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Third-Party Documents Admissible as Business Records

By Kelso L. Anderson, Litigation News Contributing Editor – November 15, 2013


Evidence from a third-party custodian may be offered at trial as an exception to the hearsay rule as long it is trustworthy and satisfies the business records exception. Residential Funding Company, LLC v. Terrace Mortgage Company. The ruling from the U.S. Court of Appeals for the Eighth Circuit reflects a broader litigation trend of allowing otherwise inadmissible third-party evidence at trial if such evidence is reliable.

Contract Dispute
In Residential Funding, the defendant mortgage company entered into a contract with the plaintiff to sell residential mortgage loans originated by the defendant. The contract incorporated terms that provided, among other things, that the defendant would repurchase loans from the plaintiff that the plaintiff determined were in default. The parties sustained their business relationship for some time, but it soured around the time of the mortgage crisis in 2008, when the plaintiff demanded that the defendant repurchase 13 loans it considered to be in default. The defendant refused to repurchase the loans.

The plaintiff then sued the defendant in the U.S. District Court for the District of Minnesota alleging breach of contract for failure to repurchase the 13 loans. During the trial, the district court admitted into evidence two of the loan documents in the custody of an employee of third-party GMAC Mortgage, LLC, which oversaw the plaintiff’s repurchase of all loans from the defendant. Specifically, the court reasoned that the documents were admissible under the business records exception to the hearsay rule. Federal Rule of Evidence 803(6).

Reliability of Third-Party Records
On appeal to the Eighth Circuit, the defendant faulted the district court for admitting the affidavit of the third-party employee, which the defendant argued was hearsay evidence. That affidavit noted that the 13 loan records were “made at or near the time of the occurrence of the underlying matter by a person with knowledge of the matters.” In rejecting the defendant’s position and affirming the district court’s decision, the Eighth Circuit reasoned that the district court did not err in admitting GMAC’s employee’s affidavit for two reasons. First, the plaintiff relied on all the records from GMAC in the regular course of the plaintiff’s business. And second, the records were made by someone with personal knowledge of the plaintiff’s repurchase of loans from the defendant, consistent with Rule 803(6).

Here, the Eighth Circuit properly affirmed the district court on the evidentiary issue, says Jeffrey S. Tibbals, Charleston, SC, cochair of the ABA Section of Litigation’s Real Estate Litigation Committee, observing that the court followed its precedent in Brawner v. Allstate Indemnity Co. In that previous decision, the Eighth Circuit cited other circuit court decisions holding that a “record created by a third party and integrated into another entity’s records is admissible as the record of the custodian entity, so long as the custodian entity relied upon the accuracy of the record, and the other requirements of Rule 803(6) are satisfied.”

According to Rule 803(6), records of a regularly conducted business activity made at or near the time of a dispute may be offered for its truth at trial if it is trustworthy, despite being hearsay evidence. “The business records exception—like the other hearsay exceptions—should apply only where the circumstances establish that the factual assertion is trustworthy,” says Ian H. Fisher, Chicago, IL, cochair of the Section of Litigation’s  Trial Evidence Committee. “A lot of courts have allowed third-party data into evidence under the business records exception where a party has relied on the data and incorporated it into their own business records,” Fisher added.

Given that during the recent mortgage foreclosure crisis third parties without personal knowledge of business records submitted false affidavits, courts must be especially vigilant about the authenticity of third-party evidence, Fisher emphasizes. Accordingly, a court must consider “whether the circumstances in which the [third-party] records are kept have sufficient indicia of trustworthiness that a court can rely upon in resolving the disputed facts in issue,” offers Nash E. Long, Charlotte, NC, cochair of the Section’s Trial Practice Committee.

Discovery and Third-Party Evidence
At least some federal courts that admit third-party evidence at trial have built-in discovery mechanisms to permit such evidence generally. For instance, in some jurisdictions, “the federal district courts have a deadline for records custodian witnesses built into every scheduling order, so it’s something that a trial attorney will consider in every case [i.e., the admissibility of third-party evidence].” Incorporating custodial records into the discovery process streamlines litigation and “cuts down on third-party discovery—benefitting both the party and the non-party record preparer,” Tibbals says.

A third-party affidavit attesting to the custody of business records avoids the “hearsay problem,” ostensibly because such an affidavit is not being offered for the truth of the assertions therein but as foundation for the admissibility of the business records, opines Kent A. Lambert, New Orleans, LA, former cochair of the Section of Litigation’s Trial Evidence Committee.

Since district courts are masters of their dockets and will only be reversed on evidentiary issues where an abuse of discretion exists, Section leaders opine that, as in Residential Funding and similar cases, third-party hearsay evidence will continue to be admitted at trial. “At the end of the day, the catchall exception to the hearsay rule, which is now codified at Federal Rule of Evidence 807,” will permit courts to admit hearsay evidence if guarantees of trustworthiness exist, Fisher concludes.

Keywords: business records exception, hearsay, third-party evidence

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