Court Approves Valuation Expert’s $18.6M Diminished Value Tag in S&L Case

WASHINGTON, D.C. – In a case that begins at the dawn of the 1980s S&L crisis, the U.S. Court of Federal Claims has found “fair and reasonable” the opinion of an expert witness for S&L owners that the Government’s breach of their assistance agreements caused by the enactment of FIRREA cost them $18.6 million in economic value.  Claims for future lost profits did not survive, however.

 

Publisher’s Note:  You can comment on this story and see the complete case summary where the Court addresses a number of valuation methods and the defense expert’s testimony elsewhere on this blog.  

 

Plaintiffs Holland and Ross purchased all of the shares in Rock Falls Savings & Loan Association in 1986, about the time that S&Ls were collapsing across the country.  The FSLIC, which insured the thrift deposits, tried to get healthy thrifts to acquire insolvent ones.  The plaintiffs entered into an assistance agreement with the FSLIC to purchase some S&Ls.  The agreement included language that cash contribution from the FSLIC, the subordinated debenture and preferred stock purchased by the FSLIC could all be counted as regulatory capital on River Valley’s books – a provision that was wiped out with the enactment of FIRREA in1989.   To purchase another thrift called San Antonio Federal Savings Bank, the pair had to find other investors and form a new entity.  They acquired the bank.  Its assets were sold at a significantly gain for the investors.  First Bank acquired River Valley in 1995. 

 

Holland, Ross and First Bank sued the Government for breach of contract.  The court ruled in an earlier decision that the Government’s enactment of FIRREA did breach the contracts. 

 

Losing on Future Lost Profits

 

In calculating damages, the Court reviewed the plaintiffs’ theories, starting with the claim that they suffered lost opportunity to purchase SAFSB; therefore losing  potential profits or dividends.  Rejecting this claim, the Court said that when seeking damages from future income generating property, the market value of the asset at the time of the breach must be considered, not lost actual profits that could have been produced in the future had a different set of circumstances occurred.  Lost potential future income and dividends are not recoverable for the loss of the acquisition opportunity, the Court determined.

 

Daubert Attacks Go Beyond Experts to the Supporting Data

OCALA, FLA. – In an interesting twist to what’s becoming the standard Daubert challenge, the party opposing the financial expert in this case not only attacked the reliability of his opinions but also moved to exclude the mortgage pricing data on which he based his calculations, claiming that the provider should have been disclosed as a separate expert under the federal rules. 

 

The case raises an important distinction: the fine line between an expert offering a qualified opinion and his impermissible conclusion of law or fact.

 

In this suit between two mortgage companies, the plaintiff challenged the defendant’s financial expert in a pre-trial, Daubert-based motion.  To determine this preliminary matter, the court did not recite the facts of the case but it did summarize the expert’s findings in his report, including 1) that the defendant overpaid the plaintiff for certain mortgage servicing rights (MSRs); and 2) that the overpayment totaled $20 million.  To calculate the $20 million damages, the expert relied on data provided by the Mortgage Industry Advisory Corporation (MIAC)—in particular, its price indices for mortgage servicing rights.

 

The plaintiff argued that the MIAC data constituted such an “essential” aspect of the expert’s opinion that the provider qualified as an additional expert, requiring disclosure under Rules 26 of the Federal Rules of Civil Procedure (FRCP).  Because the defendant had failed to disclose MIAC, the plaintiff argued, its “opinions” should be excluded from the expert’s report pursuant to Rule 37 FRCP.

 

The court found the defendant had disclosed its expert’s use of the MIAC data.  “Moreover, there is no suggestion that MIAC created its indices or generated any other data based upon the specific details of this case,” it said.  Rather, the expert relied on the compilation of data that MIAC routinely provides the public.  An MIAC representative did give the expert “general guidance” on using the data, the court said, but that “does not, in and of itself, make MIAC an expert in this case.”   Instead, MIAC was a source of data, comparable to the federal Bureau of Labor Statistics, and the defendant’s expert did not rely on anyone else’s analysis or calculations but his own.

