Issues in Credit Card Cases – Part I by Randall L. Sarosdy [1]

Issues in Credit Card Cases – Part I

In 2008 the housing bubble burst, the financial markets collapsed and the economy entered into a severe and prolonged recession.  Not only did millions of Americans default on their mortgages, many millions also defaulted on their credit card debt.   Credit card issuers generally sought to recover this debt in one of two ways: by filing collection actions themselves against the credit card holders or by selling the accounts and the right to collect the debt to a third party.   Thousands of cases have been filed in Texas courts over the last four years seeking to collect millions of dollars in outstanding credit card debt.  Many of the defendants in these cases appear pro se. 

 

These cases have presented Texas courts with issues relating to: (1) the business records exception to the hearsay rule; (2) the proper use of requests for admissions; (3) liquidated damages; (4) the statute of limitations; and (5) proof of assignment of the debt.  This article addresses the business records exception to the hearsay rule; subsequent articles will address the remaining issues.

 

  1. I.        The Business Records Exception to the Hearsay Rule

 

Parties seeking to collect credit card debt typically rely, either on summary judgment or at trial, on the business records exception to the hearsay rule as a means of admitting into evidence monthly account statements documenting the debt owed by the defendant.  The most vexing issue that has arisen is who may sponsor the business records. 

 

If the plaintiff is the credit card company itself (or an affiliate) it will be able to submit an affidavit from a witness with personal knowledge of its record keeping practices.  But if the plaintiff is a third party to whom the account was sold (or a subsequent assignee as is often the case), then the plaintiff will not have a witness within its own organization who has personal knowledge of the record keeping practices of the entity that extended the credit and created the records sought to be admitted under the business records exception.  In that case may the plaintiff nevertheless rely on one of its own employees to sponsor the records or must the plaintiff obtain an affidavit from a custodian of records of the entity that created the business records?  The courts are split on this question. 

 

  1. A.      The Business Records Exception

Rule 801(d) of the Texas Rules of Evidence 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.”  Tex. R. Evid. 801(d).  The proponent of hearsay has the burden of showing that the testimony fits within an exception to the general rule prohibiting the admission of hearsay evidence.  Volkswagen of America, Inc. v. Ramirez, 159 S.W.3d 897, 908 n.5 (Tex. 2004);   FIA Card Services, N.A. v. Frausto, 2011 WL 6260653, at *3 (Tex. App.—Amarillo Dec. 15, 2011, no pet.).

 

The exception for business records is found in Rule 803(6) of the Texas Rules of Evidence:

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 the testimony of the custodian or other qualified witness, or by affidavit that complies with Rule 902(10), unless the source of information or the method or circumstances of preparation indicate lack of trustworthiness.

Tex. R. Evid. 803(6); see In re E.A.K., 192 S.W.3d 133, 141 (Tex. App.—Houston [14th Dist.] 2006, pet. denied). 

 

Rule 902(10) provides a means of admitting business records through an affidavit rather than live testimony of the sponsoring witness:

Any record or set of records . . ., which would be admissible under Rule 803(6) or (7) shall be admissible in evidence in any court in this state upon the affidavit of the person who would otherwise provide the prerequisites of Rule 803(6) or (7), that such records attached to such affidavit were in fact so kept as required by Rule 803(6) or (7) . . . .

Tex. R. Evid. 902(10)(a).  The rule also provides a form for an affidavit seeking to admit records under the business records exception: 

My name is _________.  I am of sound mind, capable of making this affidavit, and personally acquainted with the facts herein stated:

 

I am the custodian of the records of _________.  Attached hereto are ___ pages of records from _________.  These said ___ pages of records are kept by _________ in the regular course of business, and it was the regular course of business of _________ for an employee or representative of _________, with knowledge of the act, event, condition, opinion, or diagnosis, recorded to make the record or to transmit information thereof to be included in such record; and the record was made at or near the time or reasonably soon thereafter.  The records attached hereto are the original or exact duplicates of the original. 

Tex. R. Evid. 902(10)(b).

