Russell v. Perkins Ex Rel. International Management Associates, LLC

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[PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
________________________
No. 14-13423
Non-Argument Calendar
________________________
D.C. Docket Nos. 1:13-cv-02067-RWS; 08-bkc-06215-PWB
In Re: INTERNATIONAL MANAGEMENT ASSOCIATES, LLC,
Debtor.
GEORGE RUSSELL CURTIS, SR. LIVING TRUST,
GEORGE RUSSELL CURTIS, SR.,
BETTY CURTIS,
Defendants-Appellants,
versus
WILLIAM F. PERKINS,
in his Capacity as Chapter 11 Trustee of International
Management Associates, LLC and its affiliated debtors,
Plaintiff-Appellee.
________________________
Appeal from the United States District Court
for the Northern District of Georgia
________________________
(March 19, 2015)
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Before ED CARNES, Chief Judge, HULL and ROSENBAUM, Circuit Judges.
PER CURIAM:
George Russell Curtis, Betty Curtis, and the George Russell Curtis, Sr.,
Living Trust, who are the defendants in this adversarial proceeding, appeal the
bankruptcy court’s judgment, which allowed the bankruptcy trustee to avoid a
$200,000 transfer from the debtor, International Management Associates (IMA), to
the defendants. See 11 U.S.C. §§ 544(b), 547(b), 548(a)(1)(A)–(B).
I.
Kirk Wright ran IMA and its affiliates, which he claimed was a hedge fund
but which looked like a Ponzi scheme. The defendants invested $500,000 with
IMA from 2002 to 2006. Over that same period, they received $621,000 in
disbursements from IMA. The last of those disbursements took place on January
10, 2006, when IMA transferred $200,000 to the defendants.
On March 16, 2006, the bankruptcy trustee, whom a Georgia state court had
appointed as IMA’s receiver,1 filed a voluntary petition to place IMA in
bankruptcy. As part of that bankruptcy action, the trustee filed a series of
adversary proceedings against IMA’s investors, including the defendants. In those
proceedings, he sought to avoid transfers that IMA had made to those investors
1
In a later action brought by the Securities and Exchange Commission, the bankruptcy
trustee also became IMA’s federally appointed receiver.
2
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shortly before being placed in bankruptcy. The bankruptcy court consolidated all
those proceedings for the sole purpose of determining whether IMA was a Ponzi
scheme. It held a consolidated hearing to take evidence on that question.
The trustee was the only witness at that hearing. He gave few details about
the state of IMA’s finances at the time he took control of it. He focused almost
entirely on laying the foundation for his documentary evidence. He testified how
he had seized IMA’s files and, using his training as a certified fraud examiner, had
“reconstructed” them to verify their accuracy.
According to the trustee’s testimony, the day after the state court appointed
him as receiver, he took possession of IMA’s offices and their contents, most
importantly IMA’s documents. He immediately changed the locks and removed
any means of remotely accessing IMA’s electronic documents. He then worked
with the FBI and the SEC to canvass national financial institutions for accounts in
the name of either IMA or Wright. He subpoenaed the records of those institutions
where he found IMA’s accounts. He interviewed IMA’s investors. With the help
of an international accounting firm, he cross-checked IMA’s own documents with
those kept by the financial institutions and the investors. He also interviewed
IMA’s principals and its employees, including its office manager. From them he
learned about the procedures used to create IMA’s documents. Satisfied as to their
reliability, the trustee prepared detailed summaries of them.
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At the bankruptcy court’s consolidated hearing, the trustee offered those
summaries into evidence to prove the state of IMA’s finances up to the start of this
bankruptcy action. See Fed. R. Evid. 1006 (“The proponent may use a summary,
chart, or calculation to prove the content of voluminous writings, recordings, or
photographs that cannot be conveniently examined in court.”). He did not offer
into evidence the documents underlying those Rule 1006 summaries. The
defendants objected to the introduction of the summaries and argued that the
underlying documents had not been authenticated and were hearsay not within any
hearsay exception. See Fed. R. Evid. 802, 901. The bankruptcy court overruled
that objection, specifically concluding that the underlying documents would be
admissible under the residual hearsay exception. See Fed. R. Evid. 807.
Based on the evidence presented at that consolidated hearing, the bankruptcy
court found that IMA was a Ponzi scheme. It then severed the consolidated
adversary proceedings and used its Ponzi scheme finding and the trustee’s Rule
1006 summaries to adjudicate them individually. In this adversary proceeding, the
trustee and the defendants stipulated to three facts: (1) that the defendants had
invested $500,000 with IMA; (2) that IMA had disbursed a total of $621,000 to the
defendants; and (3) that IMA’s last disbursement to them was the $200,000
transfer on January 10, 2006, 65 days before this bankruptcy petition was filed.