 

Further, the court found that even though the expert did not “understand every detail” of how MIAC calculated its data, the pricing indices were the type on which experts in the mortgage servicing industry reasonably relied.  The expert’s timely disclosures permitted the plaintiff sufficient opportunity to conduct its own research and analysis regarding the reliability of the MIAC data, the court held, and denied the motion based on any failure to disclose.

 

For the rest of this article and the opinion, go to BVRLegal.com.

 

Taylor, Bean & Whitaker Mortg,. Corp. v. GMAC Mortg. Corp., 2008 WL 3819752 (M.D. Fla.)(Aug. 12, 2008) or  Taylor, Bean & Whitaker Mortg. Corp. v. GMAC Mortg. Corp., 2008 U.S. Dist. LEXIS 59900 (M.D. Fla. Aug. 6, 2008)

 

‘Lost Sales’ Damages Valuation Based on Independent Data Verification Prevails

Lyman v. St. Jude Medical S.C., Inc.; 2008 WL 2224352 (U.S. Dist.) or 2008 U.S. Dist. LEXIS 42015

A case from federal court in Wisconsin, involving starkly different approaches to valuing damages in a contract dispute, stresses the importance of independent verification and objective data.

Plaintiff Lyman entered into a 10-year deal with St. Jude Medical to sell pacemakers and defibrillators (CRM products). The agreement contained a four-year guarantee period for which Lyman was to receive $3 million. After that, compensation was commission-only. St. Jude terminated the agreement after two years. Lyman sued. Daniel Gotter with Winter, Kloman, Moter & Repp, the plaintiff’s expert, used raw data to prepare five different models of damages projections based on sales quotas; projections calculated by the CFO for St. Jude’s parent company; regression analysis of the plaintiff’s company’s past sales at St. Jude; projected future sales; and projected net sales of the plaintiff’s company. The court allowed testimony on all five calculations, saying they would assist the jury in assessing damages.

Winter, Kloman, Moter & Repp, the plaintiff’s expert, used raw data to prepare five different models of damages projections based on sales quotas; projections calculated by the CFO for St. Jude’s parent company; regression analysis of the plaintiff’s company’s past sales at St. Jude; projected future sales; and projected net sales of the plaintiff’s company. The court allowed testimony on all five calculations, saying they would assist the jury in assessing damages.

The defendant’s expert, Randall D. Wilson with RGL Forensic Accountants & Consultants prepared two sets of projections: one weighted and one unweighted. Both sets were derived from the plaintiff’s “alleged sales” during the approximately two years it sold CRM products to St. Jude, the numbers were obtained from one document provided to the expert by St. Jude’s counsel. Taking into account the plaintiff’s decreased sales performance between 2003 and 2004, St. Jude’s expert’s original regression resulted in a “negative sloping trendline.” Because the plaintiff’s sales varied widely from month-to-month, the expert weighted the data to obtain a positive trendline for years five through 10 of the agreement.

The court focused not only on the source of the defendant’s expert’s data, but what he failed to do with it. Contrasted with Gotter’s independent valuation of raw data, the court said “the bottom line is that [the defense expert] never talked to anyone at St. Jude to verify the accuracy of the information in any of the documents he reviewed.” Finding the basis for his projections unreliable, the court excluded Wilson’s projection testimony. The case settled on the eve of trial.

Plaintiff attorneys: Todd R. Seelman and Leslie E. Miller of Grimshaw & Harring PC, Denver, CO; Michael J. Cohen and Thomas M. Hruz, Meissner Tierney Fisher & Nichols SC, Milwaukee, WI. Defense counsel: Brian G. Cahill, David J. Turek and Paul F. Heaton, Gass Weber Mullins LLC, Milwaukee, WI.

