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.

 

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.