 

  1. B.      Business Records Created by the Proponent or an Affiliate

 

When the proponent is the entity (or an affiliate) that created the business records, the application of Rules 803(6) and 902(10) is straightforward and routine.  For example, Citibank has frequently chosen to collect debt owed by the users of its credit cards by bringing suit directly in its own name.  See, e.g., Singh v. Citibank (S.D.), N.A., 2011 WL 1103788 (Tex. App.—Austin March 24, 2011, no pet.); Citibank (S.D.), N.A. v. Tate, 2010 WL 5117466 (Tex. App.—Houston [1st Dist.] Dec. 16, 2010, no pet.); Damron v. Citibank (S.D.), N.A., 2010 WL 3377777 (Tex. App.—Austin Aug. 25, 2010, pet. denied); McFarland v. Citibank (S.D.), N.A., 293 S.W.3d 759 (Tex. App.—Waco 2009, no pet.)In these cases Citibank relies on an affidavit of a vice president or litigation analyst of a servicing company, Citicorp Credit Services, Inc., who avers that monthly account statements are business records kept in the regular course of Citibank’s business and that it is the regular course of Citibank’s business for an employee with knowledge of the events recorded to make such records.  Id.  Texas courts have uniformly upheld the admissibility of the business records when sponsored by an employee of a Citibank affiliate in this manner:

The rules of evidence do not require that the qualified witness who lays the predicate for the admission of business records be their creator or have personal knowledge of the contents of the record; the witness is required only to have personal knowledge of the manner in which the records were kept.

Singh, 2011 WL 1103788 at *4.  See also Damron, 2010 WL 3377777 at *4; McFarland, 293 S.W. 3d at 762; Wynne v. Citibank (S.D.), N.A., 2008 WL 1848286, at *2 (Tex. App.—Amarillo Apr. 25, 2008, pet. denied); Jones v. Citibank (S.D.), N.A. 235 S.W.3d 333, 337 (Tex. App.—Fort Worth 2007, no pet.); Bridges v. Citibank (S.D.) N.A., 2006 WL 3751404 at *2 (Tex. App.—Fort Worth Dec. 21, 2006, no pet.); Hay v. Citibank (S.D.), N.A., 2006 WL 2620089, at *3 (Tex. App.—Houston [14th Dist.] Sept. 14, 2006, no pet.).  A similar approach has been followed by American Express Centurion Bank.  See, e.g., Devine v. American Express Centurion Bank, 2011 WL 2732583, at *3 (Tex. App.—Beaumont July 14, 2011, no pet.) (affidavit sponsoring Amex’s business records was signed by in-house attorney for Amex).

                               

  1. C.      Business Records Created by a Party other than the Proponent

 

In many, if not most, suits to collect credit card debt the party bringing suit is not the bank or financial institution that extended credit to the defendant but a third party to whom the account has been sold and the right to collect the debt has been assigned.  Sometimes the initial buyer of the account in turn sells the account and assigns the right to collect the debt to another party.  See, e.g., Nice v. Dodeka, L.L.C., 2010 WL 4514174, at *3 (Tex. App.—Beaumont Nov. 10, 2010, no pet.) (JPMorgan Chase Bank, which created the business records, sold the account to Unifund Portfolio A, LLC, which in turn transferred the account to Unifund CCR Partners, which transferred the account to Dodeka).  In this situation the party bringing the suit to collect the debt is not the party who created the business records. 

 

In order to establish that the documents relied on to prove the debt fall within the business records exception the proponent could serve the bank or financial institution that extended the credit with a subpoena and also notice the custodian of records for a deposition upon written questions under Rule 200 of the Texas Rules of Civil Procedure.  This procedure, requiring only a court reporter or other notary to appear at the offices of the entity that created the business records, can be completed in a matter of minutes with no more than a dozen written questions and at minimal expense.[2] 

 

Assignees of credit card debt, however, have generally chosen not to invoke this procedure.  Instead, they typically submit an affidavit from one of their employees asserting that the documents relied on to prove the debt fall within the business records exception because they have been kept in the regular course of their business and also of the business of the entity that generated the records.  They certainly may have sufficient personal knowledge of the record keeping practices of the entity that employs them to be able to so testify.  But do they have personal knowledge of the record keeping practices of the bank or financial institution that extended credit to the defendant and created the records?  And if they do not have such personal knowledge does it make any difference in establishing the predicate for admissibility of the records under the business records exception?

 

  1. 1.       The Martinez Rule

 

One line of authority holds that such persons do not have the requisite personal knowledge and that it does indeed make a difference in whether the documents fall within the business records exception.  In Martinez v. Midlandcredit Management, Inc., 250 S.W.3d 481 (Tex. App.—El Paso 2008, no pet.), the court held that an affidavit was not sufficient to establish the admissibility of documents under the business records exception where the affiant did not indicate that he had any knowledge of the predecessor’s record keeping practices or that the records were trustworthy.  The court held:

