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May 30, 2012 Articles

For Both New and Experienced Lawyers—Particular Evidence Problems with Appraisals

One of the most powerful tools in a lawyer's valuation arsenal is the report of a professional “valuer.”

By Hon. Pam Pepper

Proof of value is a bankruptcy lawyer’s stock in trade. It is the rare debtor, creditor, or trustee who does not eventually need to prove the value of a piece of collateral, or a business, or an intangible right. One of the most powerful tools in a lawyer’s valuation arsenal is the report of a professional “valuer”—an appraisal report, a valuation report, a broker’s price opinion, or a comparative market analysis. But such a report doesn’t do a litigant much good if the litigant can’t get that report admitted into evidence. And that is where the evidence problems come in.

Appraisal Reports and Other Valuation Reports as Hearsay
Fed. R. Evid. 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.” Rule 801(a) defines a “statement” as “an oral or written assertion.” With some exceptions not relevant here, any oral or written statement that someone makes outside of the courtroom, which is then offered to prove the truth of what’s in the statement, is hearsay.

An appraisal or other valuation report is a written statement made by someone who, when she made the statement, wasn’t testifying in court. Presumably, whoever is offering the statement is doing so to prove that the valuation the appraiser came up with is true.

This does not mean that appraisal reports aren’t admissible. Most of us have a hazy recollection from law school evidence class that there are exceptions to the hearsay rule. One of those exceptions is found in Fed. R. Evid. 803(6), “Records of Regularly Conducted Activity”—the exception to which we commonly refer as the “business records” exception. Evidence has to meet a number of criteria to fall under the business records exception of rule 803(6). The evidence must:

  •          consist of a memo, report, record, or data compilation “in any form”;
  •          of “acts, events, conditions, opinions, or diagnoses”;
  •          made at or near the time of the events it describes;
  •          by, or from information transmitted by, a person with knowledge;
  •          “kept in the course of a regularly conducted business activity”;
  •           by a business whose regular practice it is to make such a record.

The witness called to testify about the record must be a “custodian” of the record “or other qualified witness.” Finally, the rule defines “business” to include “business, institution, association, profession, occupation, and calling of every kind, whether or not conducted for profit.”

The circumstances under which a valuation report will qualify as a “record of regularly conducted activity” under Rule 803(6) are fact-specific. An appraisal report a year after the appraisal was conducted probably will not pass the “at or near the time” requirement. If the person who wrote the report didn’t conduct the appraisal, the report probably flunks the “by a person with knowledge” requirement.

But most frequently the requirement that trips up lawyers is the requirement that the report be admitted through testimony of “the custodian or other qualified witness.” It is not unusual for a debtor’s attorney to put the debtor on the stand and try to admit an appraisal report through her testimony—or for the creditor who commissioned the report to put on the loan officer who ordered it and try to admit the report through that person. In these instances, while the report may very well be a business record of someone’s, it isn’t a business record of either the debtor’s or the creditor’s. The proponent needs to call as a witness the appraiser who wrote the report or the person at the appraiser’s office who constitutes the “custodian” of that record.

The first key to getting your appraisal report admitted is to make sure the evidence meets all the criteria of Rule 803(6), and this includes making sure that you call the correct “custodian” as your witness. Next time, we’ll consider other evidentiary problems that arise around appraisals.

Keywords: appraisal, business record, evidence, Federal Rule of Evidence 801, Federal Rule of Evidence 803(6), hearsay, Judge Pepper, value, valuation report

Hon. Pam Pepper – May 30, 2012

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