COLM F. CONNOLLY, District Judge.
Presently before me are competing motions filed by the parties: the government's Motion in limine to Admit Evidence Regarding July 10, 2013 Meeting between Defendant and Artisan's Bank (D.I. 74) and Defendant's Motion in limine to Exclude Statements of Defendant's Prior Counsel (D.I. 76). Both motions ask me to rule on the admissibility at trial of testimony from three Artisans' Bank (the "Bank") employees about statements made to them by Defendant's prior counsel in Defendant's presence at a meeting in July 2013. The government argues that the out-of-court statements of Defendant's prior counsel are an "adoptive confession" of the Defendant that are admissible under Federal Rule of Evidence ("FRE") 801(d)(2)(B) and (C). D.I. 74 at 9. Defendant argues that the statements of his prior counsel were made in connection with settlement negotiations and are barred by FREs 408 and 802 from being admitted at trial. I have studied the parties' briefing on the matter and heard oral argument on December 4, 2018.
Defendant has been charged by Superseding Indictment with one count of bank fraud, four counts of making false statements to a bank, and one count of money laundering. D.I. 36. The charges arise out of a line of credit extended by the Bank to Defendant's food broker business, AJJ Distributing, LLC, between 2008 and 2013. The line of credit was secured in part by accounts receivable owed to AJJ. Under the terms of the line of credit, the amount of money Defendant could borrow from the Bank was dependent on the value of "eligible items," a term which the line of credit agreement defined as "accounts receivable and inventory aged less than 90 days." Id. ¶ 11. Defendant was contractually obligated to submit to the Bank on a weekly basis and when he sought withdrawals from the line of credit Borrowing Base Certificates ("BBCs") that listed AJJ's "eligible items." Id. ¶¶ 13, 14.
The false statement counts in the Superseding Indictment are based on allegations that Defendant provided the Bank on four occasions with BBCs that listed certain accounts receivable that in fact were no longer owed to Defendant. See id. ¶¶ 46, 48, 50 and 52 (alleging Defendant "provided the Bank with a BBC listing [million-dollar sums] in accounts receivable, which falsely inflated monies owed to AJJ"). The bank fraud count is similarly based in part on the allegation that Defendant submitted to the Bank "false and fraudulent" BBCs that "included as `eligible items' accounts receivable that were no longer owed to AJJ." Id. ¶ 33. The bank fraud count alleges specifically that Defendant submitted BBCs that "included dozens of accounts receivable" from AJJ's primary customer that "were no longer owing to AJJ." Id. ¶ 30.
The allegations in the bank fraud count, however, would also support an alternative prosecution theory that the BBCs were false because they listed accounts receivable that were older than 90 days. The Superseding Indictment alleges in the bank fraud count that "eligible items" were defined as "accounts receivable and inventory aged less than 90 days" (¶ 11), that "AJJ agreed to identify `eligible items' to the Bank in the form of Borrowing Base Certificates (`BBCs') listing all accounts receivable less than 90 days old" (¶ 13), that "AJJ's eligible accounts receivable were less" than Defendant represented in the BBCs (¶ 36), and that the Bank utilized Defendant's "false and fraudulent BBCs reporting AJJ's eligible accounts receivable in evaluating requests for extensions or restructuring of the Line of Credit" (¶ 41). Further, in describing the scheme to defraud on which the bank fraud charge is based, the Superseding Indictment alleges that "[b]y listing non-`eligible items' on the BBCs," Defendant "falsely and fraudulently inflated AJJ's accounts receivable, which: a) induced the Bank to disburse money under the Line of Credit to AJJ; b) influenced the Bank's decisions in connection with extensions and conversions of the Line of Credit; c) deterred the Bank from requiring larger payments on the Line of Credit; and []d) delayed the Line of Credit's termination." Id. ¶ 34.
According to the Superseding Indictment, Defendant's false statements and fraudulent scheme induced the Bank to loan AJJ millions of dollars; and, by July 2013, AJJ owed and was unable to repay the Bank approximately $4.2 million. The evidentiary dispute before me concerns a meeting Defendant and his prior counsel had with Bank employees in July 2013 to discuss Defendant's then-outstanding debt.
