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Air Land Forwarders Inc. v. United States

March 26, 1999

AIR LAND FORWARDERS, INC., PLAINTIFF, AND SUDDATH VAN LINES, INC., AALMODE TRANSPORTATION CORP., PAUL ARPIN VAN LINES, INC., TEK VAN LINES, INC., ACADEMY VAN & STORAGE, INC., ACE VAN & STORAGE, INC., INTERSTATE MOVING SYSTEMS, INC., INTERSTATE INTERNATIONAL, INC. AND INTERSTATE VAN LINES, INC., PLAINTIFFS-APPELLANTS,
v.
UNITED STATES, DEFENDANT-APPELLEE.



Before Rich, Bryson, and Gajarsa, Circuit Judges.

The opinion of the court was delivered by: Gajarsa, Circuit Judge.

Appealed from: United States Court of Federal Claims Judge James F. Merow

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

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. *fn1 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 during 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) ("[R]ecords a business ...


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