Air Land Forwarders, Inc. v. United States

172 F.3d 1338, 1999 WL 173561

Opinions

Opinion for the court filed by Circuit Judge GAJARSA. Dissenting opinion filed by Circuit Judge BRYSON.

GAJARSA, Circuit Judge:

The appellants (“carriers”) appeal from a judgment of the United States Court of Federal Claims holding that the carriers were not entitled to a refund of certain setoffs taken by the United States in connection with transportation contracts between the carriers and the United States.¹ See Air Land Forwarders, Inc. et al. v. United States, 38 Fed.Cl. 547 (1997). The only issue on appeal is whether the Court of Federal Claims erred in admitting into evidence, as business records of the military, certain repair estimates prepared by third parties. Because we find that the trial court did not abuse its discretion in this evidentiary matter, we affirm.

BACKGROUND

The appellants are common carriers and freight forwarders who transport household goods for military service members under contracts with the Military Traffic Management Command. Under these contracts, the carriers act as movers for military service members when they are transferred to a new post or separated from service. The carrier will prepare an inventory of the goods, pack, move, and then unpack the goods. At the new destination, the carrier will tender a joint statement of loss or damage at delivery to the service member to annotate which items, if any, have been damaged or are missing. The document is then endorsed by both parties. The service member then has seventy days to inspect the household goods and file additional claims with the appropriate military claims office. See Air Land Forwarders, 38 Fed.Cl. at 552.

A service member initiates a claim against the United States for lost or damaged goods by filing DD Form 1840R (Notice of Loss or Damage) with the military claims office. The service member is then required to file DD Form 1842 (Claim for Personal Property Against the United States) and DD Form 1844 (Schedule of Property and Claim Analysis Chart) to perfect the claim. DD Form 1842 details the circumstances of the claim and assigns any claim the individual may have against the carrier to the United States. DD Form 1844 is used to itemize the lost or damaged property and to record the cost to replace or repair the damaged item(s). In support, the service member may also submit repair estimates prepared by third parties or proof of purchase for the property to prove the amount of the claim.

In some cases, a claims inspector will survey the property and file an independent report. An adjudicator for the Military Claims Office reviews the documents submitted by the service member to determine the appropriate reimbursement for claimed losses. If the service member is compensated, the United States will seek reimbursement from the carrier by sending DD Form 1843 together with the service member’s supporting documents to the carrier, which has 120 days to respond. If there is no response or the parties cannot reach a settlement, the Defense Finance and Accounting Service sets off the amount demanded against payments due the carrier for other shipments. See, e.g., Dalton v. Sherwood Van Lines, Inc., 50 F.3d 1014, 1020 (Fed.Cir.1995). This appeal concerns the carriers’ suit for a refund of particular offsets.

Following a trial, the Court of Federal Claims held that some of the carriers were entitled to a refund of certain offsets. See Air Land Forwarders, 38 Fed.Cl. at 562-63. The carriers argue that the offsets not refunded were supported at trial by hearsay repair estimates made by third parties that were improperly admitted into evidence under Federal Rule of Evidence 803(6), entitled “Records of regularly conducted activity” as an exception to Rule 802, the “Hearsay rule.” The carriers argue that if these repair estimates had been properly excluded as hearsay by the trial court, the offsets would not have been supported by the evidence, and would necessarily have been refunded.

DISCUSSION

1. Standard of Review

We review a trial court’s decision in an evidentiary matter under an abuse of discretion standard and will only disturb the trial court’s ruling if it prejudiced substantial rights and was thus not harmless error. See Applied Med. Resources Corp. v. United States Surgical Corp., 147 F.3d 1374, 1380 (Fed.Cir.1998) (“We review evidentiary rulings of the district court for abuse of discretion, and interfere with its judgment only if an erroneous ruling prejudiced substantial rights.”); Kolmes v. World Fibers Corp., 107 F.3d 1534, 1542 (Fed.Cir.1997); Kearns v. Chrysler Corp., 32 F.3d 1541, 1547 (Fed.Cir.1994). An abuse of discretion is found when: (1) the court’s decision is clearly unreasonable, arbitrary or fanciful; (2) the decision is based on an erroneous construction of the law; (3) the trial court’s factual findings are clearly erroneous; or (4) the record contains no evidence upon which the district court rationally could have based its decision. See Western Elec. Co., Inc. v. Piezo Tech., Inc., 860 F.2d 428, 430 (Fed. Cir.1988).

