Opinion
Case No. 16-10772 Adversary No. 16-1029
2019-01-18
IN RE Darren Lee COURTNEY, Debtor Federal Insurance Company, Plaintiff v. Darren Lee Courtney, Defendant
Andrew R Kasle, Beachwood, OH, for Plaintiff. Darren Lee Courtney, Cincinnati, OH, pro se.
Andrew R Kasle, Beachwood, OH, for Plaintiff.
Darren Lee Courtney, Cincinnati, OH, pro se.
MEMORANDUM DECISION GRANTING JUDGMENT TO DEFENDANT-DEBTOR DARREN LEE COURTNEY
Beth A. Buchanan, United States Bankruptcy JudgePlaintiff Federal Insurance Company ("Plaintiff") commenced this adversary proceeding seeking a determination that Plaintiff's $224,081.33 insurance payment to Fujitec America, Inc. ("Fujitec") is a nondischargeable subrogation debt owed by Defendant-Debtor Darren Lee Courtney ("Debtor") pursuant to Bankruptcy Code Sections 523(a)(4) and (6). Plaintiff made the payment to Fujitec, the Debtor's former employer, to cover insurable damages arising from the Debtor's alleged conversion of funds from Fujitec during his employment as well as the costs of an investigation of the Debtor's activities.
Unless otherwise indicated, the terms "Bankruptcy Code," "Section" and "§" refer to Title 11 of the United States Code, 11 U.S.C. § 101 et seq .
A trial was held on March 6, 2018. The Plaintiff's expert witness involved in the investigation of the Debtor testified to three alleged schemes orchestrated by the Debtor to convert funds from Fujitec. However, the Plaintiff called no witness to lay the foundation for the admission of the documentary and computer-generated evidence relied upon by the expert witness in making his conclusions. The Plaintiff's only other witness, the president of Fujitec, similarly failed to lay the proper foundation for the documentary and computer-generated evidence. As such, the documentary and computer-generated evidence is deemed inadmissible. In turn, the expert's conclusions based solely upon inadmissible evidence are given no weight by this Court. Similarly, Fujitec's president lacked sufficient personal knowledge of the events to establish an underlying debt. For these reasons, this Court concludes that the Plaintiff has failed to carry its burden of establishing the Debtor's liability for a quantifiable debt. Judgment is therefore rendered in favor of the Defendant-Debtor, Darren Lee Courtney.
I. FACTS
The following facts are derived from the testimony and evidence presented at trial.
A. The Debtor's Employment With Fujitec
In 1997, the Debtor was hired by Fujitec as a human resources manager but, eventually, became the company's Chief Legal Officer, which is the position he held until his termination in February of 2012. The Debtor testified that, from early on, it became apparent to the Debtor that his job would entail guiding Fujitec's top management to remain in compliance with American laws and rules of ethics with which top management was often unfamiliar. Over the years, he became responsible for overseeing Fujitec's legal issues and helping to settle the company's lawsuits.
As Chief Legal Officer, the Debtor worked with Fujitec's insurance company, Travelers, to settle general liability lawsuits. Settlement of many of the lawsuits was handled by Travelers directly but the expense to Fujitec was high. To save money, Fujitec authorized the Debtor to settle low dollar lawsuits of $50,000 or less instead of referring them to Travelers.
Both the Debtor and the Plaintiff agree that in 2011, the Debtor began settling fake or fabricated lawsuits purportedly on behalf of Fujitec. However, the parties offered conflicting testimony as to how the Debtor became involved in the scheme. The Debtor testified that he was asked to do so by Fujitec's President, Katsuji Okuda ("Mr. Okuda") for budget reasons. The Debtor explained that Fujitec maintained an "accrual" for settling claims and lawsuits. To the Debtor's understanding, it was important from a budget standpoint to keep the actual settlements below, but close to, the budgeted accrual number in order to prevent the accrual for settlements from being reduced in the following year's budget. Although he knew it to be wrong, the Debtor testified that he did not want to lose his job so he settled both legitimate and fabricated lawsuits at Mr. Okuda's request. According to the Debtor's testimony, the funds that came in for the settlement of these fabricated lawsuits were used to cover his legitimate business expenses for work performed on behalf of Fujitec so that Fujitec did not suffer a loss as a result of these activities.
The Debtor testified that he did not want to be in a position of taking funds from Fujitec through these fabricated settlements. Consequently, he refused to continue settling the fabricated lawsuits when he no longer had a sufficient number of legitimate business expenses to which the funds could be applied. At that point, he wanted a release from liability so that he would not owe the company money for what he was being requested to do on behalf of Fujitec.
On December 22, 2011, the Debtor sent Mr. Okuda an email discussing his continued efforts to limit costs by settling certain claims in-house without going through Travelers [Pl. Ex. 8]. The email included an attached letter from Travelers that Travelers wanted signed by the Debtor on behalf of Fujitec specifically waiving Fujitec's insurance coverage for one specific claim. A second document was attached to the email, which the Debtor stated "confirms my authority going forward to enter into settlements" and was designed to protect "both me and third parties, such as Travelers, who rely on my having such authority." [Id. ]. The document, titled an Authority Agreement and General Release ("Release") included language setting the general limits of the Debtor's settlement authority and further included a broad "General Release" provision stating:
The Company [Fujitec]... hereby irrevocably releases and forever discharges Courtney [Debtor] of and from any and all rights, claims, debts losses, demands, acts, contracts, agreements, liabilities, obligations, damages, costs, fees ... expenses, duties breaches, actions, lawsuits, allegations, causes of action and/or suits of every nature, character and description, whether known or unknown, suspected or unsuspected, disclosed or undisclosed, legal, criminal, or equitable, which they, individually or collectively, had or claimed to have, and/or which the Company may now, or in the future, have or claims to have, against Courtney, or any of them, which in any way allegedly or actually arise from, occurred during, relate to, directly or indirectly, Courtney's employment with the Company, to the date of this General Release.
[Id. ]. In the email to Mr. Okuda, the Debtor noted that the Release "broadly releases me from any of the actions I've taken in the past up to the date of the agreement" and required "both your and my signatures." [Id. ]. No party disputes that Mr. Okuda signed the Release and the Debtor continued working until his termination in February of 2012.
Mr. Okuda also testified at the trial through an interpreter. Mr. Okuda stated that he came to the United States in March of 2011 to be President of Fujitec America, Inc. At that time, the Debtor was already employed as Fujitec's Chief Legal Officer. He admitted that the Debtor was given authority to settle smaller lawsuits in house but denied having knowledge of or involvement in the scheme to settle fabricated lawsuits.
Mr. Okuda further admitted to having signed the Release of the Debtor's liability on behalf of Fujitec but stated that he did not read or understand the Release. He testified that he often signs contracts on behalf of Fujitec that he does not read or understand and does not consider himself fluent in English. However, upon cross-examination by the Debtor, Mr. Okuda testified that, prior to being employed by Fujitec America, he was employed by Fujitec Canada for sixteen years. He further conceded that English is the primary language spoken at both Fujitec Canada and Fujitec America and that he does not often use an interpreter at work. Mr. Okuda testified that he has been speaking English at work with employees for a total of twenty-three years.