Based on those stipulated facts, the trustee’s Rule 1006 summaries, and the Ponzi
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scheme finding, the bankruptcy court entered a judgment allowing the trustee to
avoid the $200,000 transfer from IMA to the defendants. The defendants appealed
that judgment to the district court, which affirmed it. They now appeal it to us.
II.
After the district court reviews a bankruptcy court’s judgment, we review
that judgment again, independently of the district court. Senior Transeastern
Lenders v. Official Comm. of Unsecured Creditors (In re TOUSA, Inc.), 680 F.3d
1298, 1310 (11th Cir. 2012). We review the bankruptcy court’s evidentiary
rulings, here its decision to admit the trustee’s Rule 1006 summaries, only for an
abuse of discretion. Walden v. Walker (In re Walker), 515 F.3d 1204, 1213 (11th
Cir. 2008); United States v. Malol, 476 F.3d 1283, 1291 (11th Cir. 2007). Even if
the court did commit an abuse of discretion, we will overturn its evidentiary ruling
only if the defendants have shown that the ruling had a “substantial prejudicial
effect.” Adams v. Austal, U.S.A., L.L.C., 754 F.3d 1240, 1248 (11th Cir. 2014)
(quotation marks omitted).
The bankruptcy court admitted the trustee’s summaries under Federal Rule
of Evidence 1006, which allows a party to “use a summary, chart, or calculation to
prove the content of voluminous writings, recordings, or photographs that cannot
be conveniently examined in court.” The only textual limit placed on the use of
summaries is that “[t]he proponent must make the originals or duplicates available
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for examination or copying, or both, by other parties at a reasonable time and
place.” Fed. R. Evid. 1006. The rule does not require the proponent to introduce
the underlying documents into evidence, and the trustee did not. But we have held
that it is necessary to establish that the underlying documents would have been
admissible if the proponent had sought their admission. Peat, Inc. v. Vanguard
Research, Inc., 378 F.3d 1154, 1160 (11th Cir. 2004).
The defendants objected to the admission of the trustee’s Rule 1006
summaries on the ground that the underlying documents were inadmissible
hearsay. Because the trustee used the summaries based on the underlying
documents to prove the truth of the information contained in those documents, they
are hearsay and were not admissible unless covered by a hearsay exception. Fed.
R. Evid. 801(c), 802. The bankruptcy court concluded that the underlying
documents were admissible under the residual exception to the rule against
hearsay. See Fed. R. Evid. 807.
The trustee contends that, even if those documents were not admissible
under that hearsay exception, they were admissible under the hearsay exception for
“business records.” See Fed. R. Evid. 803(6). As the appellee, the trustee may
raise any argument for affirming the bankruptcy court’s judgment as long as it is
supported by the record — even arguments that are inconsistent with the
bankruptcy court’s reasoning. See Hamilton v. Southland Christian Sch., Inc., 680
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F.3d 1316, 1318 (11th Cir. 2012); see also Gwynn v. Walker (In re Walker), 532
F.3d 1304, 1308 (11th Cir. 2008) (“We may affirm on any legal ground supported
by the record.”). And we must disregard any evidentiary errors and affirm the
bankruptcy court’s judgment as long as those errors did not have a substantial
prejudicial effect. Adams, 754 F.3d at 1248. Assuming the bankruptcy court
erroneously applied the residual hearsay exception, that ruling did not have a
substantial prejudicial effect if the underlying documents were admissible under
the business records exception. See United States v. Williams, 837 F.2d 1009,
1013–14 (11th Cir. 1988) (affirming a judgment despite the erroneous admission
of a statement under a hearsay exception because the statement was admissible as
substantive evidence under another rule of evidence). If the underlying documents
were admissible under the business records exception, we must affirm.
The trustee’s testimony needed to show two things to establish that the
business records exception applied. United States v. Dreer, 740 F.2d 18, 19–20
(11th Cir. 1984). First, it needed to show that the underlying documents are
authentic. Id. at 20; see Fed. R. Evid. 901–902. Second, it needed to show that
they meet the requirements of Rule 803(6). Dreer, 740 F.2d at 20. Whether the
trustee’s Rule 1006 summaries were admissible depends on whether he made both
of those showings for the underlying documents establishing their admissibility
under Rule 803(6). See Peat, Inc., 378 F.3d at 1160–61; see also United States v.
