One of the most commonly cited exceptions to the rule against hearsay is the business records exception, which is set out in Federal Rule of Evidence 803(6). Under this exception, if an out-of-court record qualifies as a “business record”—basically, a record that employees of a business routinely make for business purposes—then a court may admit the record. To trigger the business records exception, a party typically must have a live witness lay the requisite foundation. This witness must be able to say, among other things, that it is a “regular practice” of the business to make records like the record in question.
But what happens when a party wants to offer business records that themselves incorporate the records of some other business. For example, Company A buys Company B and, as part of the transaction, takes over Company B’s records. Do Company B’s records now qualify as the business records of Company A? And if so, how does the proponent of such records lay a foundation for their admission? Does the proponent have to call a witness who has personal knowledge of the recording keeping practices of Company B (e.g., a former employee of Company B)?
In U.S. Bank Tr., N.A. as Tr. for LSF9 Master Participation Tr. v. Jones, No. 18-1719, 2019 WL 2295464, at *2 (1st Cir. May 30, 2019), former Supreme Court Justice David Souter tackled some of the questions that arise when dealing with so-called “integrated” business records. In short, the Court held that the proponent of such a record does not need to call a witness who had personal knowledge of the record keeping practices of the “other” business. Rather, the witness need only establish that the integrated records are “reliable.” The witness can do so in a variety of ways, including by establishing that the current business relies on the accuracy of the integrated records when conducting its day-to-day business operations.
I. The Facts of U.S. Bank
In U.S. Bank, the plaintiff, U.S. Bank, sued a defendant-borrower for failing to make mortgage payments to the bank. To prove the total amount owed on the defendant’s loan, U.S. Bank offered an account summary that showed, among other things, past loan payments, missed loan payments, etc. To lay the foundation for this record, U.S. Bank called an employee from Caliber Home Loans, Inc., the business then in charge of servicing the defendant’s loan on behalf of the bank.
But while the account summary did qualify as a business record of Caliber, the account summary had incorporated records from two other businesses. Specifically, before Caliber serviced the loan on behalf of U.S. Bank, two other businesses—Seterus and Bank of America—had acted as servicer on the loan. In other words, those other businesses had previously been in charge of tracking the borrower’s payments/missed payments etc. and recording that information in their own sets of records. Later, when Caliber succeeded those businesses as servicer of the loan, Caliber integrated the records of Seterus and Bank of American into its own business records.
The defendant-borrower argued that, because of this integration, U.S. Bank could not just call a witness from Caliber to lay the requisite foundation under the business records exception. According to the defendant, U.S. Bank needed to call a “custodian or qualified witness with personal knowledge of the record keeping of the respective prior servicers.”
II. Justice Souter holds that the trial court did not err in admitting the account summary.
Justice Souter, writing on behalf of the First Circuit, rejected the defendant’s argument, noting that there is “no categorical rule barring the admission of integrated business records under Rule 803(6) based only on the testimony from a representative of the successor business.” Id. at *2. “The key question,” as Justice Souter observed, “is whether the records in question are ‘reliable enough to be admissible.’” Id.
Justice Souter outlined how a proponent of integrated business records could establish such reliability. For example, the proponent could establish that the successor business relies on the accuracy of the integrated records when conducting its day-to-day business.
The Court ultimately held that the witness from Caliber had laid a sufficient foundation for the records at issue. Specifically, the Caliber witness had testified that (1) “Caliber incorporated the previous servicer’s records into its own database”; (2) that “Caliber’s acquisition department took steps to review the previous servicer’s records in a way that assured itself of the accuracy of the records”; and (3) that Caliber “plac[ed] its own financial interest at stake by relying on those records[.]” Id. at 2.
The Court specifically rejected the defendant-borrower’s contention that the Caliber witness needed to have “knowledge about how prior loan servicers maintained their records.” Id. at *3. In doing so, the Court again stressed that the key factor is reliability and Caliber had staked its own financial interest on the reliability of the records at issue. The Court wrote:
“[The defendant] not only fails to eliminate [the records custodian’s] competence as a witness, but she also fails to discredit the substance of [the records custodian’s] testimony that the incorporated records were reliable owing to the very fact that Caliber put its financial interest at stake by relying on them. [The defendant] claims that any reliance is of little, if any, evidentiary worth, simply because Caliber is a contractor that services the mortgage account, not the holder of the note. According to [the defendant], if the incorporated information turns out to be unreliable so as to defeat any action to collect the balance Caliber says is due, the loser will be U.S. Bank, not Caliber. But this is simply unrealistic. If Caliber is shown to be claiming unsupportable facts about an account’s history, to the financial detriment of U.S. Bank as assigned payee of a mortgagor’s note, Caliber’s business with U.S. Bank will suffer accordingly, as will its appeal in the eyes of other note holders who contract or might contract with Caliber for its services.” Id. at 3.
III. Takeaways
The U.S. Bank case is a good reminder that, before offering business records at a trial, a party should consider whether the records at issue include records originally created by some other business. If they do, the party needs to account for these “integrated” records by making sure its witness is prepared to lay a sufficient foundation.
Although a party should research the foundation that is required in his or her particular circuit, the witness should, at a minimum, be prepared to testify that the business (1) has integrated the business records into its own records and (2) relies on those integrated records. Brawner v. Allstate Indem. Co., 591 F.3d 984, 987 (8th Cir. 2010) (holding that a court may admit “acquired” business records under Federal Rule of Evidence 803(6) so long as the acquiring entity relies on the business records); Air Land Forwarders, Inc. v. United States, 172 F.3d 1338, 1342-44 (Fed. Cir. 1999) (joining other courts of appeal in holding that “a document prepared by a third party is properly admitted as part of the business entity’s records if the business integrated the document into its records and relied upon it”); United States v. Childs, 5 F.3d 1328, 1333 (9th Cir. 1993) (same).
And of course, if the witness can provide an even more fulsome foundation, the witness should do so. For example, a party should consider whether it is possible to have the testifying witness be a “legacy” employee (i.e., an employee who worked at the other business and has personal knowledge of that company’s recordkeeping practices). Although a party will not necessarily need such a witness to lay an adequate evidentiary foundation, having one will likely squelch any evidentiary challenges to the records at the outset.
To read the entire opinion, click on the link below.
