Conceptualizing Claim Objections Part II Books and Records Revisited

Journal Issue

Jul/Aug 2006

Column Name

Practice & Procedure

Citation

ABI Journal, Vol. XXV, No. 6, p. 42, July/August 2006

Topic Tags

Practice and Procedure

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In last month's column, I pointed out the stark
similarity between the objector's burden of coming forward with
evidence to rebut the presumptive validity of a properly filed proof
of claim (POC) in bankruptcy and the non-moving party's burden under
Fed. R. Civ. P. 56(e) of setting forth specific facts that demonstrate
a genuine issue for trial. Based on this similarity, I suggested that
any question about the sufficiency of a claim objection might be
answered (at least conceptually) by reference to the existing body of
summary judgment jurisprudence. The methodology is simple: First,
imagine that the claimant is the plaintiff and the objector the
defendant in a nonbankruptcy civil action, then ask whether the
objector's showing would create a triable issue of fact in response to
a properly supported summary judgment motion brought by the claimant.
If not, the objection should be overruled; if so, the claimant can no
longer rest on her POC and must come forward and prove her
case.1 In this article, I take the summary-judgment
analogy for a test drive with the ubiquitous (perhaps infamous)
"books and records" objection, which seeks to disallow or
modify a claim on the grounds that the POC "does not correspond
to the amount reflected as due and owing in the debtor's books and
records." I do not write on a clean slate. In an earlier Practice

& Procedure column, Bruce H. White and William L.
Medford seriously questioned the probative value of
books-and-records evidence and concluded that an objection premised
thereon amounts to little more than a general denial of liability
that, if successful, eviscerates the prima facie validity of
POCs under Fed. R. Bankr. P. 3001(f).2 While the
summary-judgment analysis confirms that an ultra-generic
books-and-records objection fails for want of specificity and
evidentiary foundation, it shows that there is nothing wrong with
books-and-records evidence per se. Such is clear from several
noncontroversial cases where books-and-records evidence was sufficient
to create a triable issue of fact or to put the opposing party to her
proof on an essential element of her case. In light of these permissible
uses of books-and-records evidence outside of bankruptcy, it appears
there should be a place for books-and-records objections within
bankruptcy, at least where the problems of specificity and evidentiary
foundation are properly addressed. "Books and Records,"
without More, Is Terminally Vague Suppose Cindy the Claimant
files a POC in Dave the Debtor's bankruptcy case seeking to enforce
Dave's guaranty obligations stemming from a secured credit line and
accounts-receivable factoring agreement Dave executed to guaranty
obligations of the now-defunct DaveCo, Dave's former employer. Cindy
supports her POC with copies of the relevant documents, as well as a
detailed calculation of Dave's guaranty obligation, including the
specific amounts owed by DaveCo under its agreements with Cindy and
the amounts realized by Cindy upon liquidation of each item of DaveCo
collateral. Dave does not deny the existence of the guaranty or that
DaveCo has defaulted under its agreements with Cindy. He objects to
Cindy's claim on the ground that it overstates the amount of the
outstanding debt and proffers the affidavit of a CPA who, having
reviewed DaveCo's books and records, concludes that DaveCo owes Cindy
$X rather than $Y. The CPA does not, however, explain why the figures
he uses to arrive at his calculation are correct or where exactly
Cindy's calculation went wrong. What is the result? Outside of
bankruptcy, it is summary judgment for Cindy: "[Dave] may not
create an issue of fact sufficient to avoid entry of judgment in favor
of [Cindy] merely by changing the numbers used to calculate the
account balance when those numbers are not supported by the
evidence."3 AT&T Corp. v. Community Network
Services Inc.4 is also illustrative. In that case,
AT&T sued several resellers of telecommunication service to obtain
payment for long-distance charges incurred under the applicable FCC
tariffs and moved for summary judgment on the basis of the defendants'
account histories for the relevant time periods. The defendants
resisted summary judgment by questioning the sufficiency of AT&T's
evidence. The court's response: <blockquote> [W]hile the defendants
have speculated that the proof submitted by AT&T in support of
its motion is "far from true," defendants do not point to
even a single call (1) they did not make, (2) for which they were
charged an inaccurate rate or (3) whose duration was measured
incorrectly... Defendants' unsupported conjecture that the final
balances due in their accounts may be wrong is not sufficient to
ward off summary judgment either as to liability or as to the amount
of the requested judgment. Because defendants have failed to set
forth specific material facts in dispute, judgment is granted
in favor of AT&T5 (emphasis added).