With respect to his understanding of the Release, Mr. Okuda testified that he thought it was prepared by Travelers and necessary for the Debtor to take care of business and continue settling smaller lawsuits in house. While Mr. Okuda believed the Release was legitimate when signed, he testified that he no longer believed that to be true because of the Debtor's fabrications. Mr. Okuda testified that the Debtor's "thefts" were reimbursed by the Plaintiff in the amount necessary to cover both the losses caused by the Debtor's activities and the fees for the expert's investigation.
The Debtor was terminated in February of 2012 but the nature of the termination is subject to dispute. Mr. Okuda testified that he asked the Debtor to resign because of some "problems" that were found but admitted on cross examination that the termination was not related to the present allegations. The Debtor asserts that while he met with Mr. Okuda and the HR director, his termination occurred after the meeting while he was hospitalized preventing him from having access to copies of the records of his activities that were in his desk and computer. If access had been given, the Debtor stated that the records would demonstrate that the vast majority of funds from settling the fabricated lawsuits were used to cover legitimate business expenses that the Debtor incurred in his employment with Fujitec.
In March of 2012, Fujitec hired a forensic accountant to investigate the Debtor's activities while employed by Fujitec. The investigation will be discussed in more detail below. The Debtor was also prosecuted. In March of 2013, the Debtor pleaded guilty to felony aggravated theft charges under Ohio Revised Code § 2913.02(A)(1) in the Warren County Court of Common Pleas [Pl. Ex. 1]. In conjunction with the guilty plea, the Debtor was ordered to pay $5,000 in restitution to Fujitec [Id. ]. Besides the $5,000 restitution order, no factual findings were made regarding the theft nor the amount of damages Fujitec sustained [Id. ]. The Debtor testified that he paid the $5,000 restitution debt to Fujitec.
The Debtor relinquished his license to practice law with disciplinary proceedings pending. Currently, the Debtor works part-time doing home remodeling for his own company, Vita Nova Properties and is not otherwise employed.
B. The Investigation of the Debtor's Activities While Employed at Fujitec
Fujitec hired Mr. Todd Pleiman ("Mr. Pleiman"), a partner at RSM US LLP ("RSM") in March of 2012 to conduct a forensic accounting investigation (the "investigation") of alleged thefts by the Debtor while employed at Fujitec. Mr. Pleiman is a certified public accountant who has been employed by RSM for eleven years and is a member of the American Institute of Certified Public Accountants and the Ohio Society of Certified Public Accountants. He has served on the University of Dayton Accounting Advisory Board and the Finance Committee of the Dayton Children's Hospital. He has conducted five or six similar forensic investigations of employee activities on behalf of other companies prior to investigating the Debtor. Mr. Pleiman testified that his role in the investigation was to review summary statements created by RSM employees, invoices and other information to ensure that the documents relied upon in the investigation supported the conclusions that his team at RSM were reaching.
1. Mr. Pleiman's Conclusions
The investigation undertaken by Mr. Pleiman and his team at RSM led Mr. Pleiman to conclude that the Debtor engaged in three schemes to convert funds from Fujitec, which included: (i) the setup of fictitious law firms to make and settle fictitious lawsuits against Fujitec; (ii) the use of a company credit card for personal charges; and (iii) padding and forging expense reports for reimbursement of expenses that did not occur.
With respect to the first scheme, Mr. Pleiman testified at trial that the Debtor set up three fictitious law firms as a way to funnel the settlement funds provided by Fujitec, under the guise of settling lawsuits, into Huntington National Bank and U.S. Bank accounts controlled by the Debtor. Mr. Pleiman formed his opinion based on checks, emails and other records he received from Fujitec, information gleaned from the computer provided by Fujitec that was purportedly used by the Debtor at work, bank statements received from Fujitec and/or the prosecutor, and internet searches of the law firms and case information found in these records. Mr. Pleiman opined that each of the law firms did not exist, except for on paper; Fujitec checks payable to each of the three fictitious law firms were deposited into bank accounts under the Debtor's control; and the bank accounts and signature cards linked to the fictitious law firms were traceable to the Debtor via the Debtor's computer. As a result of this scheme, Mr. Pleiman calculated that a total of $150,125 was fraudulently paid by Fujitec to the three law firms under the guise of settling fictitious claims.
Second, Mr. Pleiman testified to the Debtor's alleged use of a Fujitec credit card for personal expenses. Mr. Pleiman's opinion was based on a summary prepared by RSM employees analyzing monthly credit card statements that RSM received from Fujitec. RSM differentiated between charges that appeared business-related versus those that were personal by attempting to match the statements to business expenses for which reimbursement requests were made. Mr. Pleiman testified that while the Debtor used the credit card for legitimate business expenses, he also used the card for personal charges. Mr. Pleiman concluded that the Debtor's personal expenses on the credit card totaled $29,170.74. Of that amount, the Debtor was reimbursed for $10,995.42 and an additional $18,175.32 in personal charges remained unpaid on the credit card.
Third, Mr. Pleiman analyzed copies of expense reports, invoices and credit card statements provided by Fujitec to determine which of the Debtor's reimbursement requests were for legitimate business trips and expenses and which were for trips or expenses that did not occur. In making the determination, Mr. Pleiman compared the records to airline flight activity and sky miles records to see if the trips occurred. Mr. Pleiman also discussed hotel invoices that appeared to be created on the computer provided by Fujitec and allegedly used by the Debtor. From a review of these records, Mr. Pleiman concluded that the Debtor was reimbursed $17,386 for padded expenses.
The other component of Plaintiff's alleged damages discussed at trial was the costs of the investigation of the Debtor. Mr. Pleiman testified that the investigation lasted a couple of months and that he and RSM charged just over $48,000 for it.
Based on Mr. Pleiman's testimony, the total amount of damages to Fujitec for the Debtor's three fraudulent schemes plus the cost of the investigation equals $244,681.74. However, this amount does not match the $224,081.83 that Plaintiff's counsel asserts is the total nondischargeable debt.
2. The Documentary and Computer Evidence to Support Mr. Pleiman's Conclusions
The business records reviewed and relied upon by Mr. Pleiman or other RSM employees to reach their conclusions include photo-copies of Fujitec checks, emails, bank account statements and signature cards, credit card statements for a Fujitec credit card allegedly used by the Debtor, expense reports, and invoices (together, the "Business Records") [Pl. Exs. 2-7]. In addition, Mr. Pleiman and other RSM employees relied upon information gleaned from the computer that the Debtor allegedly used while working at Fujitec, including allegedly doctored hotel receipts (the "Computer Records") [Id. ]. Furthermore, Exhibits 6 and 7 include summaries created by RSM employees to document the amount of the alleged conversion of funds by the Debtor as gleaned from the Business and Computer Records (the "Summary Evidence").
Mr. Pleiman testified that except for bank statements received from the prosecutor, the Business Records relied upon in the investigation were provided by various members of Fujitec's management. Mr. Pleiman stated that he believed the documents were authentic and accurate because they were approved by members of Fujitec management including, Ray Gibson, Fujitec's Chief Financial Officer, and Melissa Busch, the Controller. Neither Mr. Gibson nor Ms. Busch were called by the Plaintiff to testify. While Mr. Okuda, the President of Fujitec, testified that Fujitec provided the Business Records to Mr. Pleiman, he was not personally involved in the investigation.
