What Should You Know About the Rules of Evidence?

In last month's issue, we discussed the fact that bankruptcy lawyers may think they do not have to worry about the rules of evidence  '  and we then went on to prove otherwise. The Federal Rules of Evidence apply to most issues that arise in bankruptcy cases, according to Rule 9017 of the Federal rules of Bankruptcy Procedure. We discussed two of the four useful subjects under these rules: attorney-client privilege, and attorney work-product doctrine. Part Two of this article, below, discusses settlement offers and affidavits.

Settlement Offers

Evidence of settlement offers made to settle a disputed claim is inadmissible under Rule 408 of the Federal Rules of Evidence. This broad provision excludes any evidence related to the furnishing or accepting of a compromise of a claim that is disputed as to validity or amount. The exclusion also covers factual statements made during the course of settlement talks.

There are several limitations to the scope of Rule 408. Pre-existing documents used during compromise negotiations remain discoverable. Also, the requirement that there be a dispute as to the claim's validity or amount means, for example, that the rule's exclusion does not apply to communications intended “to induce a creditor to settle an admittedly due amount for a lesser sum” (Fed. R. Evid. 408 Advisory Committee Note). Another important limitation is that the exclusion applies only against a party that seeks to admit the evidence “to prove liability for or invalidity of the claim or its amount.” The evidence remains admissible for any other purpose, including to dispute a contention of undue delay, to prove wrongful acts during the negotiations, or to demonstrate the nature of damages.

Courts disagree on the breadth of Rule 408's coverage, but a lawyer may take two steps to ensure that communications will be deemed inadmissible under the rule. First, the communication should be clearly identified as a compromise offer or a communication related to such an offer. Second, some courts have held that the inclusion of the words “without prejudice” in the communication promotes inadmissibility (See, e.g., S. Leo Harmonay Inc. v. Binks Mfg. Co., 597 F. Supp. 1014 (S.D.N.Y. 1985)). This phrase, a holdover from the common law, can still carry some weight.

Affidavits

An additional rule of evidence can be useful to bankruptcy lawyers not to protect confidential information, but to ensure that evidence submitted to a court will be deemed admissible. This is the rule on affidavits, regularly used by bankruptcy lawyers to accompany motions filed with a court. The general rule is that any witness who testifies must be made available for cross-examination, but there is an important exception pertaining to the use of affidavits. Although affidavit testimony is technically hearsay, Fed. R. Civ. P. 43(e) permits a court to rely on it to hear a motion based on facts not appearing in the record (See, e.g., In re Garner, 246 B.R. 617 (B.A.P. 9th Cir. 2000); Huddleston v. Nelson Bunker Hunt Trust Estate, 102 B.R. 71 (N.D. Tex. 1989)). Under this rule, for example, a proceeding to dismiss or convert a bankruptcy case (In re Cabral, 285 B.R. 563 (B.A.P. 1st Cir. 2002)), or to dismiss a claim (In re Garner, 246 B.R. 617 (B.A.P. 9th Cir. 2000)), may be heard based on affidavits. But lawyers must exercise caution when relying on this rule, because courts retain discretion to direct that the matter be heard on oral testimony, in which case the affidavit will be held inadmissible if the affiant is unavailable for cross-examination. In one case, an appellate court held that it was an abuse of discretion for a bankruptcy court to refuse to entertain oral testimony on a motion for summary judgment where controverted questions of fact turned on a witness's credibility (In re Bryan, 261 B.R. 240 (B.A.P. 9th Cir. 2001)). In a situation where a bankruptcy case was reopened to determine the priority of a lien and the parties had agreed to a stipulation of facts, the bankruptcy court refused to admit an affidavit not included in the stipulation, where the affiant had not testified at trial (In re Dial Business Forms, Inc., 273 B.R. 594 (Bankr. W.D. Mo. 2002), aff'd 283 B.R. 537 (B.A.P. 8th Cir. 2002)). Further, even when a court hears a motion based on one party's affidavit, its opponent must be allowed an opportunity to challenge that affidavit and submit its own affidavits (First Republicbank Dallas v. Gargyle Corp., 91 B.R. 398 (N.D. Tex. 1988)). Finally, this exception does not apply beyond motion practice; witnesses whose affidavits are submitted at other stages of the case must be available for cross-examination in accordance with the rules of evidence (See, e.g., In re Roberts, 210 B.R. 325 (Bankr. N.D. Iowa 1997); In re Doser, 281 B.R. 292 (Bankr. D. Idaho 2002)).

Conclusion

The rules of evidence can further a party's interest by preventing confidential information from being used against it. Lawyers should take advantage of the rules as much as possible. This can be accomplished most easily by having a detailed knowledge of the rules of evidence and by adding text to any documents that might fall within the rules' protections. Materials lacking legal grounds for protection will be admissible regardless of catch-phrases stamped on them by a lawyer, but sometimes identifying a document as “Attorney Work Product,” “Privileged and Confidential,” or “Without Prejudice” can make the difference between disclosure and protection of important documents.

