Antioch Co. Litig. Trust v. Morgan, 2014 U.S. Dist. LEXIS 47740 (April 7, 2014)
A recent bankruptcy-related case illustrates how an experienced valuator was precluded from testifying because he had agreed to be a mere conduit for information that the client wanted to place in evidence. If the court’s exclusion did not sting enough, the expert heard the client argue to the court that it could show damages without the expert because the calculation required only “simple arithmetic,” which the jury could perform on its own.
The debtor was a privately held company that produced bookplates, bookmarks, book covers, and calendars. By 2007, it experienced financial trouble and determined it needed to sell its business to meet its obligations. The company’s board of directors (the defendants) hired a financial advisor to guide the 2007-2008 sales process. Two credible buyers presented letters of interest (LOIs) that the board and its legal and financial advisors pursued. The values ranged between $148 million and $185 million. But, after doing due diligence on the company, in October 2007 both of the prospective buyers withdrew, citing the company’s declining financial health. In May 2008, there was an offer from a venture capital firm, J.H. Whitney, to buy the company’s assets for $54 million in a “363” sale that required the company to file for bankruptcy and reorganize. Ultimately that proposition was not accepted and other efforts to pursue a sale also failed. In November 2008, the company petitioned for bankruptcy.
As part of the bankruptcy filing, the company submitted a disclosure statement that referenced a valuation of the company between $31 million and $38 million. The disclosure statement cautioned that the estimate “does not necessarily reflect, and should not be construed as reflecting, values that will be attained in the public or private markets.” The Bankruptcy Court did not adopt the valuation in any of its findings or its confirmation order.
The plaintiff, a litigation trust, sued the defendants claiming that they mismanaged the sales process and committed waste by employing various professionals without receiving value in return. The trust demanded lost value and professional fees damages.
To testify as to damages, the trust retained a financial expert with decades of experience in business valuation, deal structuring, and financial and investment analysis, who had dealt with “363” sales. However, he was not a qualified damages expert and had never given testimony on damages. He admitted that he was not familiar with any damages methodologies and said he did not use any method to calculate damages for this case. He opined that the defendants’ conduct “caused the Company to lose the opportunity to realize between $20 million and $30 million in value, and to waste $6 million on professional fees.”
As to lost value, he said he arrived at his range by using the $54 million from the Whitney LOI as a “top-end value” and the $31 million-to-$38 million range appearing in the bankruptcy disclosure statement as a “bottom-end value”—subtracting the latter from the former. He did not perform a formal business valuation and also did no independent analysis of the LOI. He did not contend that the $54 million offer was reasonable. Rather, he believed that when it came to the value of the company “the worst it would have been would have been $54 million if there wasn’t anybody else stepping up to the option of the 363 sale.” Whitney, he believed, had done “substantial due diligence,” and its offer would have been a “stalking horse” that would have attracted other offers. At the same time, he conceded that “there’s no way to know that.” He also stated that a letter of intent was nonbinding and was not the equivalent of cash; he noted there was only one way to know a deal was done: “when the money is in the bank.” And “more value is lost between the time there is a signed letter of intent and a closing than anyone ever cares to admit.”
Although his report said that the amount of waste on professional fees related to the unsuccessful sales process was $6 million, he admitted that he had not reviewed any information related to the professional fees. This amount, he said, was an estimate he had received from plaintiff’s counsel; he did not know which professional received what part, if any, of the amount and did not know what part of the $6 million estimate actually represented waste.
Plaintiff at oral argument on the Daubert motion admitted the figure stemmed from just adding up invoices and subsequently said it would not rely on the expert’s testimony for this damages claim.
The defendants filed a Daubert motion to strike both parts of the expert’s damages opinion, arguing he had lifted his base values from the work of others without establishing the reliability of the source material. He admitted to having no experience with the computation of damages and to using no methodology or reliable principles. Therefore, the testimony was unreliable. Also, the plaintiff failed to commit to a damages calculation in the pretrial stage and should be precluded from introducing it for the first time at trial.
The plaintiff countered that the expert had experience in dealing with the transactions at issue in the contested sales process. He was qualified to testify to the reliability of the Whitney letter. His testimony combined with the bankruptcy court record sufficed to establish lost value damages. The damages methodology he used was “simple arithmetic.” Once the top and bottom values were in evidence, the jury could subtract the two numbers itself.
The court found the argument seriously flawed. As to methodology, the expert did not do any independent analysis of the $54 million amount in the Whitney letter. Even if an expert’s opinion need not be based on first-hand knowledge and he or she need not have performed his own valuation of the company, the expert must establish that he drew on a reliable sources. Regarding the top value he used, he never suggested that it was a reliable data point. Also, no Whitney representative was deposed to speak to the letter of intent. Therefore, it was hearsay. And, although an expert may rely on hearsay, “s/he cannot do so blindly,” said the court. Regarding the bottom value, the valuation range included in the disclosure statement also was not reliable. “It is a document prepared, sponsored and filed by a party soliciting votes to accept or reject a reorganization plan,” the court pointed out. Therefore, “courts do not look to values set forth by a plan proponent in a disclosure statement as admissible evidence.” Accordingly, even if the court were to allow the plaintiff to prove damages by “simple arithmetic,” without a damages expert, the plaintiff lacked reliable sources providing the requisite base values.
The court swiftly dismissed the expert’s opinion about the $6 million professional fees, noting that he had performed no independent review of the payment records and invoices related to professional fees.
In conclusion, the court not only excluded the expert’s damages testimony, but it also denied the plaintiff’s last-minute request to show damages without an expert. The court’s finding was, therefore, the end of the case.
At Rosenfarb LLC we produce well supported, well-reasoned and well communicated damage calculations that withstand the rigors of litigation. We are a firm of forensic accounting and valuation experts. We understand business, have keen insights and always connect the dots. We understand the litigation process. We frame the issues simply and in alignment with the litigation strategy. We use logic to support our opinions, while creating compelling stories. We are sincere, professional and credible. We are accounting experts with legal acumen.
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