Federal Evidence Review

Eighth Circuit holds trial court erred in taking judicial notice sua sponte that an accountant was an agent, which allowed the accountant to bind the defendant to a $2.5 million settlement agreement; the trial court also erred in taking judicial notice based on materials that would violate “the relevancy, foundation, and hearsay rules,” in American Prairie Const. Co. v. Hoich, 560 F.3d 780 (8th Cir. March 24, 2009) (Nos. 08-1288, 08-1292, 08-1394)

As with most evidentiary issues, the taking of judicial notice is reviewed on appeal under the abuse of discretion standard of review. This deferential standard frequently removes from assessment the trial court actions that effectively deprive a party of the chance to introduce rebuttal evidence, pursue cross-examination or pursue other avenues to challenge the evidence. Because judicial notice short-circuits the traditional adversary process, its use is governed by the requirements of FRE 201. The rule not only requires that the noticed fact be beyond controversy, but that fact cannot be based on evidence that would be excluded by other rules of evidence. The Eight Circuit recently explained some of the boundaries of appropriate judicial notice.

American Prairie Const. Co. v. Hoich

In the case, defendant Hoich appealed a district court finding that he was party to a binding settlement agreement with North Central Construction, Inc. (NCC), the predecessor of plaintiff American Prairie Construction. The purported settlement arose from a dispute involving Hoich’s investment in an ethanol production plant in South Dakota (such as the one pictured above) that was built by NCC. The plant was not profitable and was owned by Tri-State Ethanol (TSE), an entity in which Hoich held an interest. As a result of debts owed to NCC for the plant’s construction, NCC secured a mechanics lien against the plant, reflecting its $1 million equity interest in the plant. After the plant suffered a fire, it was closed and was awaiting repairs. Its operator, TSE filed for Chapter 11 Bankruptcy protection and claimed that NCC was an unsecured non-priority creditor. While this dispute simmered, a group of investors, including Hoich, formed a new shell-company, TSF, for the purpose of funding TSE so that the plant could be repaired and returned to operation. American Prairie Const. Co., 560 F.3d at 786.

In the bankruptcy proceedings, efforts were made to reach a settlement so that NCC would not oppose a reorganization of the enterprise. The parties tried to work out a deal after a complicated series of transactions. Apparently, a deal was struck although certain aspects were unclear, such as “who would provide the funds” as well as “how the settlement should be structured.” As the Bankruptcy court started planning confirmation hearings on the TSE bankruptcy, “[s]everal parties were present, including at least sixteen attorneys, and a significant amount of confusion existed about the terms of the agreement” that they claimed had been reached in the case. One attorney who was “newly representing TSF, seemed confused about who he was representing in the course of the hearing,” noted the circuit. The bankruptcy court was told that while no one was there to directly represent Hoich’s interests, that he was “personally committed” to a deal in which he would pay $2.5 million to NCC for its claim against TSE. American Prairie Const. Co., 560 F.3d at 787.

The bankruptcy court was not persuaded and refused to approve the settlement agreement, noting that the “parties disagreed as to whether a meeting of the minds occurred.” Accordingly, NCC sought to have the district court enforce the alleged settlement agreement that the bankruptcy court refused to recognize. The district judge reversed the bankruptcy court determination, finding that Hoich and TSF had breached their obligations under an enforceable settlement agreement. Hoich appealed and raised as one ground of error that the district judge improperly took judicial notice of TSF business records as well as a book written by Hoich as a basis for finding that Hoich agreed to the purported settlement. American Prairie Const. Co., 560 F.3d at 796.

Judicial Notice Based On The Trial Court’s “Own Research”

The Eighth Circuit concluded that Hoich was not bound by the settlement and that the district court abused its discretion in taking judicial notice of a “fact” that Hoich agreed to be bound by the TSF settlement with NCC. The district court reached this conclusion sua sponte. The district judge “ordered TSF …to provide the court with a copy of TSF’s ‘corporate records’” in which it found minutes of a corporate meeting that Hoich did not attend in which accountant Jandrain who was associated with Hoich, purported to have a proxy from Hoich to act as Hoich’s ‘agent.’” In doing this, Jandrain indicated Hoich’s approval of the settlement agreement. In addition, the circuit noted that the trial court’s judicial notice that accountant Jandrain had authority to act for Hoich was based on the court’s own research “after trial” in which it:

“conducted independent internet research [and] located Hoich's book, From the Ground Up, and referenced it for the first time in the district court's opinion. The court took judicial notice of the book and described some of the contents, including ‘a picture of Jandrain in Hoich's airplane,’ and its corresponding caption which read, ‘Jim Jandrain, John's CPA and friend on John's plane in 2005, returning from an ethanol meeting.’ The court referenced another picture with the caption, ‘Jim Jandrain (John's CPA), John L. Hoich, and Doug Pugh (Real Estate Advisor) in front of John's plane (2006).’ Based on Hoich's book, the court found, ‘John Hoich is not a babe in the woods. He is a very intelligent and enormously successful business person.... He is a friend of more than one President of the United States. He is a friend of Warren Buffet of Omaha, perhaps the most sophisticated business person in the world.’ The court used this information to support its finding that Jandrain was Hoich's agent.”