According to Defendant, "[t]he only purpose for having th[e] [July 2013] meeting was to discuss the loan and to negotiate whether the loan was going to continue, the terms under which it was going to continue." Tr. 11:23-12:1. The grand jury testimony of Defendant's prior counsel confirms and adds detail to this stated purpose:
D.I. 74, Ex. B at 10:20-11:8, 18:25-19:1.
Defendant has not suggested that the Bank initiated or threatened a civil law suit. It is clear from later portions of Defendant's prior counsel's grand jury testimony that the "settlement" he was trying obtain for Defendant was an arrangement that would resolve any potential claims AJJ's primary customer and Defendant had relative to each other and at the same time restructure the repayment terms for the debt Defendant owed to the bank:
Id. at 34:10-35:20.
According to the government:
D.I. 74 at 3-4. The government has proffered that it will present this account of the meeting at trial through the testimony of three members of the Bank's loan workout group who participated in the meeting. The government cites in support of this account of the July 2013 meeting: (1) a memorandum written "one to two days" after the meeting by one of the three Bank employees, and (2) three reports written by a Postal Inspector who interviewed the three Bank employees in question. See generally D.I. 74, Ex. A.
I have reviewed the memorandum and reports and find that they are generally consistent with each other and support the government's account of the July 2013 meeting. According to the memorandum, for example, the meeting was held at Defendant's request "to discuss workout arrangements," and during the meeting
Id. at 3.
Neither the memorandum nor the reports of interviews explain or suggest what any participant in the July 2013 meeting understood "falsified" accounts receivable to mean. Thus, it is impossible to discern from the government's proffer if the government is saying that the Bank employees and Defendant's prior counsel believed the accounts receivable listed on Defendant's BBCs were "falsified" because they were already satisfied, older than 90 days, or for some other reason. It is similarly impossible to discern from the government's proffer exactly why any participant in the meeting would have concluded that Defendant had committed bank fraud, other than because Defendant had listed accounts receivable that were "falsified" in some unidentified way.
Defendant argues that the grand jury testimony of his prior counsel "directly and materially contradicts" the government's account of the July 2013 meeting. D.I. 89 at 2. The government acknowledges that Defendant's prior counsel "provided a somewhat[ ] different recollection of the meeting" in his grand jury testimony, D.I. 74 at 4, but not in any way material to my deciding whether the government can introduce at trial through the testimony of the three Bank employees the statements of Defendant's prior counsel at the July 2013 meeting.
I have reviewed carefully the testimony Defendant's prior counsel gave before the grand jury on March 28, 2017 — i.e., almost four years after the July 2013 meeting. I question whether I need to determine the extent to which that testimony corroborates or conflicts with the proffered testimony of the three bank witnesses, but in any event I do not agree with Defendant that his prior counsel "rejected the Government's assertions on virtually every material aspect regarding his contacts with Artisan's Bank." D.I. 89 at 3. The grand jury testimony — perhaps because it was given so many years after the July 2013 meeting — is much more equivocal than Defendant suggests.
For example, Defendant argues that his prior counsel "flatly rejected" that he told the Bank that Defendant had submitted false documentation with respect to accounts receivable. D.I. 89 at 3. But the actual testimony is as follows:
D.I. 74, Ex. B at 19:15-28:9.
I do not agree with Defendant that this testimony "flatly rejects" the government's allegation that Defendant submitted falsified listings of accounts receivable to the bank. On the contrary, portions of the testimony would appear to corroborate the allegation in the Superseding Indictment that Defendant knowingly submitted listings of accounts receivable that were not "eligible items" (i.e., were not less than 90 days old). The testimony can also be read as consistent with the government's proffered testimony of Bank employees that "falsified" listings of accounts receivable and "fraud" were discussed at the meeting, even if it is not clear from the testimony that Defendant's prior counsel and the Bank employees had the same understandings about why the listings could be fairly described as "falsified" or what was intended by the use of "fraud" at the meeting.