2. Admissibility of Repair Estimates Under Rule 803(6)

The carriers argue that the Court of Federal Claims abused its discretion by admitting into evidence under Rule 803(6) the repair estimates produced by third parties and submitted by the service members as “business records” of the military. The carriers argue that Rule 803(6) requires, as a prerequisite to admission, the production of a qualified witness to testify that the documents were prepared by a person regularly engaged in the production of such documents. The carriers argue that the requirements for admissibility under Rule 803(6) have not been met in this case because the government’s witnesses could not establish that: (1) the estimates had been prepared by persons with first hand knowledge of the damage; (2) the preparer of the estimate was engaged in the regular business of repairing damaged goods; and (3) the preparer provided estimates as part of a regular business activity.

The United States counters the basic premise of the carriers’ argument asserting that the documents were not admitted under Rule 803(6) as the “business records” of the repair shops making the estimates, but rather that the entire claims files were properly admitted under 803(6) as the “business records” of the military. As such, the United States argues that it must only establish that the claims files were the “business records” of the military and as a whole constituted records of the regularly conducted activity of adjudicating a service member’s claim. Thus, the United States argues that the only foundation testimony necessary to establish the admissibility of these records is that it was the military’s regular practice to obtain, integrate, and rely upon the estimates dim-ing the claims adjudication process.

The Court of Federal Claims agreed with the United States that the files as a whole, including the repair estimates from third-party repair shops contained therein, constituted records of regularly conducted activity of the military in adjudicating claims, and thus the files were admissible under Rule 803(6). See Air Land Forwarders, 38 Fed.Cl. at 555-56. The trial court reasoned that documents may be admitted into evidence as the business records of one of the parties even though they were not prepared by the entity, as long as the entity is able to produce testimony that it was the entity’s regular practice to obtain information from such a third party, or that the records were integrated into the office’s records and relied upon in its day to day operations. See id. at 556 (citing United States v. Mendel, 746 F.2d 155, 166 (2d Cir.1984)). We detect no abuse of discretion in the trial court’s admission of these records.

Federal Rule of Evidence 802 is the general rule excluding hearsay: “Hearsay is not admissible except as provided by these rules or by other rules prescribed by the Supreme Court pursuant to statutory authority or by Act of Congress.” Federal Rule of Evidence 801(c) defines hearsay as “a statement, other than one made by the declarant while testifying at the trial or hearing, offered in evidence to prove the truth of the matter asserted.” The parties do not dispute that the repair estimates at issue fall within the definition of hearsay. Rule 803 enumerates twenty-three exceptions to the hearsay rule. In particular, Rule 803(6) provides an exception to the hearsay rule for records of regularly conducted activity. It states:

A memorandum, report, record or data compilation, in any form, of acts, events, conditions, opinions or diagnoses, made at or near the time by, or from information transmitted by, a person with knowledge, if kept in the course of a regularly conducted business activity, and if it was the regular practice of that business activity to make the memorandum, report, record, or data compilation, all as shown by testimony of the custodian or other qualified witness, unless the source of information or the method or circumstances of preparation indicate lack of trustworthiness [is not excluded by the hearsay rule, even though the declarant is available as a witness]. The term “business” as used in this paragraph includes business, institution, association, profession, occupation, and calling of every kind, whether or not conducted for profit.

This court has not previously addressed the question of the foundation testimony necessary to admit documents produced by third parties not before the court under Rule 803(6) where those documents have been incorporated into another business entity’s records. Other courts of appeal have addressed this situation in a number of cases and have generally held 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.

In United States v. Childs, 5 F.3d 1328, 1334 (9th Cir.1993), the Court of Appeals for the Ninth Circuit held that documents prepared by third parties and integrated into the records of an auto dealership were properly admitted based on testimony that the documents were kept in the regular course of business and were relied upon by the dealership. The Ninth Circuit found the fact that the auto dealership relied upon the accuracy of the documents in its day-to-day business activities particularly relevant. The court distinguished its earlier ruling in NLRB v. First Termite Control Co., 646 F.2d 424 (9th Cir.1981), in which it reversed a district court’s decision to admit a freight bill prepared by a third party, by explaining “[i]n reaching that decision we emphasized the fact that [the company integrating the document into its records] did not rely on the portion of the record at issue and ‘had no interest in the accuracy of that portion of the [record].’” Childs, 5 F.3d at 1334 n. 3 (quoting First Termite Control, 646 F.2d at 429). See also MRT Const., Inc. v. Hardrives, 158 F.3d 478, 483 (9th Cir.1998) (“[Records a business receives from others are admissible under Federal Rule of Evidence 803(6) when those records are kept in the regular course of business, relied upon by that business, and where that business has a substantial interest in the accuracy of the records.”) (citing Childs, 5 F.3d at 1333-34 & 1334 n. 3)

