill. 2013), the Northern District of Illinois denied a finance company’s summary judgment motion in a breach of contract suit against an automobile  warranty provider. 

The finance company plaintiff sued the car warranty provider (warrantor) for breach of contract, claiming it failed to reimburse the plaintiff for various warranty claim losses.

The finance company moved for summary judgment on its breach of contract claim and supported its motion with its business analyst’s declaration.

Disposition: Motion for summary judgment denied.  

Reasoning:

To prove breach of contract under Illinois law, a plaintiff must show (1) the existence of a valid contract, (2) substantial performance by the plaintiff, (3) breach by the defendant and (4) resultant damages.  

The business analyst stated in his declaration that the defendant owed over $5M in reimbursement payments.  He declared he was familiar with plaintiff’s business practices and that his damage calculation was based on a review of the company’s business records.  *3-4.

Federal Rule of Evidence 803(6) – The Business Records Exception

The Court ruled that the plaintiff’s declaration and its underlying business records were inadmissible hearsay.

The business records exception to the hearsay rule- codified in FRE 803(6) –  is based on the theory that business records are generally trustworthy and their risk of fabrication low.  The party offering business records in support of its claim must lay a foundation for the records and establish their reliability. 

To establish business record foundation at summary judgment, the record’s proponent must supply an affidavit (or declaration) signed by someone qualified to introduce the record at trial (i.e. a records custodian).  

FRE 803(6) allows into evidence a  “record of an act, event, condition, opinion or diagnosis if”: (1) the record was made at or near the time by someone with knowledge (or from information transmitted by someone with knowledge); (2) the record was kept in the course of regularly conducted activity of a business, (3) making the record was a regular practice of that activity; and (4) all these conditions are shown by the testimony of a custodian or other qualified witness, or by certification that complies with FRE 902(11), (12).  (*4-5)

While the plaintiff’s analyst did parrot the the business records rule elements in his declaration, this wasn’t enough.

He didn’t establish that the records were made at or near the time of the event by someone with knowledge of the event or that making the record was the finance company’s regular practice.  

And since the declaration and business records constituted plaintiffs’ only evidence on the breach and damages elements of its contract claim, the Court denied plaintiff’s summary judgment motion.   *5-6.

Notes: It’s an understatement to say that getting key documents into evidence during a breach of contract trial is critical.  Trial success or defeat often hinges on whether a litigant successfully gets business records into evidence over a hearsay or foundation objection.  Same goes for summary judgment practice; especially in Federal court.