Discretion, Not Exclusion: Sixth Circuit Clarifies Rule 32(a) Admissibility and the Retroactive Reach of Amended Rule 801(d)(2)

1. Introduction

Insight Terminal Solutions v. Cecelia Financial Management (and Intervenor Bay Bridge Exports), No. 24-5222, marks a significant Sixth Circuit precedent on two evidentiary fronts in bankruptcy litigation:

Proper interpretation of Federal Rule of Civil Procedure 32(a) governing deposition use at trial.
Application of the December 1, 2024 amendment to Federal Rule of Evidence 801(d)(2) (the “privity” amendment) to cases already pending on appeal or remand.

Behind the evidentiary issues lies a classic debt-versus-equity battle. Insight, now controlled by post-confirmation owner Autumn Wind, seeks to recharacterize roughly $6 million advanced by Cecelia as equity, thereby wiping out the claim. The bankruptcy court, adopting verbatim Bay Bridge’s proposed findings, excluded critical deposition testimony of Insight’s late founder John Siegel and, applying the eleven AutoStyle factors, ruled for Bay Bridge/Cecelia. The Bankruptcy Appellate Panel affirmed.

The Sixth Circuit reverses, holding that the bankruptcy court committed legal error by reading Rule 32(a) as imposing an automatic bar to any deposition where the opposing party lacked an opportunity to cross-examine. The panel further instructs the bankruptcy court on remand to reassess admissibility in light of the new Rule 801(d)(2).

2. Summary of the Judgment

Key holdings:

Rule 32(a) does not impose a categorical cross-examination requirement. Lack of cross-examination merely triggers a discretionary, case-specific balancing; courts retain power to admit or exclude, but cannot treat exclusion as mandatory.
Legal error is reversible even if the court possessed discretion. Because the bankruptcy court believed itself compelled to exclude Siegel’s deposition, its evidentiary ruling warrants reversal.
The 2024 amendment to Rule 801(d)(2) applies “insofar as just and practicable” to pending proceedings. On remand, the bankruptcy court must consider whether Siegel’s statements are admissible against Bay Bridge under the new “derivative liability” clause.
The Sixth Circuit declined to decide (a) whether Cecelia’s advances should be recharacterized under AutoStyle or (b) whether verbatim adoption of Bay Bridge’s proposed order was an abuse of discretion. Both issues remain open for the bankruptcy court’s renewed consideration.

3. Detailed Analysis

3.1 Precedents Cited and Their Influence

In re AutoStyle Plastics, Inc., 269 F.3d 726 (6th Cir. 2001) – Governs debt-versus-equity recharacterization via eleven-factor test. Although the Sixth Circuit refrained from applying AutoStyle pending remand, Judge Murphy’s concurrence questions its ongoing validity after Travelers and Harrington, foreshadowing future doctrinal shifts.
Czyzewski v. Jevic Holding Corp., 580 U.S. 451 (2017) – Recited for hierarchy of claims and importance of creditor/owner distinction.
Derewecki v. Pennsylvania R. Co., 353 F.2d 436 (3d Cir. 1965) and kindred cases – Showcase long-standing judicial discretion to admit uncrossed deposition testimony when the witness is unavailable.
POM Wonderful LLC v. Coca-Cola Co., 573 U.S. 102 (2014) – Supports expressio unius canon the court used to read Rule 32(a).
Recent Supreme Court order amending Rule 801(d)(2) (Apr. 2, 2024) – Central to retroactivity discussion.

3.2 Legal Reasoning Explained

A. Rule 32(a)

Rule 32(a)(1) contains three enumerated conditions (party presence/notice, evidentiary admissibility, permissible purpose). The bankruptcy court added an unwritten fourth: prior cross-examination. The Sixth Circuit applied two interpretive tools:

Textualism – If drafters intended a cross-examination prerequisite they would have said so; expressio unius implies omission is deliberate.
Historical Practice – Cases from the 3d, 5th, and 9th Circuits acknowledge court discretion, not compulsion, to exclude uncrossed depositions.

Because the bankruptcy court converted a discretionary factor into a mandatory bar, it misapplied the rule, amounting to per se legal error (abuse of discretion).

B. Rule 801(d)(2) & Retroactivity

Prior circuit split: whether a statement admissible against an assignor (Cecelia) remains admissible against an assignee (Bay Bridge). The 2024 amendment resolves in favor of admissibility where the claim is “directly derived” from the declarant. The Supreme Court’s implementation clause (“all proceedings thereafter commenced and, insofar as just and practicable, all proceedings then pending”) guided the panel to order application on remand.

C. Harmless-Error Rejection

Siegel’s testimony uniquely informed two pivotal AutoStyle factors—arm’s-length nature and expectation of repayment—contradicting the bankruptcy court’s conclusory assertion that exclusion was harmless. The appellate panel deemed the deposition “crucial” and the error outcome-determinative.

3.3 Impact of the Decision

Evidentiary Practice – Trial courts within the Sixth Circuit must now treat uncrossed depositions of deceased/unavailable witnesses as potentially admissible, performing a balancing analysis rather than default exclusion.
Bankruptcy Litigation – Parties cannot rely on cross-examination gaps alone to neutralize key Rule 30(b)(6) depositions; strategic preservation of testimony gains new prominence.
Rule 801(d)(2) Uniformity – By directing retroactive application, the opinion accelerates nationwide consistency on the privity issue, reducing forum shopping and evidentiary unpredictability.
Foreshadowing Future Developments – Judge Murphy’s concurrence invites en banc or Supreme Court review of AutoStyle, hinting at a possible shift toward state-law definitions for debt/equity—potentially reshaping financing strategies in closely held entities.

4. Complex Concepts Simplified

Recharacterization – A bankruptcy court’s power (recognized in AutoStyle) to treat an asserted “loan” as an equity contribution, thereby subordinating repayment claims below all genuine creditor claims.
AutoStyle Factors – Eleven non-exclusive criteria (e.g., name of instrument, fixed maturity, interest rate, capitalization adequacy) courts weigh to decide debt vs. equity.
Rule 32(a) vs. Rule 801(d)(2) – Rule 32(a) governs procedural admissibility of deposition transcripts; Rule 801(d)(2) governs substantive hearsay exclusion for party statements.
Privity Amendment – New language in Rule 801(d)(2) permitting statements to be used against a party whose liability is “directly derived” from the declarant—e.g., assignees, successors, insurers, indemnitors.

5. Conclusion

Insight Terminal Solutions clarifies that:

Courts possess discretion, not obligation, to exclude deposition testimony lacking prior cross-examination when the witness is unavailable.
Post-2024 Rule 801(d)(2) applies to ongoing matters and facilitates admission of statements against derivative parties.

Beyond the evidentiary realm, the case places the Sixth Circuit at the vanguard of a brewing debate over the federal courts’ authority to recharacterize debt as equity. Practitioners should monitor the remand—and potential higher-court review—for signals on the future of AutoStyle and the primacy of state law in bankruptcy debt-equity classification.