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Johnson, 594 F.2d 1253, 1257 (9th Cir. 1979) (“[T]he proponent of a summary
must demonstrate the admissibility of the underlying writings or records
summarized, as a condition precedent to introduction of the summary into evidence
under Rule 1006.”) (emphasis added).
A.
The trustee met his authentication burden, which is a light one. See United
States v. Lebowitz, 676 F.3d 1000, 1009 (11th Cir. 2012) (refusing to disturb an
authentication decision unless there is “no competent evidence in the record to
support it”) (quotation marks omitted). Had he sought to admit the underlying
documents, the trustee would have needed to establish only a prima facie case that
they are what he claims they are. See Fed. R. Evid. 901(a); United States v.
Caldwell, 776 F.2d 989, 1001–02 (11th Cir. 1985) (holding that Rule 901 required
only enough evidence that a jury “could have reasonably concluded” that a
document was authentic). The trustee could meet his burden with circumstantial
evidence of the authenticity of the underlying documents through the testimony of
a witness knowledgeable about them. See Fed. R. Evid. 901(b)(1); Caldwell, 776
F.2d at 1002–03. Once that prima facie showing of authenticity was made, the
ultimate question of the authenticity of the documents would have been left to the
factfinder, here the bankruptcy court. See Caldwell, 776 F.2d at 1002.
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The trustee testified that all of the underlying documents were found at
IMA’s offices and that the information in those documents substantially matched
the records kept by the financial institutions and clients with which IMA had
transacted. If the bankruptcy court believed that testimony, it could have
reasonably concluded that the underlying documents were a true and authentic
record of IMA’s business. That is all Rule 901 required. See Lebowitz, 676 F.3d
at 1009; Caldwell, 776 F.2d at 1001–02.
B.
An authenticated document is admissible as a business record if it “was
made at or near the time by — or from information transmitted by — someone
with knowledge”; if it “was kept in the course of a regularly conducted activity”;
and if “making the record was a regular practice of that activity.” Fed. R. Evid.
803(6)(A)–(C). The trustee could establish those requirements through “the
testimony of the custodian or another qualified witness,” or by means of an out-of-
court certification procedure established by rule or statute. Id. 803(6)(D). Even if
the underlying documents satisfied those three requirements, they would still be
inadmissible if either their “source of information” or their “method or
circumstances of preparation indicate a lack of trustworthiness.” Id. 803(6)(E).
The trustee testified in the bankruptcy court about how the underlying
documents satisfied the requirements of the business records exception. As IMA’s
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court-appointed receiver, the trustee was the “custodian” of the underlying
documents. See id. 803(6)(D); Warfield v. Byron, 436 F.3d 551, 559 (5th Cir.
2006) (holding that the federally appointed receiver for a Ponzi scheme qualified
as the scheme’s “record custodian”). He testified about his investigation into the
provenance and reliability of the documents he seized at IMA’s office. He testified
about his interview with one of IMA’s principals, during which he learned that the
office routinely created those documents based on its interactions with financial
institutions and IMA’s clients. And he testified about his reconciliation of the
documents with corresponding files held by those financial institutions and clients.
His testimony evidences that someone with personal knowledge created the
documents. We have no problem concluding that the underlying documents were
routinely made as part of a regularly conducted activity, near the time of that
activity, by someone with personal knowledge of their contents. See Fed. R. Evid.
803(6)(A)–(C). They were admissible under the business records exception.
Despite that, the defendants contend that the trustee’s testimony cannot
establish the requirements of the business records exception. They argue that his
testimony is itself inadmissible because it is based on hearsay — his interviews
with IMA’s principals and employees. That argument misunderstands two
principles.
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First, it misunderstands the nature of admissibility determinations. “The
court must decide any preliminary question about whether . . . evidence is
admissible. In so deciding, the court is not bound by evidence rules, except those
on privilege.” Fed. R. Evid. 104(a); see id. 1101(d)(1) (“These rules — except for
those on privilege — do not apply to . . . the court’s determination, under Rule
104(a), on a preliminary question of fact governing admissibility . . . .”). As a
result, when deciding whether an exception to the rule against hearsay applies, the
court may consider any unprivileged evidence — even hearsay. See United States
v. Byrom, 910 F.2d 725, 734–35 (11th Cir. 1990). The trustee’s testimony
establishing the foundation for the business records exception was based on
hearsay. For instance, he had no personal knowledge of IMA’s recordkeeping
practices other than what he gleaned from his interview with one of IMA’s
principals. However, the bankruptcy court was free to consider that and any other
hearsay when determining whether the underlying documents were admissible
under the business records exception. See Fed. R. Evid. 104(a); cf. United States
v. Franco, 874 F.2d 1136, 1139 (7th Cir. 1989) (“When making preliminary factual
inquiries about the admissibility of evidence under a hearsay exception, the district
court must base its findings on the preponderance of the evidence. That evidence,
however, may include hearsay and other evidence normally inadmissible at trial.”)