Although rule 803(6) does not require the predicate witness to be the record’s creator or have personal knowledge of the content of the record, the witness must have personal knowledge of the manner in which the records were prepared.  In re K.C.P., 142 S.W.3d 574, 578 (Tex. App.—Texarkana 2004, no pet.).  Documents received from another entity are not admissible under rule 803(6), if the witness is not qualified to testify about the entity’s record keepingSee Powell v. Vavro, McDonald, & Assoc., L.L.C., 136 S.W.3d 762, 765 (Tex. App.—Dallas 2004, no pet.)(custodian of records for travel agency was not qualified to testify as to records received from third-party company, showing credits to customers’ credit card account).  In this case, the affiant does not provide any information that would indicate that he (or she) is qualified to testify as to the record-keeping practices of the “predecessor.”  The affiant does not identify the predecessor, nor does he provide any information concerning the acquisition of the attached record.  The affiant does not indicate in any way that he has any knowledge of the predecessor’s record-keeping policies or that the records are trustworthy.  In fact, the affiant does not even provide his full name.  As such, the Mart Affidavit did not satisfy the requirements of rule 803(6), and the trial court erred by admitting it.

250 S.W.3d at 485 (emphasis added).  Accord Riddle v. Unifund CCR Partners, 298 S.W.3d 780, 783 (Tex. App.—El Paso 2009, no pet.).

 

Likewise, in Abrego v. Harvest Credit Management VII, LLC, 2010 WL 1718953 (Tex. App.—Corpus Christi April 29, 2010, no pet.), an account had been assigned by Chase Bank to CreditMax and then by CreditMax to the plaintiff, Harvest Credit.  An affidavit filed by Harvest Credit was held to be insufficient to establish the business records exception where the affiant did not have personal knowledge of the record keeping practices of either Chase Bank or CreditMax.  The court held: 

[I]n his affidavit, Ravin does not state that he has personal knowledge of, or is qualified to testify regarding: (1) either CreditMax LLC’s or Chase Bank’s record keeping practices or policies; or (2) the trustworthiness of the attached monthly statements from Chase Bank to Abrego.

 

We conclude that the Ravin Affidavit does not satisfy the requirements of rule 803(6), and the trial court erred in admitting it.  See Martinez, 250 S.W.3d at 485 (holding that the affiant was unqualified to testify where he failed to provide any information to indicate that he was qualified to testify as to the predecessor’s record keeping practices).

Under this line of authority the sponsoring witness must have personal knowledge of the record keeping practices of the entity that created the records. 

 

  1. 2.       Simien and its Progeny

 

In Simien v. Unifund CCR Partners, 321 S.W.3d 235 (Tex. App.—Houston [1st Dist.] 2010, no pet.), the court took a different approach.  Michelle Simien had opened a credit card account with Citibank. As of December 18, 2002, the amount owed on the account was allegedly $10,540.51.  On November 29, 2005, Unifund purchased the debt on Simien’s account from Citibank and on September 12, 2007, Unifund filed suit against Simien seeking $34,600.08 in unpaid principal and interest.  321 S.W.3d at 239.  At trial the court admitted a business record affidavit signed by a Unifund employee, Joseph Lutz, attaching three Citibank monthly statements and other documents.  Simien’s attorney objected to the admissibility of the Lutz affidavit and the monthly statements on grounds of hearsay.  The trial court overruled the objection and admitted the affidavit and statements under the business records exception.  Id.

 

Relying on the standard for admitting third-party documents in Bell v. State, 176 S.W.3d 90 (Tex. App.—Houston [1st Dist.] 2004, no pet.), the court affirmed the trial court’s ruling admitting the documents under the business records exception.  Under Bell v. State “[a] document authored or created by a third party may be admissible as business records of a different business if: (a) the document is incorporated and kept in the course of the testifying witness’s business; (b) that business typically relies upon the accuracy of the contents of the document; and (c) the circumstances otherwise indicate the trustworthiness of the document.”  Id. at 240-41.  See also Harris v. State, 846 S.W.2d 960, 963-64 (Tex. App.—Houston [1st Dist.] 1993, pet. ref’d).    

 

The court of appeals found that Unifund had satisfied each of these requirements. First, Lutz had stated in his affidavit that the documents received from Citibank were “kept by [Unifund] in the regular course of its business as permanent records of the company.”  321 S.W.3d at 242.  Lutz also stated that the files were maintained under his supervision and control and that he had reviewed them and was Unifund’s designated agent for the file.  Based on this testimony, the court of appeals concluded that Unifund had incorporated the Citibank documents. 

 

Second, the court found that Unifund had reasonably relied on the accuracy of the contents of the documents it received from Citibank even though the Lutz affidavit did not state that he had confirmed the accuracy of the records.  Id. at 243.  The reliance by Unifund was found in the fact that it used the Citibank documents to determine the existence and value of Simien’s debt which was the basis for its lawsuit.  Id. 

