Paddack v. Dave Christensen, Inc.

• Citation: 745 F.2d 1254
• Decision Date: 24 October 1984
• Docket Number: 83-3631,Nos. 82-3510,s. 82-3510
• Parties: 117 L.R.R.M. (BNA) 2963, 102 Lab.Cas. P 11,228, 5 Employee Benefits Ca 2542, 16 Fed. R. Evid. Serv. 1280 Rychen PADDACK, Arthur J. Darling, Henry Hannan, Donald D. Staudenmier, Marvin Hall, Carl M. Halvorson, et al., Plaintiffs-Appellants, v. DAVE CHRISTENSEN, INC., dba Pacific Coast Fabricating Co., Christensen Group, Inc., and David H. Christensen, an individual, Defendants-Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

Page 1254

745 F.2d 1254

117 L.R.R.M. (BNA) 2963, 102 Lab.Cas. P 11,228,

5 Employee Benefits Ca 2542,

16 Fed. R. Evid. Serv. 1280

Rychen PADDACK, Arthur J. Darling, Henry Hannan, Donald D Staudenmier, Marvin Hall, Carl M. Halvorson, et al., Plaintiffs-Appellants, v. DAVE CHRISTENSEN, INC., dba Pacific Coast Fabricating Co. Christensen Group, Inc., and David H. Christensen an individual, Defendants-Appellees.

Nos. 82-3510, 83-3631.

United States Court of Appeals Ninth Circuit.

Argued and Submitted Nov. 7, 1983.

Decided Oct. 24, 1984.

Thomas J. Barnett, David S. Paull, Bailey & Paull, Portland, Or., for plaintiffs-appellants.

David H. Wilson, Jr., Bullard, Korshoj, Smith & Jernstedt, P.C., Portland, Or., for defendants-appellees.

Appeal from the United States District Court for the District of Oregon.

Before SNEED, NELSON, and REINHARDT, Circuit Judges.

SNEED, Circuit Judge:

The Trustees of several joint labor-management employee trust funds ¹ filed suit against Dave Christensen, Inc. and his affiliated companies ² for breach of several collective bargaining agreements. After a bench trial, the district court entered judgment for the Employer on the ground that the compliance audits asserting contribution deficiencies were inadmissible under the Federal Rules of Evidence. Although we agree that the audit reports and their summaries are based in part on inadmissible hearsay, we are uncertain whether the district court considered, as it should have, the audits for the limited purpose of explaining the basis of the expert's testimony under Rule 703. Thus, we reverse and remand this case to the district court for further proceedings. Because our disposition may require that the district court reach the merits of the case, we undertake a review of the district court's alternative legal rulings. While we have no quarrel with the district court's conclusion that if the audit reports are fully admissible the Employer is liable with respect to its field employees, we do disagree with the district court's conclusion that under the same circumstances the Employer is not liable with respect to shop employees.

Therefore, we affirm in part, reverse in part, and remand for further proceedings consistent with this opinion.

I. FACTS AND PROCEEDINGS BELOW

This case has its roots in two joint labor-management trust funds for carpentry industry employees created in compliance with section 302(c)(5) of the Labor-Management Relations Act, 29 U.S.C. Sec. 186(c)(5) (1982), and two collective bargaining agreements entered into by the Employer and the Carpenters' Union between 1970 and 1978. One of the agreements was a field agreement covering employees who worked on location, and the other was a shop agreement covering employees who worked in the Employer's shop. Under the agreements, the Employer made payments to the Trust Funds for both field and shop employees and submitted monthly reports.

Apparently the Trustees of the Trust Funds suspected that the Employer's reports were incorrect. As a consequence the Trust Funds employed Touche Ross & Company ("Touche Ross") to perform an audit of the Employer's contributions for shop employees between January 1, 1973 and December 31, 1978 and for field employees between January 1, 1973 and January 30, 1979. The accountants were not requested to undertake a traditional financial statement audit. ³ Instead, they were requested to determine the extent of the Employer's compliance with the collective bargaining agreements. The compliance audit reports asserted that the Employer had wrongfully failed to contribute to the Trust Funds in the amount of $12,108.75 for shop employees and $14,093.11 for field employees.

Five months after Touche Ross completed the audit, the Trustees filed suit in an Oregon state court against the Employer for breach of the collective bargaining agreements. The Trustees sought to recover $31,009 for the unpaid contributions, liquidated damages, interest, the accountants' fees, and attorneys' fees. The Employer removed the action to federal court pursuant to 28 U.S.C. Sec. 1441 (1982).

During the bench trial, the Employer objected to the admission of the audit reports into evidence. The district court reserved ruling on the issue of admissibility and proceeded with the trial. After the trial, the district court found that the audits were based on hearsay and inadmissible under Federal Rules of Evidence 803(6), 1006, and 703. Because it found that the Trustees had introduced no other evidence to support their allegations of contribution deficiencies, the district court entered judgment for the Employer.