(citation omitted).
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Second, the defendants’ argument misunderstands the nature of the
testimony that the business records exception requires. See Fed. R. Evid.
803(6)(D). Someone who is knowledgeable about the procedures used to create
the alleged business records must testify. See United States v. Garnett, 122 F.3d
1016, 1018–19 (11th Cir. 1997) (“[Rule] 803(6) requires the testimony of a
custodian or other qualified witness who can explain the record-keeping procedure
utilized.”) (emphasis added); see also United States v. Box, 50 F.3d 345, 356 (5th
Cir. 1995) (“A qualified witness is one who can explain the system of record
keeping and vouch that the requirements of Rule 803(6) are met . . . .”). The
testifying witness does not need firsthand knowledge of the contents of the records,
of their authors, or even of their preparation. See United States v. Bueno-Sierra,
99 F.3d 375, 378–79 (11th Cir. 1996); United States v. Parker, 749 F.2d 628, 633
(11th Cir. 1984); United States v. Atchley, 699 F.2d 1055, 1058–59 (11th Cir.
1983); see also Box, 50 F.3d at 356 (“[T]he witness need not have personal
knowledge of the record keeping practice or the circumstances under which the
objected to records were kept.”). As long as the trustee presented enough
circumstantial evidence to establish the trustworthiness of the underlying
documents, he did not need to present testimony from the person who actually
prepared them; his own testimony would suffice. See Itel Capital Corp. v. Cups
Coal Co., 707 F.2d 1253, 1259 (11th Cir. 1983); see also United States v. Flom,
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558 F.2d 1179, 1182 (5th Cir. 1977) (“Although the usual case involves an
employee of the preparing business laying the necessary foundation under 803(6),
the law is clear that under circumstances which demonstrate trustworthiness it is
not necessary that the one who kept the record, or even had supervision over [its]
preparation, testify.”) (citation omitted). 2
The trustee’s testimony shows that his knowledge of the underlying
documents is greater than what we concluded was sufficient in a case that raised a
similar issue. See Allen v. Safeco Ins. Co. of Am., 782 F.2d 1517, 1519 (11th Cir.
1986). In Allen a state fire marshal testified about the contents of a lab report that
his office did not create. Id. at 1519. His testimony established only that the lab
“regularly analyzed samples sent from his office” — not the reliability of the lab
test, nor even his secondhand knowledge of the lab’s procedures. Id. That was
enough; we held that the district court had not abused its discretion when it
admitted that lab report under Rule 803(6). Id. In this case, the trustee knew
secondhand how IMA created its records from his interviews. Based on his
investigation, he knew firsthand about the reliability of those records. That is
enough.
2
In Bonner v. City of Prichard, 661 F.2d 1206, 1209 (11th Cir. 1981) (en banc), we adopted
as binding precedent all decisions of the former Fifth Circuit handed down before October 1,
1981.
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The underlying documents would have been admissible into evidence as
business records. The bankruptcy court therefore did not abuse its discretion by
admitting the trustee’s Rule 1006 summaries based on them into evidence.
III.
The defendants also contend that the trustee’s Rule 1006 summaries were
insufficient to establish that IMA was a Ponzi scheme. “A Ponzi scheme uses the
principal investments of newer investors, who are promised large returns, to pay
older investors what appear to be high returns, but which are in reality a return of
their own principal or that of other investors.” Wiand v. Lee, 753 F.3d 1194, 1201
(11th Cir. 2014). A key feature of most Ponzi schemes is that the “entities used to
perpetrate the scheme usually conduct little to no legitimate business.” Id. The
bankruptcy court expressly considered whether IMA conducted some legitimate
business, and it found that IMA was not set up to, and did not, conduct any
legitimate business at all. We review that finding only for clear error. In re
TOUSA, Inc., 680 F.3d at 1310. The defendants assert that the bankruptcy court
could have found that IMA conducted “substantial legitimate business operations.”
Under the clear error standard, however, could have is not enough. They must
show that the bankruptcy court could not have reasonably made the finding that it
did. See United States v. Almedina, 686 F.3d 1312, 1315 (11th Cir. 2012)
(“Where a fact pattern gives rise to two reasonable and different constructions, the
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factfinder’s choice between them cannot be clearly erroneous.”) (quotation marks
omitted). The bankruptcy court’s finding that IMA was a Ponzi scheme was not
clearly erroneous.
AFFIRMED.
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