Federal Evidence Review

In bankruptcy trial, testimony by witness who overheard a bookkeeper tell the company president of a significant accounting error, which meant the company was no longer solvent, was admitted for the non-hearsay purpose to show the president had knowledge that the financial records he sent to another company for advance payments on a project were incorrect, in Morrison v. Western Builders Of Amarillo Inc., 555 F.3d 473 (5th Cir. Jan. 16, 2009) (No. 07-51118)

Normally, testimony by a witness about an overheard conversation involving others is subject to exclusion on hearsay grounds. A recent Fifth Circuit case shows that an overheard statement may be admitted when offered for the non-hearsay purpose to show knowledge.

In the bankruptcy trial, the central issue was whether Morrison, the president and principal shareholder of his company, should be personally liable for a $549,773.63 nondischargeable debt. After he learned that his company was suffering financially, he entered into an arrangement with another company, Western Builders, which agreed to provide advance payments. He faxed his company financial statement to Western Builders and omitted an accounting error about overstated accounts by approximately $857,000. During the bankruptcy proceedings, Morrison testified that he first learned of the overstated accounting error on March 23rd or 24th. The bookkeeper could not recall the precise date but thought she told Morrison of the accounting error “around February 15.” Employee Davenport “testified that she “overheard [bookkeeper] Ms. Dexter tell Morrison about the error … ‘at or about the same time that the error was discovered.’” Morrison, 555 F.3d at 477. Morrison’s objection that the statement was inadmissible hearsay was overruled. The bankruptcy court then concluded the debt was nondischargeable. The district court affirmed the judgment on appeal. Morrison appealed to the circuit, claiming the bankruptcy court erred in admitting the testimony.

The Fifth Circuit also affirmed the admission of the testimony about the conversation between the bookkeeper and Morrison. The testimony concerning the overheard conversation was non-hearsay as it was “not offered to prove that the financial statement was incorrect, but that Morrison had knowledge that it was incorrect before he sent it to Western Builders.” Morrison, 555 F.3d at 483 (citing Snyder v. Whittaker Corp., 839 F.2d 1085, 1090 (5th Cir. 1988) (memorandum offered to “prov[e] that certain statements were made to” defendant corporation were admitted as nonhearsay); Alexander v. Conveyors & Dumpers, Inc., 731 F.2d 1221, 1230 (5th Cir. 1984) (noting “the value of the statement does not rest upon the declarant’s credibility and, therefore, is not subject to attack as hearsay”)).

As the case shows, the statement was not admitted to show the truth of the matter asserted in the statement (the accuracy of the accounting records). The statement was admitted for a non-hearsay purpose, to show knowledge of the accounting information by a certain point in time.