In order to preclude the need for a new trial in the event the evidentiary ruling was in error, the district court entered alternative conclusions of law and findings of fact. It found that if the audits had been admitted, it would have found the Employer liable for the alleged deficiencies with respect to the field employees' contributions, but not with respect to the shop employees' contribution deficiencies because the shop employee agreement did not satisfy section 302(c)(5) of the Labor-Management Relations Act. See 29 U.S.C. Sec. 186(c)(5) (1982). The district court subsequently awarded $29,871.33 in attorney's fees to the Employer pursuant to 29 U.S.C. Sec. 1132(g) (1982).

II.

ADMISSIBILITY OF THE COMPLIANCE AUDIT REPORTS TO PROVE THE

CONTRIBUTION DEFICIENCIES

In its compliance audit Touche Ross first used an audit program with statistical sampling techniques to identify "problem" employees. Once a problem employee was identified, the accountants examined both Employer and nonemployer sources to determine whether a contribution deficiency existed.

The audit resulted in the production of three separate documents: (1) the accountants' workpapers and exhibits showing the results of the investigation of the Employer's contributions for every employee examined; (2) the audit reports which listed only those employees for whom, in the opinion of Touche Ross based on its investigation (as outlined in the workpapers and exhibits), insufficient contributions had been made by the Employer; and (3) certain one-page "summaries" of each of the audit reports. The Trust Funds sought to have both the audit reports and their summaries admitted as evidence of the amount of the deficiencies. ⁴ They argued that the reports were admissible under: (1) the business records exception to the hearsay rule, see Fed.R.Evid. 803(6); (2) as summaries of voluminous writings, see Fed.R.Evid. 1006; and (3) as a basis of the expert's testimony, see Fed.R.Evid. 703. The district court concluded that the audit reports were inadmissible to prove the existence of the contribution deficiencies under each of these rules. We agree. ⁵

A. The Audit Reports Are Not Admissible Under Fed.R.Evid. 803(6)

Under Rule 803(6), for a memorandum or record to be admissible as a business record, it must be "(1) made by a regularly conducted business activity, (2) kept in the 'regular course' of that business, (3) 'the regular practice of that business to make the memorandum,' (4) and made by a person with knowledge or from information transmitted by a person with knowledge." Clark v. City of Los Angeles, 650 F.2d 1033, 1036-37 (9th Cir.1981), cert. denied, 456 U.S. 927, 102 S.Ct. 1974, 72 L.Ed.2d 443 (1982). Business records are admissible "unless the source of information or the method or circumstances of preparation indicate lack of trustworthiness." Fed.R.Evid. 803(6). In this case the district court found that the audit reports were not made or kept in the ordinary course of business and that they were prepared for purposes of litigation. We agree.

Clearly, the audit reports are not the business records of the Trust Funds or the Employer. The administrator of the Trust Funds testified that the Trustees had no regular compliance audit procedure. Once the Trustees suspected that a deficiency existed, they would employ an accountant to perform the compliance audit. No evidence was submitted that such audits were conducted with any regularity. The irregular frequency and nature with which the audits were conducted also precludes their classification as business records of the Employer. Thus, the audit reports were not kept in the course of a regularly conducted business activity of the Trust Funds or the Employer.

We also believe that the compliance audit reports cannot be viewed as business records of Touche Ross. ⁶ This was not a regularly conducted audit of the Employer; it was a special audit ordered in response to the Trustees' suspicion of irregularities. These reports, which are the direct product of the accountants, are not "business records" of the accounting firm within the meaning of Rule 803(6). A contrary interpretation would allow any firm to produce "business records" that would be automatically admissible. Such reports do not contain the same reliability that normally attends records kept in the course of a regularly conducted business activity.

Even if we were to say that the audit reports were Touche Ross' business records, the district court's finding that they were prepared in anticipation of litigation precludes their admission. In this case the Trustees employed Touche Ross only after they suspected that the Employer's contributions were deficient. "[A] document prepared for purposes of litigation is not a business record because it is lacking in trustworthiness." Clark, 650 F.2d at 1037 (citing Palmer v. Hoffman, 318 U.S. 109, 63 S.Ct. 477, 87 L.Ed. 645 (1943)). This is because "where the only function that the report serves is to assist in litigation or its preparation, many of the normal checks upon the accuracy of business records are not operative." McCormick on Evidence Sec. 308, at 877 n. 26 (E. Cleary 3d ed. 1984). Thus, we affirm the district court's refusal to admit the audit reports under Rule 803(6). ⁷

B. The Audit Reports Are Not Admissible As A Summary...