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#2290 signed 1-7-97

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF KANSAS




In re:

BLUE MOUNTAIN INVESTMENTS, INC.,

DEBTOR(S).





CASE NO. 86-41407-7C

CHAPTER 7





ORDER DECLARING PROPOSED EVIDENCE TO BE INADMISSIBLE

This matter is before the Court for resolution of an evidentiary question related to the trustee's objection to the claim filed by William and Grace Shamblin. The trustee appears by counsel James E. Kelley, Jr. The Shamblins appear by counsel Samuel S. Ory, Ronald S. Weiss, and David J. Weimer. The debtor appears by counsel Michael J. Friesen. The Court has reviewed the relevant pleadings and is now ready to rule.

The Shamblins have asserted a claim against this bankruptcy estate for $8,730,000 based on alleged slander of title and tortious interference with contractual relations for business expectancy. They owned some real property in California against which the debtor filed an affidavit of equitable interest. The trustee concedes the debtor's affidavit constituted a cloud on the Shamblins' title to the property. The Shamblins contend they had an agreement to sell the property to a man named Arthur M. Viereck, who declined to carry out his promise to buy because of the debtor's interference, especially due to the affidavit of equitable interest. The purported contract required the Shamblins to convey title free of encumbrances, with standard exceptions such as certain taxes, and covenants, restrictions, and easements of record.

The Shamblins cannot now locate Mr. Viereck and propose to prove the reason he declined to perform through the testimony of Robert Goodman, a real estate broker they allege acted as Mr. Viereck's agent in the transaction. The trustee and the debtor argue that testimony would be inadmissible hearsay. The Shamblins reply that it would be admissible under Federal Rule of Evidence 804(b)(3) as a statement against Mr. Viereck's interest.

The cited Evidence Rule reads:

(b) Hearsay Exceptions. The following are not excluded by the hearsay rule if the declarant is unavailable as a witness:

. . . .

(3) Statement Against Interest. A statement which was at the time of its making so far contrary to the declarant's pecuniary or proprietary interest, or so far tended to subject the declarant to civil or criminal liability, or to render invalid a claim by the declarant against another, that a reasonable person in the declarant's position would not have made the statement unless believing it to be true. A statement tending to expose the declarant to criminal liability and offered to exculpate the accused is not admissible unless corroborating circumstances clearly indicate the trustworthiness of the statement.

The Shamblins argue:

This exception exactly fits the situation at hand since Viereck's statement was contrary to his pecuniary interests and rendered invalid his claim against the [Shamblins] for the sale of the subject property and further subjected him to the possibility of civil liability for breach of contract. Viereck wanted to purchase the subject property but gave up his claim to do so. It was likewise contrary to Goodman's interest since he lost his commission. This surrender of Viereck's interest in the property is what gives the statement its indicia of reliability.

The Court cannot agree.

It is far from clear that Mr. Viereck's purported statement that he would not buy the property because of the affidavit of equitable interest would be contrary to his pecuniary interest, much less so far contrary that a reasonable person would have made the statement only if he believed it to be true. Buying real property with a cloud on the title would not ordinarily be in anyone's pecuniary interest. If the buyer could be sure the cloud could be successfully removed at low cost and the property was worth more than the agreed price plus that low cost, then the purchase would probably be in the buyer's pecuniary interest. However, the Shamblins have presented nothing that might show such circumstances existed here or that their existence was so clear that a reasonable person in Mr. Viereck's position would not have stated his intention to back out of the purchase because of the cloud. Furthermore, if he had a valid, enforceable contract with the Shamblins, Mr. Viereck's statement that he would not perform his part of the contract might preclude him from seeking specific performance from the Shamblins, but would not necessarily invalidate his possible claim against them for damages for breach of contract based on their inability to convey good title to him.

So far as the Court is aware, Mr. Viereck's purported statement could have given the Shamblins a civil claim against him only if he had agreed to buy the property even with the cloud on the title or without regard to the state of the Shamblins' title. However, the contract which the Shamblins presented to support their proof of claim clearly requires them to supply clear title to the property. Under such a contract, the real property seller cannot require the buyer to accept less than clear title, or sue for breach of contract if the buyer refuses to do so. Since the cloud would excuse Mr. Viereck from performing the contract, his statement that he would not perform because of the cloud would not be a statement against interest.

Finally, Mr. Goodman's loss of a possible commission on the sale has no bearing on the admissibility of Mr. Viereck's statement. An out-of-court statement of a party's agent is declared not to be hearsay under the circumstances described in Evidence Rule 801(d)(2)(D), but Rule 804(b)(3) does not extend to statements of a declarant's agent. It renders Mr. Viereck's statement admissible only to the extent it was against his own interest.

For these reasons, the Court concludes the Shamblins have failed to establish that Mr. Goodman's testimony about Mr. Viereck's statement to him is admissible under Evidence Rule 804(b)(3).

IT IS SO ORDERED.

Dated at Topeka, Kansas, this _____ day of January, 1997.













__________________________________

JAMES A. PUSATERI

CHIEF BANKRUPTCY JUDGE

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