 

Finally, the court found that the circumstances indicated the trustworthiness of the Citibank documents because Citibank had to “keep careful records of its custormer’s credit card debt, otherwise its ‘business would greatly suffer or even fail.’” Id. at 244 (quoting Harris, 846 S.W.2d at 963).  The court rejected Simien’s contention that Lutz was not qualified to testify about the Citibank documents because neither he nor anyone “from Unifund knew of the events or conditions recorded in Citibank’s records or had knowledge of the manner in which Citibank prepared the documents.”  321 S.W.3d at 244.  The court held that “[p]ersonal knowledge of the record-keeping practices of the third-party is not required under the line of authority represented by Bell and federal precedent.”  Id.  To the extent that Martinez and Powell conflict with Bell and prior opinions of the First Court and federal precedent, the court held, “we decline to follow them.”  Id.   

 

The court concluded its analysis by noting that the “primary concern in admitting records such as these is their reliability. . . .  Simien does not attack the reliability of the records, but contends Unifund’s proof supporting the admission of the records is inadequate.  Unifund presented evidence to the trial court that met the three factors in Bell.  Therefore, the trial court properly admitted the Citibank records as the records of Unifund under the business records exception.”  Id. at 245.

 

The First Court has applied Simien in similar cases.  See Wood v. Pharia L.L.C., 2010 WL 5060621, at *3 (Tex. App.—Houston [1st Dist.] Dec. 9, 2010, no pet.) (documents created by Chase and obtained by Pharia from Unifund were admissible based upon an affidavit of a Pharia employee stating that the documents were “kept by Pharia L.L.C. in the regular course of business,” that they were in the “care, custody and control of Pharia, L.L.C.,” and that the affiant was the custodian of the records and had reviewed them and had personal knowledge of them); Smith v. Federated Financial Corp. of America, 2012 WL 682258, at *6-*9 (Tex. App.—Houston [1st Dist.] March 1, 2012, no pet.) (records created by Advanta and acquired by Federated were admissible based upon an affidavit of a Federated employee stating that Advanta’s records were now kept by Federated “in the regular course of its business as permanent records of the company and it was the regular course of business for an employee with personal knowledge of the act, event, or condition recorded, to make the memorandum or record, or to transmit information thereof to be complete in such attached memorandum or record; and the memorandum or record was made at or near the time of the act, event, or condition recorded or indicated in said record, or reasonably soon thereafter.”).

 

Three other courts of appeals have followed Simien in holding that the business records exception may be established by an affidavit of an employee of a party acquiring credit card debt who has no personal knowledge of the record keeping practices of the entity that extended the credit. See Nice v. Dodeka, 2010 WL 4514174, at *4 (Tex. App.—Beaumont Nov. 10, 2010) (where Chase Manhattan Bank sold an account to Unifund Portfolio A, LLC, which assigned its interest in the account to Unifund CCR Partners, which in turn sold the account to Dodeka, L.L.C., an affidavit from a Dodeka employee stating that she was Dodeka’s custodian of records, that she was personally familiar with how Dodeka prepared and maintained its records, had personal knowledge of Unifund’s business record practices and vouched for the accuracy of the records originally created by Chase[3] was sufficient to meet the business records exception); Dodeka, L.L.C. v. Campos, 2011 WL 6396417, at *4-*5 (Tex. App.—San Antonio Dec. 21, 2011, no pet.) (court of appeals reversed the trial court’s ruling sustaining the defendant’s hearsay objection to the affidavit and documents offered by a Dodeka employee having no personal knowledge of the record keeping practices of Chase Bank, from which Dodeka acquired the account); Troung v. Dodeka, L.L.C., 2011 WL 2693504, at *2-*3 (Tex.  App.—Houston [14th Dist.] July 12, 2011, no pet.) (court of appeals affirms trial court’s admission of a Chase credit card agreement and a bill of sale between Chase and Unifund based on a business records affidavit of a custodian of records of Dodeka).  See also Ekpe v. Cach, LLC, 2011 WL 1005379, at *3 and n. 1 (Tex. App.—Austin March 16, 2011, no pet.) (noting in dicta that “this Court and others have recognized that a witness may have personal knowledge and competence to testify regarding the record-keeping practices of a person other than his or her employer.”).[4]

 

In short, the cases following Simien allow documents to be admitted under the business records exception even though the sponsoring witness has no personal knowledge of the record keeping practices of the entity that created the records.

 

  1. 3.       Issues Raised by Simien

 

The approach followed by the court in Simien raises two issues for consideration in cases dealing with the business records exception: (1) under what circumstances is a document “incorporated” into a subsequent party’s business; and (2) has the court shifted the burden from the opponent to show the documents are untrustworthy to the proponent to show they are trustworthy?