Plaintiff included Raymond Gibson, Fujitec's Chief Financial Officer as a lay witness on its Witness List [Docket Number 46] to testify regarding the thefts committed by Debtor while he was employed by Fujitec, the damages, and the Release proffered by the Debtor. However, Plaintiff did not call Mr. Gibson to testify during the trial.
Throughout Mr. Pleiman and Mr. Okuda's testimony, the Debtor raised a continuing objection to the documentary evidence as hearsay, for lack of authentication, and for failure of the Plaintiff to lay the proper foundation for admission. While the Debtor did not object to Mr. Pleiman's qualifications as an expert, he asserted that Mr. Pleiman's conclusions were based on facts of which he had no personal knowledge and that he, instead, discerned from inadmissible evidence.
II. JURISDICTION
This Court has subject matter jurisdiction over this adversary proceeding pursuant to 28 U.S.C. §§ 157 and 1334 and the general order of reference entered in this district. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(I). III. LEGAL ANALYSIS
Plaintiff seeks to except a debt from the Debtor's discharge pursuant to 11 U.S.C. § 523(a)(4) and § 523(a)(6). "Because the overarching purpose of the Bankruptcy Code is to provide a fresh start to those in need of relief from collection efforts of creditors, exceptions to discharge are to be strictly construed against the complaining party." Coughlin Chevrolet, Inc. v. Thompson (In re Thompson), 458 B.R. 409, 417 (Bankr. S.D. Ohio 2011).
Before determining whether the Plaintiff can meet its burden of proving the elements to except a debt from discharge, the Plaintiff must first show that a debt exists. Vande Ryt v. Peace (In re Peace) , 546 B.R. 65, 69 (Bankr. S.D. Ohio 2015) ; Weidle Corp. v. Leist (In re Leist), 398 B.R. 595, 601 (Bankr. S.D. Ohio 2008) ("As elementary as it may seem, a creditor must establish that [the creditor] is owed a debt before it can be determined that the debt is nondischargeable under any § 523(a) exception to discharge."). "In many nondischargeability cases, a bankruptcy court is never tasked with making such a determination." Jennings v. Bodrick (In re Bodrick) , 2017 Bankr. LEXIS 3752 at *11-12, 2017 WL 4877266, at *5 (Bankr. S.D. Ohio Sept. 18, 2017). Where, for example, the debt is liquidated by judgment prior to the bankruptcy filing or the debtor does not dispute the amount or existence of the debt, then the bankruptcy court may only have to determine whether that debt is nondischargeable under § 523(a). Id. In this case, however, the Plaintiff holds no judgment against the Debtor and the Debtor disputes owing any debt to Fujitec or Plaintiff as its subrogee.
While federal bankruptcy law governs whether a debt is nondischargeable, the existence of a debt is determined by applicable nonbankruptcy law. Lawson v. Conley (In re Conley) , 482 B.R. 191, 207 (Bankr. S.D. Ohio 2012) (citing Grogan v. Garner , 498 U.S. 279, 283-84, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991) ). Accordingly, this Court must first look to nonbankruptcy law to determine whether any liability exists before addressing the issue of nondischargeability.
At trial, the Plaintiff maintained that the Debtor employed three fraudulent schemes to pilfer money from Fujitec, those being, the settlement of fake lawsuits, the improper use of the company credit card and falsification of expense reports. The Plaintiff noted that the Debtor pleaded guilty to aggravated theft charges pursuant to Ohio Rev. Code 2913.02(A)(1) [Pl. Ex. 1]. This felonious conduct, the Plaintiff argued, is an admission against interest and forms the basis for liability, which damages the Plaintiff contends totals between $185,686.33 and $196,681.74.
In its amended complaint [Docket Number 38] (the "Amended Complaint"), the Plaintiff seems to assert causes of action for theft, conversion, fraud, misrepresentation, embezzlement and breach of fiduciary duty as the state-law basis for the Debtor's liability, although it was not entirely clear which of these legal theories the Plaintiff was trying to establish at trial.
In his opening statement, Plaintiff's counsel asserted that the Debtor's thefts totaled $185,686.33. However, this amount does not match Mr. Pleiman's testimony that the Debtor converted $150,125 through the settling of fictitious lawsuits, $29,170.74 through personal charges on his Fujitec credit card, and $17,386 in "padded" expenses which totals $196,681.74.
The Debtor fully acknowledged pleading guilty to theft. The Debtor, however, denied any liability stemming from his theft conviction beyond the $5,000 in restitution that he has already paid. The Debtor maintained that the theft charge related solely to the settlement of fictitious lawsuits. As such, the Debtor argued that his admissions in connection with the theft charge do not extend to the Plaintiff's allegations at trial relating to the Debtor's purported improper use of the company credit card and falsification of expense reports. Further, the Debtor maintained that the majority of money from settling the fictitious lawsuits was used to pay legitimate business expenses. Any liability beyond that, the Debtor argued, is covered by the Release.
The Debtor objected to Mr. Pleiman's testimony regarding the Debtor's alleged use of a company credit card for personal charges and his alleged padding and forging expense reports for reimbursement of expenses that did not occur. The Debtor argued that allegations relating to the company credit card and his expense reports were beyond the scope of the Amended Complaint since the Amended Complaint only described the Debtor's alleged settlement of fictitious lawsuits against Fujitec. This Court allowed Mr. Pleiman to testify regarding these matters but reserved the right for the parties to brief their positions on the scope of the Amended Complaint. Given this Court's determination on the evidentiary issues, the issue relating to the scope of the Amended Complaint is moot.
While the Debtor's guilty plea to felonious theft under Ohio Rev. Code § 2913.02 is an admission that very well may establish wrongful conduct under one or more of the state law claims for relief in the Amended Complaint, the Plaintiff must also provide admissible evidence to establish the amount of damages suffered. For example, to establish the tort of conversion under Ohio law, which the Plaintiff appears to plead in the Amended Complaint, a plaintiff must demonstrate "that the plaintiff owned or had a right to possess the subject property at the time of the alleged conversion [and] that the defendant's alleged conversion was the result of a wrongful act or disposition of the plaintiff's property rights." CMEA Title Agency, Inc. v. Little (In re Little) , 335 B.R. 376, 386 (Bankr. N.D. Ohio 2005) (internal quotation marks and citation omitted). However, a viable claim for conversion also requires a plaintiff to prove "damages ... that occurred as a result of the alleged conversion." Id. The Debtor's guilty plea under Ohio Rev. Code § 2913.02(A)(1) to knowingly obtaining or exerting control over property with the purpose of depriving the owner of such property without the owner's consent arguably establishes the first two elements of conversion but does not establish quantifiable damages beyond the $5,000 in restitution the Debtor was ordered to pay. Such quantifiable damages are what the Plaintiff was required to prove at trial.
A debt arising from a felonious theft conviction under Ohio Rev. Code § 2913.02 may also be nondischargeable under § 523(a)(4). See Fruehauf Trailer Corp. v. Stahler (In re Stahler), 140 B.R. 887, 888 (Bankr. N.D. Ohio 1992) (noting that both Ohio Rev. Code § 2913.02 and 11 U.S.C. § 523(a)(4) contemplate the intentional and wrongful taking of property so that an admission of conviction under the criminal statute may constitute an admission of nondischargeable conduct for purposes of § 523(a)(4) ); Toledo Blade Co. v. Shinew (In re Shinew) , 33 B.R. 588, 592 (Bankr. N.D. Ohio 1983) (same).