In last month's issue, we discussed the fact that bankruptcy lawyers may think they do not have to worry about the rules of evidence  '  and we then went on to prove otherwise. The Federal Rules of Evidence apply to most issues that arise in bankruptcy cases, according to Rule 9017 of the Federal rules of Bankruptcy Procedure. We discussed two of the four useful subjects under these rules: attorney-client privilege, and attorney work-product doctrine. Part Two of this article, below, discusses settlement offers and affidavits.

Settlement Offers

Evidence of settlement offers made to settle a disputed claim is inadmissible under Rule 408 of the Federal Rules of Evidence. This broad provision excludes any evidence related to the furnishing or accepting of a compromise of a claim that is disputed as to validity or amount. The exclusion also covers factual statements made during the course of settlement talks.

There are several limitations to the scope of Rule 408. Pre-existing documents used during compromise negotiations remain discoverable. Also, the requirement that there be a dispute as to the claim's validity or amount means, for example, that the rule's exclusion does not apply to communications intended “to induce a creditor to settle an admittedly due amount for a lesser sum” (Fed. R. Evid. 408 Advisory Committee Note). Another important limitation is that the exclusion applies only against a party that seeks to admit the evidence “to prove liability for or invalidity of the claim or its amount.” The evidence remains admissible for any other purpose, including to dispute a contention of undue delay, to prove wrongful acts during the negotiations, or to demonstrate the nature of damages.

Courts disagree on the breadth of Rule 408's coverage, but a lawyer may take two steps to ensure that communications will be deemed inadmissible under the rule. First, the communication should be clearly identified as a compromise offer or a communication related to such an offer. Second, some courts have held that the inclusion of the words “without prejudice” in the communication promotes inadmissibility ( See, e.g., S. Leo Harmonay Inc. v. Binks Mfg. Co. , 597 F. Supp. 1014 (S.D.N.Y. 1985)). This phrase, a holdover from the common law, can still carry some weight.

Affidavits

An additional rule of evidence can be useful to bankruptcy lawyers not to protect confidential information, but to ensure that evidence submitted to a court will be deemed admissible. This is the rule on affidavits, regularly used by bankruptcy lawyers to accompany motions filed with a court. The general rule is that any witness who testifies must be made available for cross-examination, but there is an important exception pertaining to the use of affidavits. Although affidavit testimony is technically hearsay, Fed. R. Civ. P. 43(e) permits a court to rely on it to hear a motion based on facts not appearing in the record (See, e.g., In re Garner, 246 B.R. 617 (B.A.P. 9th Cir. 2000); Huddleston v. Nelson Bunker Hunt Trust Estate , 102 B.R. 71 (N.D. Tex. 1989)). Under this rule, for example, a proceeding to dismiss or convert a bankruptcy case (In re Cabral, 285 B.R. 563 (B.A.P. 1st Cir. 2002)), or to dismiss a claim (In re Garner, 246 B.R. 617 (B.A.P. 9th Cir. 2000)), may be heard based on affidavits. But lawyers must exercise caution when relying on this rule, because courts retain discretion to direct that the matter be heard on oral testimony, in which case the affidavit will be held inadmissible if the affiant is unavailable for cross-examination. In one case, an appellate court held that it was an abuse of discretion for a bankruptcy court to refuse to entertain oral testimony on a motion for summary judgment where controverted questions of fact turned on a witness's credibility (In re Bryan, 261 B.R. 240 (B.A.P. 9th Cir. 2001)). In a situation where a bankruptcy case was reopened to determine the priority of a lien and the parties had agreed to a stipulation of facts, the bankruptcy court refused to admit an affidavit not included in the stipulation, where the affiant had not testified at trial (In re Dial Business Forms, Inc., 273 B.R. 594 (Bankr. W.D. Mo. 2002), aff'd 283 B.R. 537 (B.A.P. 8th Cir. 2002)). Further, even when a court hears a motion based on one party's affidavit, its opponent must be allowed an opportunity to challenge that affidavit and submit its own affidavits ( First Republicbank Dallas v. Gargyle Corp. , 91 B.R. 398 (N.D. Tex. 1988)). Finally, this exception does not apply beyond motion practice; witnesses whose affidavits are submitted at other stages of the case must be available for cross-examination in accordance with the rules of evidence (See, e.g., In re Roberts, 210 B.R. 325 (Bankr. N.D. Iowa 1997); In re Doser, 281 B.R. 292 (Bankr. D. Idaho 2002)).

Conclusion

The rules of evidence can further a party's interest by preventing confidential information from being used against it. Lawyers should take advantage of the rules as much as possible. This can be accomplished most easily by having a detailed knowledge of the rules of evidence and by adding text to any documents that might fall within the rules' protections. Materials lacking legal grounds for protection will be admissible regardless of catch-phrases stamped on them by a lawyer, but sometimes identifying a document as “Attorney Work Product,” “Privileged and Confidential,” or “Without Prejudice” can make the difference between disclosure and protection of important documents.