As noted above, the government seeks to introduce at trial through the testimony of the three Bank employees the out-of-court statements made by Defendant's prior counsel at the July 2013 meeting. Defendant argues that the statements of his prior counsel were made in connection with settlement negotiations and are barred from admission at trial by FREs 408 and 802. The government argues that the out-of-court statements of Defendant's prior counsel are an "adoptive confession" of the Defendant that are admissible under FRE 801(d)(2)(B) and (C).
Federal Rule of Evidence 408 reads as follows:
FED. R. EVID. 408.
By its express terms, the rule prohibits the admission of certain evidence if the evidence is offered for either of two purposes: (1) "to prove or disprove the validity or amount of a disputed claim" or (2) "to impeach by a prior inconsistent statement or a contradiction." Neither purpose exists here. The government has stated explicitly that it is not seeking to introduce the statements of Defendant's prior counsel to prove the validity or the amount of debt he owed to the Bank. See Tr. at 7:13-15 ("[T]he Government is not seeking to introduce this evidence to prove that the defendant owed [the] Bank $4.2 million"). There is also of course no testimony at this point to impeach or contradict by such evidence. Rather, the stated purpose for which the government seeks to introduce the testimony is to prove that Defendant knowingly made and submitted false BBCs and intentionally defrauded the Bank. Rule 408 does not prohibit that "use" and therefore even if Defendant's prior counsel's statements constituted settlement negotiations, Rule 408 does not preclude those statements from being introduced into evidence at trial. See Roe v. McKee Mgmt. Assocs., Inc., 2017 WL 690538, at *3 (E.D. Pa. Feb. 21, 2017) (Kearney, J.) ("The settlement discussions are not an issue because [the proponent's] allegations address the causation elements of the [] claim. They are not introduced for a use Rule 408 prohibits."); see also Affiliated Mfrs., Inc. v. Aluminum Co. of America, 56 F.3d 521, 526 (3d Cir. 1995) ("The application of [Rule 408] is limited to evidence concerning settlement or compromise of a claim, where the evidence is offered to establish liability, or the validity or amount of the claim."); FED. R. EVID. 408, advisory committee's note to 2006 amendment ("The amendment retains the language of the original rule that bars compromise evidence only when offered as evidence of the `validity,' `invalidity,' or `amount' of the disputed claim. The intent is to retain the extensive case law finding Rule 408 inapplicable when compromise evidence is offered for a purpose other than to prove the validity, invalidity, or amount of a disputed claim.").
Rule 408 would not bar the admission of Defendant's prior counsel's statements for a second, independent reason — namely, the absence of a disputed claim. See 23 Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure § 5303 at 201 (2d ed. 2018) ("Rule 408 excludes the evidence only if the claim is disputed."). As made clear by Defendant's prior counsel's grand jury testimony, Defendant did not dispute the fact that he owed the Bank money; nor did he dispute the amount of money he owed. Indeed, Defendant did not have a pending dispute with the Bank as of the July 2013 meeting. It may have been the case that, going into the July 2013 meeting, Defendant anticipated that he would have a dispute with the Bank after the meeting, as his counsel planned on telling the Bank at the meeting that AJJ's primary customer "was cutting off its business with" Defendant and that Defendant therefore "would not be making any further payments" to the Bank. D.I. 74, Ex. B at 10:20-11:8. But, as counsel testified before the grand jury, "[t]he whole idea [of having the July 2013 meeting] was [to accomplish] how [Defendant] was going to pay back the loan." Id. at 18:25-19:1. Thus, there was no disputed claim as of the time the July 2013 meeting occurred, and any discussions that occurred during that meeting — even if Defendant intended those discussions to lead to a restructuring or reduction of his repayment obligations — are not barred from admission at trial by Rule 408. See FED. R. EVID. 408 advisory committee's note to 1972 proposed rule ("The policy considerations which underlie the rule do not come into play when the effort is to induce a creditor to settle an admittedly due amount for a lesser sum. Hence the rule requires that the claim be disputed as to either validity or amount.").
