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:

[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).

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

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

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

[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

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.

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Footnotes

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).