American Prairie Const. Co., 560 F.3d at 796 (citations omitted).

Deficiencies Of Underlying Proof

The circuit found that the trial court’s judicial notice was an abuse of discretion. It rejected the district judge’s use of TSF corporate documents to find that Hoich had agreed to the settlement because he had “authorized Jandrain to act as an agent for Hoich as to TSF affairs.” According to the circuit:

“The document does not directly state or even imply this. The only conclusion which can be ascertained from the document is Hoich, and eleven other TSF members, gave Jandrain a proxy to vote on their behalf in a single meeting taking place ten months after the alleged agreement was made. The district court also erred in taking judicial notice of statements Hoich made in his book regarding Hoich's success and the friendships Hoich had with Jandrain. These facts are not subject to judicial notice under Fed. R. Evid. 201(b) or for relevance under Fed. R. Evid. 401 because a friendship and a position as one's CPA do not tend to establish an authorized agency to negotiate a contract.”

American Prairie Const. Co., 560 F.3d at 797.

Lack Of Notice Under FRE 201

The circuit found several deficiencies in the judicial notice taken. First, the district court failed to give the parties notice and an opportunity to object to the notice that would be taken. Notice is a “procedural” requirement embedded in FRE 201. Hoich was provided no notice because: “[w]hile Hoich was present during trial and he knew the court requested TSF business records, Hoich did not have knowledge of the specific TSF documents which would be sent, nor did he know which documents the court would select for taking judicial notice. Thus, Hoich was not provided with advance notice that the court intended to take judicial notice of minutes from a TSF meeting. Hoich was also not provided with notice of the court's intent to take judicial notice of Hoich's book.” American Prairie Const. Co., 560 F.3d at 797.

Importance Of Other Evidence Rules

The second reason the district judge erred in taking judicial notice was that the matter noticed was admitted into evidence:

“in contravention of the relevancy, foundation, and hearsay rules. Each judicially noticed document included hearsay evidence which is generally only admissible at trial through an enumerated hearsay exception. No such foundation was laid for the TSF business records before the district court took judicial notice of the documents. Further, a proper foundation was not laid for the admission of statements in Hoich's book.”

American Prairie Const. Co., 560 F.3d at 797 (citing Baker v. Barnhart, 457 F.3d 882, 891-92 (8th Cir. 2006); United States v. Samaniego, 187 F.3d 1222, 1224 (10th Cir. 1999)).

Common Knowledge Or Certain Verification

Finally, the district court violated the specific requirement of FRE 201 that the matter noticed be of common knowledge or be capable of “certain verification.” Use of “independent research” by a trial court is appropriate only on questions of law. “On fact questions,” the circuit cautioned, “the court should not use the doctrine of judicial notice to go outside the record unless the facts are matters of common knowledge or are capable of certain verification.” American Prairie Const. Co., 560 F.3d at 798 (citing Alvary v. United States, 302 F.2d 790, 794 (2d Cir. 1962) (“It was error for the trial judge to take judicial notice of text books that were not part of the record.”))

The circuit reversed the district court’s finding that Hoich was bound by the purported settlement agreement in which he would have been bound to pay $2.5 million to purchase from NCC the debt it was owed by TSE. The trial court abused its discretion by judicially noticing that Hoich was bound by representations of accountant Jandrain that he “had authority to bind Hoich to a $2.5 million settlement agreement.” In reaching this conclusion in American Prairie Const. Co., the circuit illustrates the caution that is appropriate in making a determination that a fact be judicially noticed.

FRE 201 provides a way to establish the existence of facts which are not subject to reasonable dispute through judicial notice without having to provide formal evidentiary proof. Judicial notice may be raised by a party. As the American Prairie Const. Co. case points out, when a court takes judicial notice for the first time, the parties should be afforded an opportunity to be heard on the issue. The case underscores the importance of satisfying the requirements of judicial notice before it is taken.