</blockquote>Would the result have been any different if the
defendants had submitted an affidavit stating that not all of the
calls appearing on the account histories proffered by AT&T were
reflected in the defendants' books and records? Probably not, unless
the affidavit also identified the specific calls in question and
provided the court with some basis for concluding that those calls were
never made or were over-billed. Accordingly, an analogous
"books-and-records" objection to AT&T's POC in the
defendants' hypothetical bankruptcy cases would also fail. Now
suppose that Dave's CPA explains in his affidavit that DaveCo's books
and records indicate that several entire blocks of accounts receivable
sold to Cindy had been paid by the account debtors within 30 days.
Under the terms of the parties' factoring agreement, such timely
settlement of the accounts entitles DaveCo to credits against amounts
otherwise owed to Cindy. Dave's CPA points out that Cindy's
calculation failed to take these credits into account. He identifies
each credit and reduces Cindy's guaranty claim accordingly, showing his
math. Suppose further that the AT&T defendants' affiant provides
a list of specific calls that do not have a corresponding entry in the
defendants' customers' billing records. He explains that, as the end
users of the phone service purchased from AT&T, the customers
would have originated any calls that were properly chargeable to the
defendants' AT&T accounts. He also explains that because the
defendants generate most of their revenue by billing their customers
for phone service, they have an obvious incentive to keep accurate
records of each customer's usage. Few would conclude that such
showings, whether made in support of a claim objection or in
opposition to summary judgment, fail for want of specificity. Indeed,
many would conclude that they succeed in raising a triable issue of
fact. But Dave and the AT&T defendants aren't quite out of the
woods yet. Books-and-Records Evidence Is Hearsay This bears
repeating: Books-and-records evidence is hearsay. It is the
out-of-court statement of the recordkeeper(s), offered for the truth of
the matter asserted—namely, that the transactions recorded
actually took place, and that the transactions not recorded did

not take place.6 As the Federal Rules of Evidence
make perfectly clear, hearsay is not admissible7
unless it is admissible.8 (I'm still trying to
figure that one out.) This presents a real problem for Dave and the
AT&T defendants, because the summary judgment cases hold that
inadmissible hearsay, without more, is insufficient to create a
triable issue of fact.9 Notwithstanding the enhanced

specificity of the new affidavits, they still rely entirely on
hearsay (i.e., books and records) to establish the material
factual dispute: for Dave, whether DaveCo's customers paid their
accounts in full within 30 days; for the AT&T defendants, whether
the questionable calls were ever made. Recognizing
books-and-records evidence as hearsay may explain our general distrust
of books-and-records objections in bankruptcy. But what will become of
Dave and the AT&T defendants if their books-and-records evidence
is inadmissible? Must Dave, in order to prevail on his claim
objection, submit an affidavit from every one of the DaveCo account
debtors to establish DaveCo's entitlement to the "timely
settlement" credits? And how might the AT&T defendants
establish that a particular phone call was never made? Depose everyone
in the world who possibly could have made the call and ask each where
they were at 12:22 p.m. on May 14, 2005? Such results would be
patently absurd. Luckily, the Federal Rules of Evidence do not compel
them. FRE 803(6) "Business Records" Exception
Under the "business records" hearsay exception,
books-and-records are admissible to prove the occurrence of a
transaction if (1) they were "made at or near the time by, or
from information transmitted by, a person with knowledge" of the
transaction, (2) they were "kept in the course of a regularly
conducted business activity" and (3) "it was the regular
practice of that business" to record such transactions, (4) all
of which is "shown by the testimony of the custodian or other
qualified witness" (5) "unless the source of information or
the method or circumstances of preparation indicate lack of
trustworthiness." The inherent reliability of such evidence
<blockquote> is furnished by the fact that regularly kept records
typically have a high degree of accuracy. The regularity and
continuity of the records are calculated to train the recordkeeper
in habits of precision; if of a financial nature, the records are
periodically checked by balance-striking and audits; and in actual
experience, the entire business of the nation and many other activities
function in reliance upon records of this kind.10
</blockquote>One noncontroversial use of books-and-records
evidence in the summary judgment cases occurs in the
employment-discrimination context. Where an element of the
plaintiff-employee's prima facie case is that she had performed
competently in her position, the defendant-employer's proffer of
books-and-records evidence to show that the employee had not met her
performance quotas has been held sufficient to put the plaintiff to
her proof.11 Similarly, so long as the affidavit of Dave's
CPA lays out the proper foundation under Fed. R. Evid. 803(6), it
would seem that the books-and-records evidence establishing DaveCo's
entitlement to "timely settlement" credits should be
sufficient to put Cindy to her burden of proving the full amount of
her guaranty claim. FRE 803(7) "Negative Evidence"
Exception Under the "negative evidence" hearsay
exception, the absence of a transaction in a business's books
and records is admissible to prove the nonoccurrence of such
transaction, so long as it was "of a kind of which
a...record...was regularly made and preserved" by the
business (emphasis added).12 The logic behind this rule is
that <blockquote> [w]hen a book purports to contain all items
transacted within the scope of the book's subject, the absence of an
entry of transaction of a specific purport is in plain implication a
statement by the maker of the book that no such transaction was had.
The psychology of it is the same as that of the testimony on the
stand by a person who denies that a sound took place in his presence
because he heard no such sound. The practical reliability of it is shown
by every day's practice in every business house. All industry and
commerce is daily conducted on the negative as well as the
affirmative showings of the regular books of entry.13