In United States v. Jakobetz, 955 F.2d 786 (2d Cir.1992), the Second Circuit also adopted this application of the business records exception in admitting into evidence toll receipts that had been incorporated into the business records of a construction company. The court stated:

Rule 803(6) allows business records to be admitted “if witnesses testify that the records are integrated into a company’s records and relied upon in its day to day operations.” Matter of Ollag Constr. Equip. Corp., 665 F.2d 43, 46 (2d Cir. 1981). Even if the document is originally created by another entity, its creator need not testify when the document has been incorporated into the business records of the testifying entity.

Jakobetz, 955 F.2d at 801 (citing United States v. Carranco, 551 F.2d 1197,1200 (10th Cir.1977)).

The Eleventh Circuit, in United States v. Parker, 749 F.2d 628, 633 (11th Cir. 1984), also agreed that it is not necessary under Rule 803(6) that the records be prepared by the business that has custody of them and the fact that “the witness and his company had neither prepared the certificate nor had first-hand knowledge of the preparation does not contravene Rule 803(6).” See also United States v. Soko-low, 91 F.3d 396, 403 (3d Cir.1996) (explaining that business records exception still applies even though the records were derived from outside sources as long as there are other assurances of accuracy present); United States v. Doe, 960 F.2d 221, 223 (1st Cir.1992) (invoice properly admitted even though it was previously the record of another company); United States v. Ullrich, 580 F.2d 765, 771-72 (5th Cir.1978) (documents furnished originally from other sources but kept in the regular course of business and relied upon to confirm inventory were properly admitted under 803(6)).

The above cases hold that Rule 803(6) does not require that the document actually be prepared by the business entity proffering the document. Rather, the cases stress two factors, indicating reliability, that would allow an incorporated document to be admitted based upon the foundation testimony of a witness with first-hand knowledge of the record keeping procedures of the incorporating business, even though the business did not actually prepare the document. The first factor is that the incorporating business rely upon the accuracy of the document incorporated and the second is that there are other circumstances indicating the trustworthiness of the document. See, e.g., Munoz v. Strahm Farms, Inc., 69 F.3d 501, 503 (Fed.Cir.1995) (“Reliability is the basis for admitting evidence under the business records exception.”).

The trial court found both reliance and additional assurances of credibility to be present in this case. First, the repair estimates at issue were clearly relied upon by the military during the claims adjudication process. See Air Land Forwarders, 38 Fed.Cl. at 556. The trial court found that the military considered the entire record, third-party repair estimates, in making its decision on the proper amount of compensation to be paid to the service member. See id. at 553. Compare MRT, 158 F.3d at 483 (bills prepared by third party and incorporated into a company’s records admissible under Rule 803(6) to establish fees paid because company relied upon bills as statements of fees owed) with First Termite Control, 646 F.2d at 428 (explaining that certain records prepared by third party not admissible under Rule 803(6) to prove origin of lumber because nothing in the trial record indicated that there was a reason for offering party to be interested in the accuracy of the records as far as they referred to the origin of the lumber).

Second, the trial court explained that there were other assurances of reliability. Military service members could be fined and/or imprisoned for submitting a false claim. See id. at 556. The claims submitted by the service members, which included the estimates, were filed with an accompanying statement acknowledging potential criminal prosecution for falsity. This was a clear indicia of trustworthiness of the repair estimates and in the minimum allowed the military claim office to rely upon the accuracy of the claims filed and allowed the documents filed with the claims to be incorporated into the military’s business records.

The trial court also found that Military Claims Office personnel were responsible for becoming familiar with the competency of estimators in the local area and with the estimating process in general, thus enabling them to reject questionable estimates. See id. These additional guarantees of reliability further support the conclusion that the repair estimates at issue were properly admitted by the trial court even though the government did not produce a witness that could testify with first-hand knowledge as to the procedures used in the original preparation of each of the repair estimates. As the cases described above indicate, such testimony is not necessary where an organization incorporated the records of another entity into its own, relied upon those records in its day-to-day operations, and where there are other strong indicia of reliability.