 

  1. a.       When Are Documents “Incorporated” into Another Party’s Business?

 

The court in Simien applied the test it had articulated in Bell v. State permitting a document created by a third party to be admitted as a business record of a different business if, among other things, the document “is incorporated and kept in the course of the testifying witness’s business.”  321 S.W.3d at 240-41.  But under what circumstances is a document truly “incorporated” into the receiving party’s business?

 

To answer this question it is helpful to review the facts of Bell v. State.  In that case Daniel Bell had left a tractor and trailer for repairs at a facility owned by HeavyQuip, a business that repairs heavy equipment.  176 S.W.3d at 91.  Some time later Bell came to the site to check on the status of the repairs and left towing a trailer similar to his but “brand new” that had been left by B&D Construction.  B&D claimed its trailer had been stolen and HeavyQuip filed a loss claim with its insurance carrier, St. Paul Guardian Insurance Company.  At Bell’s trial for felony theft a HeavyQuip employee testified that she had received two letters from St. Paul to HeavyQuip stating that it had offered to settle, and had settled, B&D’s claim for $7,125.  Id. at 92.  Both of these letters were admitted as business records of HeavyQuip.  Id.

 

On appeal Bell argued that in order for the business records exception to apply “the same ‘business activity’ must both make and keep the records in question.”  Id.  The First Court rejected this contention adopting the three-part test discussed above and adopted in SimienSee supra at 5-6.  But the circumstances in which the records were created and incorporated into the testifying witness’s business in Bell v. State are substantially different than in Simien and similar cases.  

 

In Bell v. State the letters from St. Paul that were offered in evidence by the HeavyQuip custodian of records were sent by St. Paul directly to HeavyQuip in connection with a loss claim for a trailer that had been located on HeavyQuip’s premises.  The letters were addressed to HeavyQuip and in response to HeavyQuip’s claim on its insurance policy with St. Paul.  HeavyQuip and St. Paul had an ongoing business relationship.  The HeavyQuip witness could therefore testify from her personal knowledge that the letters were in response to HeavQuip’s claim on its policy with St. Paul, and that HeavyQuip had relied on the letters to settle the loss incurred by B&D.  Due to its ongoing business relationship with St. Paul, HeavyQuip could have sought clarification from St. Paul if there were any questions concerning the contents of the letters.  In addition, HeavyQuip and St. Paul generally had a common interest in determining the fair market value of B&D’s tractor and trailer in order to settle the loss claim. 

 

Similarly, in Harris v. State, supra, which the First Court relied on in Bell v. State, the issue was whether a certificate of record generated by General Motors and sent to one of its dealers, Lester Goodwin Pontiac-Honda-GMC, could be admitted as a business record of the dealer.  The court said yes: the certificate of record could be sponsored by the dealer because it possessed a high degree of trustworthiness and was kept in the regular course of the dealer’s business.  846 S.W.2d at 964.  As in Bell v. State the dealer had an ongoing business relationship with General Motors and the certificate of record had been sent to the dealer in connection with that ongoing relationship.  The dealer’s custodian of records could therefore testify from personal knowledge about the use of the certificate of record by the dealer and that it was trustworthy.

 

These are not the circumstances when a bank or credit card issuer sells its accounts to a collections company such as Unifund or Dodeka.  First, the documents relating to the credit card account are not transferred to the collections firm as part of an ongoing business relationship, as were the letters from St. Paul to HeavyQuip or the certificate of record from General Motors to Lester Goodwin Pontiac.  The credit card issuer does not have any ongoing business relationship with the collections firm; it has simply engaged in a single transaction by which it has sold one or more accounts to the collections firm.  The credit card issuer’s ongoing business relationship is with the credit card holder, not the collections firm.  The custodian of records of the collections firm therefore cannot testify that the documents were received and used in connection with an ongoing business relationship which could give rise to knowledge of an irregularity in the documents and the means to clear up any such issues with the party that created the documents.  

 

Further, in the absence of such an ongoing business relationship it is significant that the nature of the acquiring business is not the same as the business that created the records.  If Chase Bank sold a credit card account to Citibank, and Citibank developed an ongoing business relationship with the credit card user and dealt with the user as its own customer, Citibank would in effect “incorporate” Chase’s records into its own records and should be able to treat the documents acquired from Chase as its own for purposes of the business records exception.  Citibank would have an inherent interest in maintaining true and accurate records, just as Chase did when it created and maintained the records.  The party extending credit (whether Chase or Citibank) also has the same interest as the credit card user in keeping accurate records.  The rationale of Harris v. State, supra, may very well apply in those circumstances.     