In an effort to prove damages, the Plaintiff relied on documentary evidence in the form of the Business Records, Computer Records, and Summary Evidence, and the testimony of Mr. Pleiman and Mr. Okuda. For the reasons that follow, the Debtor's objections to the admissibility of the documentary evidence and the testimony of Mr. Pleiman and Mr. Okuda are sustained. The documentary evidence relied on by the Plaintiff to establish the facts is inadmissible hearsay. While Mr. Pleiman is a qualified expert, and his expert testimony is admissible, his conclusions as to the Debtor's liability are afforded no weight by this Court because the conclusions are not verifiable nor corroborated by any other witness's testimony or admissible documentary evidence. Mr. Okuda similarly failed to lay the proper foundation for the documentary evidence and lacked sufficient personal knowledge of the underlying events to establish the amount of damages. As such, this Court concludes that the Plaintiff did not carry its burden of establishing the existence of a debt.
The Plaintiff sought to establish damages as well as the existence of the three fraudulent schemes allegedly employed by the Debtor to steal money from Fujitec. Because this Court concludes that the Plaintiff has failed to establish the amount of damages—a necessary element to determining the existence of a debt under any of the causes of action espoused by the Plaintiff—this Court will not address the admissibility or sufficiency of the evidence to establish any other elements necessary to prove the existence of a debt. Similarly, this Court need not address whether the Debtor's theft conviction encompassed charges relating to his use of the company credit card or expense reimbursements or the efficacy of the Release.
A. Admissibility of Plaintiff's Documentary Evidence
To establish the critical facts of the Debtor's alleged liability, Plaintiff proffered documentary records, cumulatively found in Plaintiff's Exhibits 2-7, as testified to by Mr. Pleiman and, to some extent, Mr. Okuda. The Debtor objected to the admissibility of the documentary evidence as hearsay and for failure to lay the proper foundation for authenticating the documents. Unfortunately, each of Plaintiff's exhibits contain multiple documents of varying types and Mr. Pleiman did not specifically testify as to each page or document within each exhibit making it difficult for this Court to sift through the documents for admissibility purposes. To aid in this process, this Court divides the documents in Plaintiff's Exhibits 2-7 based on categories relevant under the Rules of Evidence: Business Records, Computer Records and Summary Evidence.
1. Business Records
Most of the documents presented in Plaintiff's Exhibits 2-7 are documents generated by Fujitec, banks, or other businesses, which this Court will label for evidentiary purposes as the Plaintiff's Business Records. This Court agrees with the Debtor that the Business Records constitute statements, other than ones made by a declarant while testifying, offered into evidence to prove the truth of the matters asserted therein and are thus, hearsay. Fed. R. Evid. 801(a) - (c). See also Sicherman v. Diamoncut, Inc. (In re Sol Bergman Estate Jewelers, Inc.) , 225 B.R. 896, 900 (6th Cir. BAP 1998), aff'd , 208 F.3d 215 (6th Cir. 2000). Accordingly, the Business Records may not be admitted into evidence unless qualified under an exception to the hearsay rule. Fed. R. Evid. 802 ; Sol Bergman , 225 B.R. at 900. The Plaintiff, as the party offering the evidence, carries the burden of demonstrating that the evidence falls within a hearsay exception. Fifth Third Bancorp & Subsidiaries v. United States, 2008 WL 11351544, at *2 (S.D. Ohio March 28, 2008).
The Plaintiff appears to rely on an exception to the hearsay rule found in Federal Rule of Evidence ("Rule") 803(6), commonly referred to as the Business Records Exception, to establish the admissibility of the Business Records in Plaintiff's Exhibits 2-7. The Business Records Exception permits a record of regularly conducted business activity to be admissible if:
Upon the Debtor's continuing objection for hearsay and failure to lay the proper foundation for admission of the records, Plaintiff's counsel did not specify a particular exception to the hearsay rule to establish the admissibility of its documentary evidence. Instead, the Plaintiff asserted that the documents were admissible because they were provided to Mr. Pleiman from Fujitec and/or a prosecutor as part of Mr. Pleiman's investigation. This Court has found no exception to the hearsay rule based on Debtor counsel's argument beyond the possible application of the Business Records Exception.
(A) the record was made at or near the time by — or from information transmitted by — someone with knowledge;
(B) the record was kept in the course of a regularly conducted activity of a business, organization, occupation, or calling, whether or not for profit;
(C) making the record was a regular practice of that activity;
(D) all these conditions are shown by the testimony of the custodian or another qualified witness, or by a certification that complies with Rule 902(11) or (12) or with a statute permitting certification; and
(E) the opponent does not show that the source of information or the method or circumstances of preparation indicate a lack of trustworthiness.
Fed. R. Evid. 803(6). "The business records exception is based on the indicia of reliability that attaches to a record created or maintained by an employer in the ordinary or regular course of their business." Cobbins v. Tenn. Dep't of Transp. , 566 F.3d 582, 588 (6th Cir. 2009). If a party can establish a foundation showing that the evidence satisfies the requirements of the Business Records Exception under Rule 803(6), the authentication requirements of Rule 901 are also met and no additional foundation is necessary. Imhoff Inv., LLC v. SamMichaels, Inc. , 2014 U.S. Dist. LEXIS 4965, at *23, 2014 WL 172234, at *8 (E.D. Mich. Jan. 15, 2014).
In addition to his hearsay objection, the Debtor objected to the documentary evidence for the Plaintiff's failure to lay the proper foundation for authentication of the records. As noted above, meeting the Business Records Exception to the hearsay rule would satisfy the authentication requirement.
The advisory committee's note to Rule 803(6) describes a broad range of records that may be admissible under the Business Records Exception extending to data retained electronically on a computer:
The form which the "record" may assume under the rule is described broadly as a "memorandum, report, record, or data compilation, in any form." The expression "data compilation" is used as broadly descriptive of any means of storing information other than the conventional words and figures in written or documentary form. It includes, but is by no means limited to, electronic computer storage. The term is borrowed from revised Rule 34(a) of the Rules of Civil Procedure.
Fed. R. Evid. 803 (advisory committee's note to Paragraph (6) ). See also United States v. Nixon , 694 F.3d 623, 634 (6th Cir. 2012). However, "[n]ot every document or item of business correspondence contained in a file constitutes a business record." Fifth Third Bancorp , 2008 WL 11351544, at *3 (citing United States v. Gwathney , 465 F.3d 1133, 1141 (10th Cir. 2006) ). "[T]he mere presence of a document in the retained files of a business entity does not by itself qualify the document as a business record." Id. In order for a document to be admissible as a business record, the party proffering the record must first satisfy the test set forth in Rule 803(6). Id.
In the Sixth Circuit, the test to qualify a record for the Business Record Exception under Rule 803(6) requires the proponent of the evidence to demonstrate that:
(1) [the record] must have been made in the course of a regularly conducted business activity; (2) [the record] must have been kept in the regular course of that business; (3) the regular practice of that business must have been to have made the [record]; and (4) the [record] must have been made by a person with knowledge of the transaction or from information transmitted by a person with knowledge.