 

Defendant’s CEO a Valuation ‘Expert,’ Not Fact Witness

Compania v. Titan International, 2008 U.S. App. LEXIS 14571

CHICAGO – The Seventh Circuit has affirmed the exclusion of testimony from an officer of the defendant in the case, because the defendant attempted to offer his opinion as a fact witness.  The court said his valuation was not based on “particularized knowledge” gained by working at the company, but on his “extensive experience purchasing and selling the type of goods at issue.”  Since the court said the CEO was truly presenting an expert opinion, and he wasn’t disclosed by the deadline, the trial court was correct in excluding him.

“[Former Titan CEO] Taylor purported to value the collateral by applying his generalized knowledge of the worldwide tire market, gained through his experience in the worldwide tire business, to a proffered list of specific items owned by a third party.”  Noting that Taylor had no personal knowledge of the items, his position was “not akin to the owner of a small business testifying to the value of that business.”  The court said that since his testimony was based on his “special training or experience,” his testimony was that of an expert.

Compania’s law firm is Sonnenschein, Nath & Rosenthal in Chicago and Brown, Hay & Stevens in Springfield, Illinois.  Titan’s firm is Pepper Hamilton in Washington, D.C.  

Lack of Very Specific Experience Beats Expert’s Knowledge, Diligence in Painstaking Daubert Review

Baldwin v. Bader, 2008 U.S. Dist. LEXIS 56236 or 2008 WL 2875351

PORTLAND, Me.—This is the Maine federal court’s second look at what it called a close and difficult question—the valuation of personal guaranties given by company insiders to secure financing.  The first review came on a motion to exclude expert testimony that valued personal guaranties by comparing them to the risks borne by equity investors.   After the previous judge retired and other issues were raised, the court reconsidered Daubert matters, with added references to the just-released Cost of Capital: Application and Examples (3d ed. 2008) by Shannon P. Pratt and Roger Grabowski.  The opinion makes for provocative reading for appraisers and attorneys alike, especially on the novel and “hard-fought” issue how to value guaranties separate from valuing the business.

One issue was whether an excerpt from Cost of Capital was admissible at a Daubert hearing if the expert didn’t rely on it.  U.S. Magistrate Judge John H. Rich III saw no such requirement.  “[N]one of the authorities that the plaintiff cites . . . can be read to stand for the proposition that a proponent of expert testimony is confined to defending against a Daubert challenge solely on the basis of the authorities the expert used to formulate his or her opinion . . . .By contrast,” the judge added, “my own research indicates that . . .  it is permissible for proponents of expert testimony to rely on authorities other than those explicitly relied on by the expert to establish the reliability of the expert’s methodology.”  He added that the exhibit is probative at least relating to whether Pratt “subscribed to the view that there was no published study quantifying the risk premium added by provision to a personal guaranty.”

Novel Methodologies, ‘Tried & True,’ and Ipse Dixit

Whether defense expert John T. Gurley’s  testimony passed Daubert muster was a “close question,” the court commented.  Despite a “combined depth of accounting experience of some 70 years,” it said, neither Gurley nor the plaintiff expert had ever valued a personal guaranty.  The plaintiff attacked Gurley’s testimony as based solely on his ipse dixit.  Daubert says novel methodologies can be reliable and old ones can be applied in new ways, the judge observed, “yet novelty does not relieve the burden of proving reliability” and the defendants did not carry that burden.  While acknowledging all the ardent study, analysis and independent research Gurley undertook, the magistrate judge said he could not conduct his gate keeping from “too generalized a perspective.”  Did Gurley arrive at the “particular conclusion” that the risk of personal guaranties was comparable to the risk of equity investment?   In the end, despite his efforts and experience—perhaps, even, following “tried-and-true” BV practices—the court excluded Gurley’s testimony on personal guaranties because he never valued one before and because of questions raised by the competing expert about Gurley’s methodology.  

The decision was handed down on July 23.  It is available in BVR’s Business Valuation Litigation Database.   Portland law firms were Marcus, Clegg & Mistretta for Baldwin and Bernstein Shur for Bader.

(Editor’s Disclosure: Shannon Pratt is the founder and former owner of Business Valuation Resources, publisher of BV LEGALWire.)