 

By contrast, Unifund and Dodeka (by way of example) are not in the business of extending credit.  They buy debt at steep discounts and their sole purpose is to collect the debt.  They do not have “customers” for whom it is important to maintain accurate and correct business records lest their business “suffer or fail.”  Indeed, they do not have “customers” at all in the usual sense.  Their only relationship with the credit card users is adversarial: they mean to collect the debt allegedly owed and they expect to have to file suit to do so.  Their interest lies in maximizing the return on their investment by recovering the maximum claim possible with a minimum of overhead.  In short, they acquired the account (and the records relating to it) not for normal business purposes but for purposes of collection and litigation.[5]  

 

It could be suggested that these collection firms still have an incentive to make sure the records are accurate because their ability to collect will suffer if they present unreliable evidence and courts begin to mistrust them.  But recent practices with respect to mortgage foreclosures, including “robo-signing” and affidavits from individuals who had never reviewed the documents relied on, suggest that the pressure for quick and inexpensive recoveries may trump other considerations. See HUD Audit Mem. No. 2012-KC-1801, at 4-5 (3/12/12), http://www.hudoig.gov/reports/featured_reports.php (concluding that affiants routinely signed foreclosure documents, including affidavits, certifying that they had personal knowledge of the facts when they did not; affiants signed large volumes of foreclosure documents without reviewing the supporting or source documents referenced in them; notaries routinely notarized documents without witnessing affiant signatures; and that “[a]s judicial States and jurisdictions routinely resolved foreclosures through summary judgment, the accuracy and propriety of the documents were essential to ensure the integrity of the foreclosure process.”)  After all, it would be a simple matter to obtain testimony from the custodian of records of the credit card issuer by means of a deposition upon written questions under Rule 200 of the Texas Rules of Civil Procedure, or even by means of an affidavit from the issuer’s custodian of records, or to serve requests for admissions on the defendant to verify the accuracy of the records.  But many collection firms apparently do not wish to incur even that de minimis expense.

 

It is accordingly suggested that documents might be considered to be “incorporated” into the receiving party’s business under the Bell v. State test only if the receiving party has an ongoing business relationship with the transmitting party, as in Bell v. State and Harris v. State, or if the receiving party’s business is the same as the transmitting party.    

 

  1. b.      Has the Court Shifted the Burden?

 

The second question raised by Simien and the cases that have followed it is whether the courts have shifted the burden from the opponent to show that the documents are untrustworthy to the proponent to show that they are trustworthy.    

 

The third prong of the Bell v. State test adopted in Simien requires the proponent of the business records to show “that the circumstances indicate the trustworthiness of the third-party documents.”  321 S.W.3d at 240, 243.  But it is well-established that “[o]nce the necessary predicate [under Rule 803(6) has been] laid, it [becomes] appellant’s burden to show that there was some underlying reason why the records were inadmissible.”  Troung v. Dodeka, L.L.C., 2011 WL 2693504, at *3, quoting Texon Energy Corp. v. Dow Chem. Co., 733 S.W.2d 328, 330 (Tex. App.—Houston [14th Dist.] 1987, writ ref’d n.r.e., and Graef v. Chem. Leaman Corp., 106 F.3d 112, 118 (5th Cir. 1997) (“The burden of establishing the untrustworthiness of such documents is on the opponent of the evidence.”).  Does the third prong of the Bell v. State test adopted in Simien shift this burden from the opponent of the evidence to the proponent?

 

The issue is illustrated by Old Republic Ins. Co. v. Edwards, 2011 WL 2623994 (Tex. App.—Houston [1st Dist.] June 30, 2011, no pet.).  The defendant, Marlana Edwards, allegedly entered into a home improvement contract with Nationwide Building Systems.  Nationwide assigned the contract to First Mutual Bank, which assigned the contract to the plaintiff, Old Republic Insurance Company.  At trial Old Republic sought to prove its case with a business records affidavit of the custodian of records of Old Republic to which were attached a copy of the agreement and 23 pages of account records.  Id. at *2.  The defendant disputed that she had signed the contract, that the work was done or that she owned the house but was not present at the trial.  Id.  Counsel for the defendant objected to the admission of the business records affidavit on the ground that the contract and documents were not business records and that the affidavit was not executed by anyone purporting to have personal knowledge of how First Mutual’s records were kept.  Id. at *3.  A witness for Old Republic testified that the defendant’s signature was on the agreement and that Old Republic “took ownership of these records when First Mutual Bank provided us their old originals.”  Id.  He also testified that Old Republic had been in possession of the records since the assignment from First Mutual and that it was the “nature of [its] business, to keep records in [its] file from the moment of assignment on.”  Id.  The trial court sustained the defendant’s objection to the introduction of the documents and rendered a take nothing judgment in favor of the defendant.    