Fambrough v. Wal-Mart Stores, Inc. , 611 F. App'x 322, 326 (6th Cir. 2015) (citing Cobbins , 566 F.3d at 588 ). Furthermore, and critical to this case, this foundation for admissibility must be laid through the testimony of a custodian or a qualifying witness. Fed. R. Evid. 803(6)(D).
Rule 803(6) also provides for the foundation being laid through a certification that complies with Rule 902(11) (for authenticating certified domestic records of regularly conducted activity) or Rule 902(12) (for authenticating certified foreign records of regularly conducted activity) or with a statute permitting certification. Fed. R. Evid. 803(6)(D). In response to the Debtor's evidentiary objections for lack of authentication, the Plaintiff did not attempt to lay a foundation through a certification or statute permitting certification. However, this Court notes that letters purportedly from a records custodian of Huntington National Bank sent to the Warren County Prosecutor's office with bank statements and signature cards were included in the Plaintiff's exhibits [Pl. Ex. 2, p. 57; Ex. 3, p. 1 and Ex. 5, p. 1]. The Huntington National Bank letters were not discussed or mentioned by Plaintiff's counsel during the trial and he did not attempt to lay the foundation for admission of any documents through these letters. See Streets v. United States , 2014 U.S. Dist. LEXIS 37704, at *25, 2014 WL 1119618, at *9 (S.D. Ohio March 20, 2014) (noting that a court need not make a party's case by scouring a voluminous record or various submissions to piece together an appropriate argument).
In the case at hand, the Plaintiff presents two possible witnesses to lay the foundation for the admissibility of the Plaintiff's proffered Business Records: Mr. Pleiman, the investigator hired by Fujitec, and Mr. Okuda, Fujitec's President. As neither of these witnesses were presented as a custodian of the records, the question presented to this Court is whether the witnesses properly laid the foundation as "other qualified witnesses" under Rule 803(6)(D).
The standard in the Sixth Circuit for knowledge required to lay the foundation by a qualified witness is very liberal. Fambrough , 611 F. App'x at 328 ; United States v. Skeddle , 981 F.Supp. 1069, 1072 (N.D. Ohio 1997). The witness is not required to have personal knowledge of the creation of the record in order to lay a proper foundation for the record's admissibility. Fambrough , 611 F. App'x at 326 ; Skeddle , 981 F.Supp. at 1072 (noting that a lack of personal knowledge goes to the credibility that should be afforded that witness's testimony rather than the admissibility of the record itself). Instead, " ‘all that is required is that the witness be familiar with the record keeping system’ " of the business. Skeddle , 981 F.Supp. at 1072 (further citation omitted). See also Fambrough , 611 F. App'x at 326. As such, a proper foundation may be laid, in part or in whole, by the testimony of a government agent, investigator, or other person outside the organization whose records are sought to be admitted so long as the witness used to lay the foundation is familiar with the organization's record keeping system. United States v. Hathaway , 798 F.2d 902, 906 (6th Cir. 1986). In this case, neither of the Plaintiff's witnesses were able to lay the proper foundation for admission of the Business Records.
a. Business Records Created by Fujitec
Many of the records in the Plaintiff's exhibits were purportedly created by Fujitec, such as Fujitec checks, emails, and expense reports [Pl. Exs. 2-7]. To properly lay the foundation, Mr. Pleiman would have to show a familiarity with Fujitec's record keeping practices. Instead, Mr. Pleiman never testified to such a familiarity. When asked by the Debtor what Mr. Pleiman did to authenticate the records received from Fujitec, Mr. Pleiman replied that he assumed the documents he received were authentic and accurate because they were approved by members of Fujitec management including, Ray Gibson, the current Chief Financial Officer of Fujitec, and Melissa Busch, Fujitec's Controller. Neither Mr. Gibson nor Ms. Busch were called by the Plaintiff to testify at the trial. In addition to failing to demonstrate a familiarity with Fujitec's record keeping, Mr. Pleiman did not testify to the other requirements of Rule 803(6) that would demonstrate that the records were made and kept in the course of Fujitec's regularly conducted activities. See Fambrough , 611 F. App'x at 327 (noting that "[i]f Rule 803(6) means anything, it must mean that the custodian or ‘other qualified witness’ at least attests to the business records requirements"); Northern Plains Feeders, Inc. v. Badami (In re AFY) , 482 B.R. 830, 844 (D. Neb. 2012) (noting that the custodian or other qualified witness does not need to have personal knowledge regarding the creation of the document but does need to be able to testify to the foundational requirements of Rule 803(6)(A)-(C), including knowledge that the record was kept and made in the course of regularly conducted activity). As such, these documents are not admissible through Mr. Pleiman.
When first asked what he did to authenticate the documents, Mr. Pleiman responded that he conducted online searches to see if the law firms were real or fictitious and reviewed expense reimbursement requests to compare against invoices to see if they were fabricated or legitimate. While those searches were important to Mr. Pleiman's investigation into the Debtor's alleged misconduct, they do not serve to authenticate that the records received from Fujitec were what they purported to be.
Mr. Okuda, Fujitec's President, also testified at the trial. Like Mr. Pleiman, Mr. Okuda could be the qualifying witness to lay the foundation for the admissibility of the Business Records created by Fujitec if he testified to a familiarity with Fujitec's record keeping system, although his position as President, alone, is not sufficient to establish that familiarity. Fambrough , 611 F. App'x at 328 (being a member of upper level management does not automatically qualify a witness to be knowledgeable about the record keeping practices of the business). While Mr. Okuda testified that Fujitec turned over checks and other business records to Mr. Pleiman as part of the investigation of the Debtor, he conceded that he was not personally involved in the investigation. Mr. Okuda further answered yes to a general question about expense reports being business records maintained by Fujitec, but mostly seemed uncertain about the questions being asked. Mr. Okuda's testimony is insufficient to establish that he had an understanding of Fujitec's record keeping system or the other requirements of Rule 803(6)(A)-(C) that would demonstrate, among other things, that the Fujitec generated records were made and kept in the course of Fujitec's regularly conducted activities. As such, these documents are not admissible through Mr. Okuda.
b. Business Records Created by Third Parties
Other documents in Plaintiff's Exhibits 2-7 were not generated by Fujitec, including Huntington National Bank statements and business signature cards, U.S. Bank statements, Fifth Third Bank credit card statements, and invoices and receipts from various vendors [Pl. Exs. 2-7]. Mr. Pleiman indicated that these records, except for some bank statements received from a prosecutor, were also provided by Fujitec.
The fact that Fujitec did not create the records does not necessarily prevent them from being admitted under Rule 803(6)'s Business Records Exception. " ‘Rule 803(6) does not require that the document actually be prepared by the business entity proffering the document[.]’ " Fambrough , 611 F. App'x at 329 (citing Air Land Forwarders, Inc. v. United States , 172 F.3d 1338, 1343 (Fed. Cir. 1999) ); Stratton v. Portfolio Recovery Assocs., LLC. , 171 F.Supp.3d 585, 590 (E.D. Ky. 2016), aff'd , 706 F. App'x 840 (6th Cir. 2017). Instead, Rule 803(6)" ‘would allow an incorporated document to be admitted based upon the foundation testimony of a witness with first-hand knowledge of the record keeping procedures of the incorporating business, even though the business did not actually prepare the document.’ " Fambrough , 611 F. App'x at 329 (citing Air Land Forwarders , 172 F.3d at 1343 ). However, such third-party generated documents may constitute admissible business records "only through foundation testimony of the record keeping practices that establish such incorporation and reliance." Id. (emphasis omitted).
