Chapter 11; Whether the funds the companies gave to the debtor constituted “loans” or “investments in equity”; Whether the bankruptcy court erred by refusing to recharacterize a “loan” as an “equity contribution” under In re AutoStyle Plastics, Inc; Hearsay; Whether the bankruptcy court wrongly excluded a witness’s deposition at trial; FRE 801(c) & (d)(2); FRE 802; FedRCivP 32 & (a)(1); Bankruptcy Appellate Panel (BAP)

The court reversed the bankruptcy court’s decision in this adversary proceeding and held that it erred by analyzing Rule 32 as barring the admission of a dead witness’s deposition when the opposition was unable to cross-examine the witness. Insight filed for Chapter 11 bankruptcy and some of its equity owners claimed that money they advanced to Insight was a “loan.” The bankruptcy court declined to recharacterize the funds as equity. Autumn Wind became Insight’s new owner under the bankruptcy plan, which “fully extinguished” the owners’ equity interest. Cecelia Financial Management, an equity owner, made a $6 million claim based on loan debt. Insight, now operated by Autumn Wind, filed an adversary complaint, seeking to have Cecelia’s debt recharacterized from a loan to one for equity, which would preclude recovery. Bay Bridge eventually took over from Cecelia. However, before the adversary proceeding could take place, Seigel, one of Insight’s original partners, developed cancer. The parties arranged for him to be deposed, but he died before the deposition was completed. Bay Bridge moved to exclude Seigel’s deposition as “hearsay.” The bankruptcy court considered the deposition to be “‘inherently prejudicial’ given that Bay Bridge could not cross-examine Siegel[,]" and ruled it inadmissible. It also declined to recharacterize Cecelia’s loans as equity contributions under AutoStyle. The BAP affirmed. Insight argued that the bankruptcy court erred by excluding Seigel’s deposition testimony. Bay Bridge argued that even though Seigel’s testimony met the admittance requirements under Rule 32, the Rule also “implied” that the opposing party can cross-examine the declarant before death. This led to the bankruptcy court’s ruling. However, the court held that the cross-examination provision did not operate as an “‘absolute[] bar[]’” to the introduction of a deposition when the opposing party did not have an opportunity to cross-examine the declarant. In fact, “the text provides that a deposition ‘may be used’ by a party if the party satisfies the three conditions listed in” Rule 32(a)(1), and federal courts have the discretion to do so. Thus, “the bankruptcy court misread the law by holding that it had to exclude the deposition for lack of cross-examination as a matter of law.” Reversed and remanded.