 

On appeal Old Republic relied on Simien, which had been decided after the trial of its case, to argue the documents were admissible.  Following a thorough review of Simien, and while noting that other courts of appeals “require a sponsoring witness to have personal knowledge of the way records were created and kept by the original creditor to be admissible,” id. at *7, citing Riddle v. Unifund Partners, 298 S.W.3d 780, 783 (Tex. App.—El Paso 2009, no pet.), the court noted:

We are faced with a different posture in this case than Simien, a case in which the issue was whether the trial court abused its discretion in admitting certain business records.  The issue here is whether the trial court abused its discretion by excluding two exhibits . . . proffered under the business records exception to the hearsay rule.  We conclude, given the totality of the unique circumstances the trial court was presented with, Old Republic has not established that the trial court abused its considerable discretion in excluding these documents. 

Id. at *9.

 

The court found that ”the first two Bell factors—(1) incorporated and kept in the course of business and (2) reliance on accuracy of documents—were satisfied by [the witness’s] testimony.” Id.  But the court concluded that the “trial court here could have . . . determined that Old Republic did not establish that the circumstances indicated the trustworthiness of the documents as required by the third Bell factor.  Id. at 10.  The court distinguished the Simien case on the ground that Simien “did not attack the reliability of the records.”  Id.  Whereas Simien “involved a credit card debt that Simien never disputed that she entered or breached,” and “[t]here was no allegation or evidence that the original contract or payment information was incorrect,” in Old Republic the defendant had filed a sworn denial and “directly challenged the original making of the business record at issue.”  Id. at *11.

 

In a concurring opinion, Justice Harvey Brown succinctly identified the issue:

I write separately to note that I believe that Simien misplaces the burden of proof by requiring the proponent of the admission of business records from a third party that are integrated into a company’s records to demonstrate the records’ trustworthiness. The proponent of the evidence does not bear the burden of proving the trustworthiness of business records offered that otherwise satisfy the requirements of Texas Rule of Evidence 803(6); such records are presumed to be trustworthy and admissible.  [citations omitted]

Justice Brown’s concurrence crystallizes the second issue raised by Simien.  The proponent of evidence clearly does not have the burden of proving the trustworthiness of business records that “otherwise satisfy the requirements” of Rule 803(6) but are those requirements satisfied when the proponent does not have personal knowledge that “it was the regular practice of that business activity to make the memorandum, report, record or data compilation, all as shown by the testimony of the custodian or other qualified witness.”  Tex. R. Evid. 803(6).[6]  In lieu of requiring such personal knowledge, Simien adopted the Bell v. State test imposing the burden on the proponent of the records to show that the “circumstances indicate the trustworthiness of the third-party documents.”  As discussed above, this could be done in Bell v. State and Harris v. State but cannot be done in the credit card cases because of the absence of an ongoing business relationship between the party receiving and the party transmitting the documents.  See supra at 8.

 

Therefore, in practice Simien and the cases following it simply assume that the documents are trustworthy because businesses generally have an interest in maintaining accurate records.  See Simien, 321 S.W.3d at 244 (“Citibank must keep careful records of its customers credit card debt, otherwise its ‘business would greatly suffer or even fail.’ See Harris, 846 S.W.3d at 963.  Also the failure to keep accurate records could result in criminal or civil penalties.”); Wood v. Pharia L.L.C., 2010 WL 5060621, at *3 (“[T]he trustworthiness of the documents at issue here is supported by the fact that Pharia’s predecessors in interest must keep careful records of their customer’s debts or else their business would suffer or fail, and inaccurate records could result in civil or criminal penalties.”); Smith v. Federated Financial Corp. of America, 2012 WL 682258, at *9 (quoting Simien); Dodeka v. Campos, 2011 WL 6396417, at *5 (“[T]he creator of documents, Chase, must keep careful records of its customer’s accounts, otherwise its ‘business would greatly suffer or even fail.’”).  The courts have not actually required any showing by the proponent that the “circumstances indicate the trustworthiness of the third-party documents.”  Id.  Indeed such a showing would be difficult, if not impossible, since the proponent has no personal knowledge of the record keeping practices of the entity that created the documents.  To this extent the concerns of Justice Brown are satisfied because as a practical matter the burden will still rest on the opponent of the evidence to show that the documents are untrustworthy, as in Old Republic.[7] 

 

In any event, regardless of who has the burden under Simien, the trial court has broad discretion in determining whether the circumstances indicate that the documents are trustworthy.  See Troung v. Dodeka, L.L.C., 2011 WL 2693504, at *4 (Tex.  App.—Houston [14th Dist.] July 12, 2011, no pet.) (the determination of whether the source of information or the method or circumstances of preparation of business records indicate a lack of trustworthiness rests within the sound discretion of the trial court); Old Republic Ins. Co. v. Edwards, 2011 WL 2623994, at *11 (”Old Republic has not demonstrated that the trial court abused its discretion by refusing to admit the Agreement and credit application into evidence.”). 