In this case, neither Mr. Pleiman nor Mr. Okuda testified to a familiarity with the record keeping system of the incorporating business, Fujitec. Furthermore, neither witness testified to how Fujitec kept and relied upon the records from third-party businesses and banks in the ordinary course of Fujitec's business. To the extent the bank statements within the exhibits were not kept by Fujitec but, instead, were provided to Mr. Pleiman by a prosecutor, Mr. Pleiman never specifically identified which bank statement fell into that category nor did he establish that he is a custodian or other qualifying witness as to any bank statements provided by a prosecutor. As such, these third-party generated business records are not admissible under the Business Records Exception through the testimony of Mr. Pleiman or Mr. Okuda. Because no other exception was articulated for admissibility of the Business Records, this Court concludes that they are inadmissible.
2. Computer Records
Sprinkled among the Plaintiff's exhibits were various documents that Mr. Pleiman alleged to be created by the Debtor on the computer he used while working at Fujitec. Those documents include letters and invoices of allegedly fictitious law firms, emails under the name of a lawyer from one of the law firms, and doctored hotel invoices (the "Computer Records") [See, e.g. , Pl. Exs. 2, pp. 13-16, p. 45-46, Ex. 7]. Like the Business Records, the Computer Records were not organized or specifically identified by source during Mr. Pleiman's testimony making it difficult to sort out which emails, letters, and receipts the Plaintiff alleges to have recovered from Debtor's work computer as part of the investigation. The Debtor objected to the admissibility of the Computer Records citing a lack of foundation for their authenticity and reliability.
To the extent that the Plaintiff is relying on the Computer Records to establish the amount of any alleged damages, this Court agrees that the Plaintiff failed to establish that the Computer Records meet the qualifications for the Business Records Exception under Rule 803(6) or are otherwise admissible under another evidentiary rule. Neither Mr. Pleiman nor Mr. Okuda established that they were familiar with Fujitec's record keeping system or that they knew how the Computer Records were kept and maintained in the regular course of Fujitec's business activities. See Health All. Network, Inc. v. Cont'l Cas. Co., CNA , 245 F.R.D. 121, 129 (S.D.N.Y. 2007), aff'd , 294 F. App'x 680 (2d Cir. 2008) (data printed from a company's computer database may be subject to the business records exception to the hearsay rule when there are sufficient indicia of reliability of the data produced and the underlying database is maintained through the ordinary course of business).
Upon the Debtor's objection, the Plaintiff did not lay a foundation to authenticate the Computer Records nor specifically argue that the Computer Records are admissible under a hearsay exception.
Even if these predicates to admissibility had been demonstrated, Rule 803(6)(E) allows otherwise admissible records to be excluded if the circumstances of their preparation indicate a lack of trustworthiness. Fed. R. Evid. 803(6)(E). See also Fifth Third Bancorp , 2008 WL 11351544, at *5 (noting that "[t]his is so because the hallmark of documents admitted under the business records exception is that they are trustworthy and reliable."). In determining whether the documents are trustworthy and reliable, "courts are to consider the character of the records and their earmarks of reliability ... from their source and origin and the nature of their compilation[.]" Fifth Third Bancorp , 2008 WL 11351544, at *5
This Court finds an additional layer of unreliability surrounds the Computer Records that the Plaintiff proffers. Neither Mr. Pleiman nor Mr. Okuda testified to how the Computer Records were stored, found, and collected to ensure that they were, in fact, recovered from a secure computer database used by the Debtor at Fujitec and to the exclusion of other employees. See, e.g. , Nixon, 694 F.3d at 634-35 ; Health All. , 245 F.R.D. at 129 (allowing admission of computer generated documents through testimony of a custodian who knew through her investigation the type of data collected, how it was inputted and maintained, where it was maintained, and how the data in question was queried and collected for purposes of litigation); American Express Travel Related Services Co., Inc. v. Vee Vinhnee (In re Vee Vinhnee) , 336 B.R. 437, 445 (9th Cir. BAP 2005) (authenticating a document stored on a computer may pose additional requirements to assure that the record is what it purports to be with important questions including what is the company's policies and procedures for use of the equipment, how is access to the pertinent database controlled and what are the audit procedures for assuring the continuing integrity of the database). This Court concludes that the Plaintiff did not lay an adequate foundation for the admission of the Computer Records under Rule 803(6) or otherwise assure this Court that the Computer Records were, in fact, retained in and retrieved from a secure computer used by the Debtor.
While Mr. Okuda testified that Fujitec gave Mr. Pleiman the computer, the details on how the computer and its data were maintained by Fujitec, how the relevant data was recovered, and how it was traced to the Debtor were not provided.
3. Summary Evidence
In addition to the Business Records and Computer Records proffered by the Plaintiff, the Plaintiff proffered summaries within Plaintiff's Exhibits 6 and 7, which this Court labels the Summary Evidence. In the first few pages of Exhibit 6, RSM created a summary of credit card expenses from the Debtor's alleged use of a Fujitec-issued credit card purporting to show its use by the Debtor for personal expenses. The front two pages of Exhibit 7 are another RSM prepared summary of the Debtor's expenses, including airfare, purportedly submitted to Fujitec for reimbursement. The summary was based on vendor receipts and expense reports also included in the exhibit.
Summary Evidence, like that prepared by RSM, may be admissible under Rule 1006, which provides:
The proponent may use a summary, chart, or calculation to prove the content of voluminous writings, records, or photographs that cannot be conveniently examined in court. The proponent must make the originals or duplicates available for examination or copying, or both, by other parties at a reasonable time and place. And the court may order the proponent to produce them in court.
Fed. R. Evid. 1006. "The Sixth Circuit imposes five requirements for the admission of summary evidence: (1) the underlying documents are so voluminous that they cannot be conveniently examined in court; (2) the proponent of the summary must have made the documents available for examination or copying at a reasonable time and place; (3) the underlying documents must be admissible in evidence; (4) the summary must be accurate and nonprejudicial; and (5) the summary must be properly introduced through the testimony of a witness who supervised its preparation." Santander Consumer USA, Inc. v. Superior Pontiac Buick GMC, Inc. , 2012 U.S. Dist. LEXIS 156872, at *14, 2012 WL 5363553, at *4 (E.D. Mich. Oct. 30, 2012) (citing United States v. Moon, 513 F.3d 527, 545 (6th Cir. 2008) ).
Significantly, the underlying documents must be admissible into evidence. Consequently, if the underlying documents from which the summary is created are business records, the business records must be admissible under the Business Records Exception requiring, among other things, that a qualifying witness attest to the record keeping practices of the business. Sol Bergman , 225 B.R. at 900-01 (noting that the foundation for admissibility obtained from an authenticating witness proffering either a business record or a summary based thereon, or secondary evidence thereto, requires that the witness be familiar with the company's record keeping practices).
In this case, the underlying documents on which the summaries were based included Fifth Third credit card statements, Fujitec expense reports and various third-party receipts and invoices, which this Court has already determined were inadmissible under the Business Records Exception of Rule 803(6) because no foundation was laid by a qualifying witness familiar with Fujitec's record keeping system. Accordingly, this Court concludes that Plaintiff's Summary Evidence based on the inadmissible Business Records is, likewise, inadmissible.