In fact, given the significant additional assurances of reliability, the documents at issue may also be admissible pursuant to Rule 807, which is the residual exception to the hearsay rule.² However, because Rule 807 was not advanced as a ground for admissibility at trial and we find no abuse of discretion in the trial court’s decision to admit the challenged documents under Rule 803(6), we do not address the admissibility of the documents under Rule 807.

The dissent is concerned that under our holding in this case, a law enforcement agency, such as the FBI, could collect statements and documents from unidentified informants and then introduce those statements and documents as business records of the agency as long as the agency could show that the records were retained and relied upon by the agency in the course of investigating federal crimes. Our holding certainly does not support such a broad theory of admissibility. Records kept in the course of a criminal investigation are generally maintained for the purpose of prosecuting a potential criminal defendant. Such records lack the other assurances of credibility and trustworthiness that our holding requires for admissibility of incorporated documents prepared by third parties. See, e.g., United States v. Bohrer, 807 F.2d 159, 162-63 (10th Cir.1986) (IRS contact card not admissible as a business record of the IRS in a prosecution for willful failure to file income tax returns because the card was maintained for the purpose of prosecuting the defendant and therefore “pose[d] a situation ‘dripping with motivations to misrepresent.’ ”).

Furthermore, some of our sister circuits have explicitly held that since Rule 803(8)(B)³ specifically excludes reports prepared by law enforcement from the public records exception to the hearsay rule if used against a criminal defendant, admitting such records under the business records exception would render Rule 803(8)(B) meaningless. Therefore, “the business records exception cannot be used as a ‘back door’ to introduce evidence that would not be admissible under Rule 803(8)(B).” United States v. Brown, 9 F.3d 907, 911 (11th Cir.1993); see United States v. Blackburn, 992 F.2d 666, 671 (7th Cir.1993) (“[I]f a document prohibited under Rule 803(B) or (C) can come into evidence under Rule 803(6), then the 803(8) restrictions are rendered nugatory.”).

CONCLUSION

Because the trial court did not abuse its discretion in admitting into evidence repair estimates prepared by third parties as “business records” of the military under Rule 803(6), the judgment of the Court of Federal Claims is hereby

AFFIRMED

1

. The litigation in the United States Court of Federal Claims consolidated twenty-one separate complaints for decision, Nos. 91-CV-922 through 91-CV-941, inclusive. Of those complaints in the original litigation, only the following ten complaints have been appealed to this court: 91-CV-924, 91-CV-926, 91-CV-927, 91-CV-929, 91-CV-930, 91-CV-933, 91-CV-934, 91-CV-938, 91-CV-940, and 91-CV-941.

2

. Former Federal Rule of Evidence 803(24), the so called "Residual Exception,” was replaced by Federal Rule of Evidence 807 on December 7, 1997. These two rules are substantively identical. Rule 807 provides that:

A statement not specifically covered by Rule 803 or 804 but having equivalent circumstantial guarantees of trustworthiness, is not excluded by the hearsay rule, if the court determines that

(A) the statement is offered as evidence of a material fact;

(B) the statement is more probative on the point for which it is offered than any other evidence which the proponent can procure through reasonable efforts; and

(C) the general purposes of these rules and the .interests of justice will best be served by admission of the statement into evidence. However, a statement may not be admitted under this exception unless the proponent of it makes known to the adverse party sufficiently in advance of the trial or hearing to provide the adverse party with a fair opportunity to prepare to meet it, the proponent's intention to offer the statement and the particulars of it, including the name and address of the declarant.

3

. Federal Rule of Evidence 803(8) states that:

The following are not excluded by the hearsay rule, even though the declarant is available as a witness.... Records, reports, statements, or data compilations, in any form, of public offices or agencies, setting forth (A) the activities of the office or agency, or (B) matters observed pursuant to duty imposed by law as to which matters there was a duty to report, excluding, however, in criminal cases matters observed by police officers and other law enforcement personnel, or (C) in civil actions and proceedings and against the Government in criminal cases, factual findings resulting from an investigation made pursuant to authority granted by law, unless the sources of information or other circumstances indicate lack of trustworthiness.

(emphasis added).