Defendant also argues that his prior counsel's statements are hearsay and barred from admission at trial by Rule 802. The Government counters that the "[s]tatements made by [Defendant's prior counsel] during this meeting qualify as statements of the Defendant for two reasons: they were statements adopted by Defendant through his silence and conduct during the meeting pursuant to Rule 801(d)(2)(B), and they were also statements made by an authorized agent or representative of the Defendant pursuant to Rule 801(d)(2)(C)." D.I. 74 at 10-11.
I find that the statements of Defendant's prior counsel at the July 2013 meeting are admissions by an authorized agent of a party opponent and not hearsay under Rule 801(d)(2)(C) and (D). Rule 801(d)(2) excludes from the definition of hearsay a statement that "is offered against an opposing party and . . . (C) was made by a person whom the party authorized to make a statement on the subject; [or] (D) was made by the party's agent or employee on a matter within the scope of that relationship and while it existed[.]" FED. R. EVID. 801(d)(2). The parties agree that Defendant's prior counsel represented Defendant as Defendant's attorney at the July 2013 meeting. Therefore, Defendant's prior counsel was Defendant's authorized legal agent for purposes of this meeting, rendering admissible under Federal Rule of Evidence 801(d)(2) Defendant's prior counsel's statements on Defendant's behalf. See, e.g., In re Joy Global, Inc., 346 B.R. 659, 665 n.13 (D. Del. 2006) (Jordan, J.) (referring to "ample authority for the proposition that an attorney's statements may bind the party whom the attorney represents" either "under Federal Rule of Evidence 801(d)(2)(C) or (D)").
I do not agree with the government that Defendant's silence at the time his prior counsel made the statements would allow the statements to be admitted under Rule 801(d)(2)(B). "Whether a statement is admissible as an adoptive admission [under Rule 801(d)(2)(B)] turns on (1) whether the statement was such that, under the circumstances, an innocent person would deny the statements and (2) whether there are sufficient foundational facts from which the jury may infer that the defendant heard, understood, and acquiesced in the statement." See United States v. Lafferty, 503 F.3d 293, 306 (3d Cir. 2007). "When silence is relied upon [to show that the party opponent acquiesced in the statement] the theory is that the person would, under the circumstances, protest the statement made in his presence, if untrue." Id. (quoting FED. R. EVID. 801 advisory committee's note to 1975 proposed rule). In light of Defendant's desire to restructure, if not reduce, his debt repayments to the bank, and the fact that he retained experienced counsel to accomplish that goal for him, I do not believe Defendant would have felt compelled to correct any statement made by Defendant's prior counsel at the July 2013 meeting.
Notwithstanding my rejection of Defendant's arguments that Rules 408 and 802 bar the admission of his prior counsel's statements, "Rule 403 always remains as a potential bar to admissibility." Holbrook v. Lykes Bros. S.S. Co., 80 F.3d 777, 786 (3d Cir. 1996). Under Rule 403, "[t]he court may exclude relevant evidence if its probative value is substantially outweighed by a danger of one or more of the following: unfair prejudice, confusing the issues, misleading the jury, undue delay, wasting time, or needlessly presenting cumulative evidence." FED. R. EVID. 403.
I have no doubt that the statements of Defendant's prior counsel are relevant evidence with probative value. Based on the Bank employee's memorandum, the Postal Inspector's reports of interviews, and Defendant's prior counsel's grand jury testimony, I expect that the parties will argue vigorously at trial what exactly was said and by whom at the July 2013 meeting and what was meant by the words "fraud" and "falsified" to the extent those words were used at the meeting. I do not think, however, that the admission into evidence of the testimony sought by the government will create a danger of unfair prejudice or misleading or confusing the jury that substantially outweighs the probative value of the testimony. Nor do I think that the testimony implicates the remaining Rule 403 factors. Accordingly, I will allow the government to present the testimony at trial.
The Court will issue an order consistent with this Memorandum Opinion.