</blockquote>One noncontroversial use of "negative"
books-and-records evidence in the summary judgment cases occurs in the
context of civil rights actions brought by prison inmates. The Prison
Litigation Reform Act requires dismissal of an inmate's lawsuit if he
did not exhaust his administrative remedies prior to
filing.14 With proper foundation, an affidavit stating that a
search of the prison's books and records revealed no formal grievance
filed by the inmate has been held sufficient to put the inmate to his
proof on the exhaustion issue.15 Similarly, so long as
the AT&T defendants' affidavit sets out a proper foundation for
admissibility of the customer records under Fed. R. Evid. 803(6) and
(7), the failure of such records to include the particular calls in
question should be sufficient to put AT&T to its proof that the
calls were actually made. Conclusion Unlike a properly
filed POC, a debtor's books and records have no inherent magical
power. Objectors cannot invoke them as a talisman to ward off the
presumptively valid claims of creditors. Upon establishing a proper
evidentiary foundation, however, objectors can use books and
records to call into question one or more of the essential elements of
a creditor's claim. Categorical exclusion of books and records in the
claim-objection context would make little sense because, as a
practical matter, they are often the most probative (or indeed only)
evidence available to the objector on a particular factual
issue.16 I submit that, to strike an appropriate balance
between preserving the prima facie validity of POCs on the one
hand and ferreting out unworthy and/or abusive claims on the other,
claim objectors must be held to the same standards as nonbankruptcy
litigators. If the requirement for specific facts supported by
admissible evidence is the sine qua non for resisting judgment
when a plaintiff has made her prima facie case outside of
bankruptcy, vague generalities and unfounded evidence should be
insufficient to defeat a claimant who, by properly filing a POC, has
made her prima facie case within bankruptcy.

<hr><h3>Footnotes</h3> 1 The exception would be a POC with
sufficient documentation attached to prove the claim by a
preponderance of the evidence even in light of the objector's proffer.
In such circumstances, the court should overrule the objection even if
the claimant fails to show up for the hearing. In practice, however,
precious few claimants go to such lengths when preparing their POCs.
2 "Omnibus Claims Objections: Debtor's Disagreement of the
Amount Is Not Enough," ABI Journal, June 2003. 3
Kitrosser v. CIT Group/Factoring Inc., 93 Civ. 5699, 1995 WL
567115, at *5 (S.D.N.Y. Sept. 25, 1995). 4 No. 97 Civ. 316,
1999 WL 1267457 (S.D.N.Y. Dec. 29, 1999). 5 Id. at *5.
6 Fed. R. Evid. 801(c). 7 Fed. R. Evid. 802. 8 Fed.
R. Evid. 803(1)-(23), 804(b)(1)-(6) and 807. 9 See, e.g.,
Blackburn v. UPS Inc., 179 F.3d 81, 95 (3d Cir. 1999) (hearsay
statements that are inadmissible at trial should not be considered when
determining whether non-movant has established a triable issue of
fact); Williams v. West Chester, 891 F.2d 458, 466 (3d Cir.
1989) (hearsay evidence may be considered on summary judgment only
"if the out-of-court declarant could later present that evidence
through direct testimony"); IBP Inc. v. Mercantile Bank of
Topeka, 6 F.Supp.2d 1258, 1263 (D. Kan. 1998) (hearsay
books-and-records evidence "may be considered only if authenticated
by a person through whom [it] could be admitted into evidence").

10 2 McCormick on Evidence §286 (6th ed. 2006).
11 Smith v. Alternative Res. Corp., 128 Fed. Appx. 614,
615 (9th Cir. 2005). 12 Fed. R. Evid. 803(7). 13 5
Wigmore on Evidence §1531 (Chadbourn ed. 1974). 14 42
U.S.C. §1997e(a). 15 Compare Thomas v. New York
State Dept. of Correctional Servs., No. 00 Civ. 7163, 2002 WL
31164546, at *3 (S.D.N.Y. Sept. 30, 2002) (conclusory affidavit that
did not describe how the search was conducted or explain the prison's
practices regarding the filing and retention of grievance records)
with Thomas v. New York State Dept. of Correctional Servs., No.
00 Civ. 7163, 2003 WL 22671540, at *5-7 (S.D.N.Y. Nov. 10, 2003)
(amended affidavit set forth sufficient detail to establish
admissibility of evidence under FRE 803(7)). 16 See, e.g.,
In re Adelphia Comm. Corp., No. 02-41729, 2006 WL 346418, at *1
(Feb. 6, 2006) (bench decision) (overruling hearsay objection to the use
of debtors' books and records to establish validity of scheduled
inter-company claims that had been challenged by various creditors).

Journal Authors

Patrick Allen Jackson

Journal Date

Saturday, July 1, 2006 - 12:00

Bankruptcy Rule

2006

none

3001