4. Admitted and Excluded Evidence
For the foregoing reasons, Plaintiff's Exhibits 2 through 7 are not admitted into evidence. There were no objections to Plaintiff's Exhibit 1 (documents relating to the Debtor's guilty plea in the Warren County Court of Common Pleas) and Plaintiff's Exhibit 8 (documents relating to the Release). Therefore, Plaintiff's Exhibits 1 and 8 are admitted into evidence.
B. Plaintiff's Remaining Evidence is Insufficient to Demonstrate a Debt
With most of the Plaintiff's documentary evidence excluded, this Court is now tasked with determining whether the Plaintiff carries the burden of establishing a debt on its remaining evidence. This Court begins with an assessment of the proper weight to give the testimony of the Plaintiff's key witness, Mr. Pleiman, before reviewing the testimony of Mr. Okuda and the Debtor.
1. Mr. Pleiman's Testimony
The Plaintiff listed Mr. Pleiman as an expert witness on the Plaintiff's Witness List [Docket Number 46], but also presented Mr. Pleiman as a fact witness at trial. The Debtor objected to Mr. Pleiman's testimony because he had no personal knowledge of the facts and, instead, relied on inadmissible documentary evidence to come to his conclusions as the amount of damages.
Ultimately, Mr. Pleiman was the only witness called by the Plaintiff to establish the facts giving rise to the Debtor's alleged liability to Fujitec. Mr. Pleiman may seem a surprising choice to establish the facts because he is an outside investigator with no first-hand knowledge of the events that occurred while the Debtor was employed at the company. Nonetheless, such an investigative witness may offer testimony stemming from both his personal knowledge of matters in the investigation and his specialized knowledge as an expert if properly qualified for both roles. Nixon , 694 F.3d at 629.
Two employees of Fujitec, Mr. Okuda, its President, and Mr. Raymond Gibson, its Chief Financial Officer were listed on Plaintiff's Witness List as lay witnesses who would testify about the thefts committed by Debtor while employed at Fujitec, damages and the Release proffered by Debtor [Docket Number 46]. While Mr. Okuda did take the stand, he did not testify to any first-hand knowledge of the thefts or damages and was not involved in the investigation. Mr. Gibson, for reasons unknown to this Court, was not called by the Plaintiff to testify.
As a lay witness, Mr. Pleiman is permitted to testify to matters of which he has personal knowledge. Fed. R. Evid. 602. Mr. Pleiman's knowledge of the facts, however, is limited to what was discerned through the documents he received from Fujitec and a prosecutor, records that this Court has deemed inadmissible. Because Mr. Pleiman has no personal knowledge of the events that occurred beyond his review of these inadmissible hearsay documents, Mr. Pleiman's fact testimony is also deemed inadmissible hearsay.
Nonetheless, Mr. Pleiman may still testify as an expert to the extent he meets the requirements of Rule 702 which provides:
A witness who is qualified as an expert by knowledge, skill, experience, training or education may testify in the form of an opinion or otherwise if:
(a) the expert's scientific, technical, or other specialized knowledge will help the trier of fact to understand the evidence or to determine a fact in issue;
(b) the testimony is based on sufficient facts or data;
(c) the testimony is the product of reliable principles and methods; and
(d) the expert has reliably applied the principles and methods to the facts of the case.
Fed. R. Evid. 702. Once the expert's opinion testimony meets these qualifications, the opinion is not "automatically" objectionable just because it embraces an ultimate issue to be decided by the trier of fact. Fed. R. Evid. 704.
This Court concluded during the trial that Mr. Pleiman was qualified as an expert witness based on his training and experience. Mr. Pleiman testified that he has been a certified public accountant for eighteen years, a partner at RSM for eleven years and has served on or been a member of various accounting boards and societies. He testified to conducting at least five or six other forensic accounting investigations of employee activities. The Debtor did not oppose Mr. Pleiman's qualification as an expert witness.
Turning to the reliability of Mr. Pleiman's expert testimony and its efficacy in assisting this Court as the trier of fact, this Court notes that an expert may rely on inadmissible hearsay evidence in arriving at an opinion so long as the evidence is the type reasonably relied upon by experts in the field. Fed. R. Evid. 703 ; see also Collins v. Prime Table Restaurant & Lounge, Inc. (In re Lake States Commodities, Inc.) , 271 B.R. 575, 585 (Bankr. N.D. Ill. 2002), aff'd , 2002 WL 31749262 (N.D. Ill. Dec. 3, 2002). The expert, however, cannot certify the truth of the evidence on which he relied. Lake States Commodities , 271 B.R. at 585 . "Moreover, the inadmissible evidence is not somehow transmogrified into admissible evidence simply because an expert relies on it." Id. "Rather, the hearsay is admitted solely to explain the basis of the expert's opinion, not as proof of the underlying matter." Id.
That an expert's opinion is admissible even when based on inadmissible hearsay, "does not equate with its utility in satisfying a burden of proof." Id. "The fact finder must still consider the credibility of the expert and determine the weight to be accorded to his or her testimony and report." Id.
"When there is a dearth of other fact evidence in the record, some courts give the expert testimony or report little or no evidentiary weight." Id. at 586. For example, in the case of Beckman v. Von Christierson (In re CSI Enter., Inc.) , 220 B.R. 687 (Bankr. D. Colo. 1998), aff'd , 203 F.3d 834 (10th Cir. 2000), the court gave little weight to an expert's testimony where there was no evidence before the court to validate the information relied upon by the expert in preparing his report. Id. at 698. In Beckman , the plaintiff's valuation expert, Stegenga, prepared a report based on financial statements and other information that the expert deemed reliable but were not in the record. Id. at 692-93, 697. In ultimately granting judgment to the defendant, the court stated that:
[W]hile it is appropriate for an expert to testify and formulate his opinion based on hearsay evidence, in this case the Court is being asked to accept Stegenga's hearsay testimony and his value judgment as evidence of the ultimate fact and in lieu of any proof of the actual indebtedness owed by Benton to NTC. On the other hand, Stegenga has testified that he started from Benton's Financial Statement because he believed that it was probably accurate. There is no reason whatsoever for the Court to accept Stegenga's evaluation as to the amount of the debt. Clearly, it is not an opinion formulated by him after an audit or any search for the truth of the actual amount of the indebtedness. An expert's testimony cannot be used to subvert the rules of evidence.
Id. at 697. See also In re James Wilson Assocs. , 965 F.2d 160, 172-73 (7th Cir. 1992) (while an expert witness normally is allowed to explain the facts underlying his opinion, even if not independently admissible, "... the judge must make sure that the expert isn't being used as a vehicle for circumventing the rules of evidence .... The fact that inadmissible evidence is the (permissible) premise of the expert's opinion does not make that evidence admissible for other purposes ....").