 

  1. D.      Conclusion

 

The courts of appeals are divided on the issue of whether the proponent of business records acquired from another party must have personal knowledge of the record keeping practices of the party that created the documents.  One line of cases holds that personal knowledge is required.  A second line of cases applies the test adopted in Bell v. State and holds that such personal knowledge is not required as long as “(a) the document is incorporated and kept in the course of the testifying witness’s business; (b) that business typically relies upon the accuracy of the contents of the document; and (c) the circumstances otherwise indicate the trustworthiness of the document.”  176 S.W.3d at 240-41.  But this formulation raises further potential issues for future consideration, if and when presented, concerning the circumstances in which a document is “incorporated” in the testifying witness’s business and who has the burden of showing the documents are trustworthy (or untrustworthy).    



[1] A.B., College of William and Mary, 1974; J.D., University of Texas School of Law, 1977.  Mr. Sarosdy is the Executive Director of the Texas Center for the Judiciary.  The opinions expressed in this article are his own and not those of the Texas Center.    

[2] The proponent could also serve requests for admissions under Tex. R. Civ. P. 198 or obtain an affidavit from the custodian of records of the entity that created the records. 

[3] The court did not explain how a Dodeka employee could “vouch for the accuracy of business records prepared by Chase.”

[4] The court in Ekpe cites two cases for this dicta: Simien and Damron v. Citibank (S.D.) N.A., 2010 WL 3377777 (Tex. App.—Austin Aug. 25, 2010, pet. denied).  Simien does not hold that a witness “may have personal knowledge and competence to testify regarding the record-keeping practices of a person other than his or her employer.”  As discussed above, Simien holds that despite a lack of personal knowledge the records may be admitted if the three-part test adopted in Bell v. State is satisfied.  In Damron the custodian of records was an employee of a Citibank affiliate who did have personal knowledge of the record keeping practices of Citibank.  Therefore, the court’s dicta goes beyond the actual holdings of the two cases cited.   

[5] The same considerations arguably apply to other businesses, such as the sale of a medical practice.  A new physician acquiring a medical practice from a retiring physician would have a common interest with the patients in maintaining accurate records.  By contrast, a collections firm to whom delinquent accounts have been assigned  would not share a common interest with the patients.

[6] As noted above, the proponent of hearsay has the burden of showing that the testimony fits within an exception to the general rule prohibiting the admission of hearsay evidence.  Volkswagen of America, Inc. v. Ramirez, 159 S.W.3d 897, 908 n.5 (Tex. 2004);   FIA Card Services, N.A. v. Frausto, 2011 WL 6260653, at *3 (Tex. App.—Amarillo Dec. 15, 2011, no pet.).  See supra at 1.

[7] Notably, the Simien test was crafted from Bell v. State and Harris v. State, which relied upon cases decided under the Federal Rules of Evidence.  See Bell v. State, 176 S.W.3d at 96 and n. 2 (citing federal cases and noting that “cases that interpret the federal rules guide us unless the Texas rule clearly departs from its federal counterpart”); Harris v. State, 846 S.W.2d at 964.  One of the principal federal cases relied upon, United States v. Hines, 564 F.2d 925, 928 (10th Cir. 1977), cert. denied, 434 U.S. 1022 (1978) holds: “The test of whether such records should be admitted rests on their reliability.”  To the extent that Simien is adopting a general reliability standard for the admission of business records, it is noteworthy that the Federal Rules of Evidence have a residual hearsay exception in Rule 807 (formerly Rule 803(25)) but the Texas Rules of Evidence have not adopted a residual hearsay exception.  Therefore, insofar as the Simien test has become simply whether the documents are shown to be reliable by the proponent (or unreliable by the opponent), it may be engrafting a residual hearsay exception onto the Texas Rules of Evidence comparable to Rule 807 of the federal rules.  On the other hand, if reliability is not an issue, then all that really needs to be shown to admit the documents under Simien is authenticity because that is essentially all that a custodian of records of a collections firm can establish.