Hudson v. Martingale Investments, LLC (In re Hudson), __ B.R. __, 2014 WL 128965 (9th Cir. BAP January 14, 2014)
Hudson v. Martingale Investments, LLC (In re Hudson), __ B.R. __, 2014 WL 128965 (9th Cir. BAP January 14, 2014): The U.S. Bankruptcy Appellate Panel of the Ninth Circuit ("BAP") reversed the bankruptcy court’s ruling to annul the automatic stay. The BAP held that the bankruptcy court abused its discretion by basing the ruling on inadmissible evidence.
FACTS:
On March 5, 2013 at 10:28 a.m. (the "Petition Date"), John E. Hudson (the "Debtor") filed a chapter 13 bankruptcy petition. Martingale Investments, LLC ("Martingale") alleged that at 10:01 a.m. on the same day, Martingale bought the Debtor’s home at a foreclosure sale. The Debtor did not vacate his home and Martingale moved to lift the automatic stay in order to proceed with its unlawful detainer action pending in a state court.
In its motion, Martingale sought to annul the automatic stay retroactive to the Petition Date by arguing that the foreclosure sale occurred pre-petition. In support of its motion, Martingale submitted two declarations. The first declaration, by Martingale’s property manager Olivia Reyes ("Reyes"), stated that she was the custodian of Martingale’s books and records with "personal knowledge" of the Debtor’s account. To support that Martingale purchased the property at 10:01 a.m., before the bankruptcy filing, Reyes attached a report (the "Sale Report") from the trustee who conducted the sale. The Sale Report was actually an email with essential information about the foreclosure sale, prepared by a third party, Priority Posting & Publishing, Inc. ("Priority"). The Debtor objected to the motion, arguing in part, that because the Sale Report was hearsay and not authenticated, Martingale failed to submit any admissible evidence. In response, Martingale submitted a second declaration. The second declaration was from the trustee’s employee, Ric Juarez ("Juarez"), who declared that the foreclosure sale was completed at 10:01 a.m. Juarez’s declaration also relied on the email message from Priority.
The bankruptcy court granted Martingale’s motion and found that the evidence was admissible. The bankruptcy court ordered annulment of the automatic stay. The Debtor timely appealed to the BAP, arguing that the Sale Report was inadmissible evidence.
REASONING:
The BAP reversed the bankruptcy court’s ruling because there was no admissible evidence to support the bankruptcy court’s ruling. The BAP reviewed various Federal Rules of Evidence ("FRE") to conclude that the Sale Report was inadmissible hearsay.
The BAP first noted that the Sale Report, which supported the bankruptcy court’s ruling, was hearsay pursuant to FRE 801(c). The BAP noted the requirement of FRE 802 that hearsay evidence must be excluded unless an exception applies. Reviewing FRE 803(6), which sets forth the "business record exception," the BAP noted that Reyes and Juarez qualified as custodians and other qualified witnesses. Reyes and Juarez’s declarations, however, contained no foundation for admissibility of the Sale Report, which was not Martingale’s or the trustee’s record, but Priority’s record.
The BAP went on to note that the business record exception can apply to records and documents received from another business. In order for the exception to apply, there must be testimony that (1) the document was kept in the regular course of business and (2) the business regularly relied on the document. Thus, in order for the business record exception to apply to the Sale Report, the BAP reasoned that Martingale should have shown that Martingale or the trustee (1) kept the Sale Report in the regular course of business and (2) regularly relied on the Sale Report.
Having explained what was required for the Sale Report to be admissible evidence, the BAP concluded that Martingale failed to make such showing in this case. The BAP held that Reyes and Juarez’s declarations failed to state that Martingale or the trustee (1) kept the Sale Report in the regular course of business and (2) regularly relied on the Sale Report. Because the declarations failed to provide these two foundational showings, the BAP held that the business records exception did not apply to the Sale Report.
The BAP concluded that the bankruptcy court’s ruling must be reversed because there was no other evidence on the record regarding the timing of the foreclosure sale. Thus, the admission of the Sale Report was prejudicial error requiring reversal of the ruling.