Likewise, in Lake State Commodities , the court was called on to determine whether a debtor company, while insolvent, made fraudulent transfers to certain investors as part of a Ponzi scheme. 271 B.R. 575. To sustain his burden of proof, the chapter 7 trustee attempted to introduce a summary report of the debtor's business records, a summary report of investor activity and certain business records of the debtor through the trustee's own testimony. Id. at 579-80. The court sustained the defendant-investors' evidentiary objections and excluded the evidence for failure to lay a proper foundation for admissibility and because the trustee lacked personal knowledge of the matters. Id. That left the trustee's expert, Malek, and Malek's expert report, as the only evidence to prove the factual requirements of the trustee's case. Id. at 585-86. While recognizing that expert testimony may embrace an ultimate issue to be decided pursuant to Fed. R. Evid. 704, the court found it "unusual," although not categorically unheard of, that the only evidence in the case to meet the trustee's burden of proof was expert evidence. Id. (noting that an expert is usually called upon to summarize and render an opinion as to the facts derived from direct testimony and business records in evidence). The court further noted that Malek did not interview employees of the debtor, test the information on which he relied, or validate his sources. Id. at 587. Instead, Malek relied on what the trustee told him and the summary report of the debtor's business records that was excluded from evidence. Id. Without the underlying facts in evidence and without meaningful testing or validation of the underlying sources, the court concluded that the Malek report was entitled to no weight and, ultimately, entered judgment in favor of the defendant-investors. Id. at 587-88.
In Lake States Commodities , the court cited two examples where it appears that a court granted judgment based solely on expert testimony. 271 B.R. at 586 (citing Babitt v. Schwartz (In re Lollipop, Inc.) , 205 B.R. 682 (Bankr. E.D.N.Y. 1997) and Floyd v. Dunson (In re Ramirez Rodriguez) , 209 B.R. 424 (Bankr. S.D. Tex. 1997) ). However, the court noted that both opinions were decided on summary judgment where the court's function was not to assess the weight or credibility of the evidence but only decide if a genuine issue of material fact existed for trial. Lake States Commodities, 271 B.R. at 586.
In the case at hand, Mr. Pleiman opined that the Debtor orchestrated three alleged schemes to convert funds from Fujitec in the total amount of $196,681.74. While his opinion is admissible, it is of questionable efficacy to this Court as the trier of fact. As in Lake State Commodities, none of the business records that might support Mr. Pleiman's opinion were admitted into evidence. Furthermore, Mr. Pleiman testified that he took no measures to independently verify the accuracy of the records he received from Fujitec and the prosecutor nor did he interview the Debtor or other Fujitec employees as part of the investigation. Instead, Mr. Pleiman testified that he assumed that the documents received from Fujitec were authentic and accurate because they were approved by members of Fujitec management, none of whom testified at trial.
While Mr. Okuda testified at trial, his testimony established that he was not personally involved in the investigation.
Mr. Pleiman's conclusions are belied by further assumptions he made during the investigation. Mr. Pleiman concluded that the Debtor converted $29,170.74 from Fujitec through his alleged use of a Fujitec credit card for personal expenses but, on cross-examination, admitted that these cards were issued in the employees' names and paid directly by the employees. Mr. Pleiman conceded that he was unaware of any prohibition against Fujitec employees using the credit cards for personal expenses nor did he check other employee credit cards to see if they included personal expenses. Mr. Pleiman made further assumptions about the type of expenses that seemed personal without verifying whether specific expenses for a show or dinner may have had a business purpose such as entertaining colleagues. With respect to his conclusion that the Debtor converted an additional $17,386 through "padded" expenses submitted to Fujitec for reimbursement, Mr. Pleiman admitted that he assumed that a business expense was manufactured by the Debtor if he submitted a receipt for it but the expense did not appear on the Fujitec issued credit card. Mr. Pleiman conceded on cross examination that if a business expense was paid for in some manner other than with the company credit card he would not know.
Further exacerbating the shortcomings of his opinions is the fact that Mr. Pleiman did not file an expert report. As such, this Court is left with no verification of Mr. Pleiman's methods or calculations. For example, Mr. Pleiman concluded that the Debtor converted $150,125 by funneling funds through three law firms under the guise of settling fictitious claims but he did not provide any summary calculation of transactions needed to reach this amount. The need for verification is further underscored by the fact that Mr. Pleiman's conclusion of the amount converted through the three separate schemes, $196,681.74, does not match the $185,686.33 in damages that Plaintiff counsel quoted in his opening statement.
Indeed, the copies of checks included in Plaintiff's exhibits 2-4 do not appear to total $150,125.
Based on the questionable assumptions and the inability of this Court to verify his calculations, this Court finds Mr. Pleiman's expert testimony unreliable. In addition, giving weight to Mr. Pleiman's conclusions on the ultimate issue of damages without admissible evidence to support his conclusions would subvert the rules of evidence. Accordingly, Mr. Pleiman's expert opinions, while admissible, are given no weight by this Court.
2. Mr. Okuda's Testimony and the Debtor's Testimony
The remaining evidence is not sufficient to establish that the Debtor owes a debt to Fujitec and, via subrogation, the Plaintiff. This Court begins with Mr. Okuda's testimony. Mr. Okuda testified that when he came to the United States in March of 2011, the Debtor was already Fujitec's Chief Legal Officer. He testified that Fujitec found some "problems" with the Debtor and the Debtor was asked to resign in February of 2012. Upon cross-examination, however, Mr. Okuda conceded that the decision to terminate the Debtor had nothing to do with the present allegations. Moreover, Mr. Okuda did not testify to the specifics of Debtor's alleged misconduct at Fujitec, except to deny being aware of it, and to state that he was not involved in the investigation. His testimony was similarly vague on the issue of damages. Mr. Okuda testified in very general terms to the amount of damages arising from the Debtor's wrongful actions, stating that he believed the damages totaled $224,000, including "something like $180,000" reimbursement to Fujitec from the Plaintiff plus "$40,000 something" for the cost of the investigation. This Court affords no weight to Mr. Okuda's testimony regarding the amount of damages given his lack of personal knowledge. That leaves the Debtor's testimony. During his testimony, the Debtor admitted to settling fictitious lawsuits for Fujitec, although he said he was asked to do so by Mr. Okuda in order to justify the current accrual in the budget for settling claims and lawsuits. The Debtor testified that the funds received from the settlement of fictitious lawsuits were not converted by him but were, in large part, applied to legitimate Fujitec business expenses. The Debtor asserted that the only debt owed to Fujitec was the $5,000 in court ordered restitution, which he had already paid. Accordingly, neither the Debtor's testimony nor the guilty plea and related judgment entry ordering restitution establish a debt beyond the $5,000 that the Debtor has already paid to Fujitec.
3. Plaintiff's Claim for Recovery of the Costs of Investigation
Without proof of an underlying debt properly founded on nonbankruptcy law, the Plaintiff has provided this Court with no basis for holding the Debtor liable for Fujitec or the Plaintiff's investigative expenses. Even if there was a basis, the only evidence of the expenses were the differing statements from Plaintiff's counsel, Mr. Pleiman and Mr. Okuda that the investigation cost $49,395, "just over" $48,000, and "$40,000 something" respectively. The Plaintiff proffered no invoice or itemization of the costs in support of these statements.
IV. CONCLUSION
For the reasons stated above, this Court concludes that Plaintiff Federal Insurance Company failed to establish that the Debtor owes a debt beyond the $5,000 in restitution that the Debtor has already paid. As such, judgment is rendered in favor of the Defendant-Debtor Darren Lee Courtney.
This opinion constitutes this Court's findings of facts and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052.