New York Attorneys JHA handles range the gamut of complex financial and commercial litigation and arbitration, including securities, RICO, corporate and contract disputes, credit default swaps, derivatives, and class, mass, and derivative actions. The firm also represents law firms in major disputes.

Commercial Litigation and Arbitration

New York Attorneys JHA handles range the gamut of complex financial and commercial litigation and arbitration, including securities, RICO, corporate and contract disputes, credit default swaps, derivatives, and class, mass, and derivative actions. The firm also represents law firms in major disputes.
Commercial Litigation and Arbitration
« Back to Complex Lit Blog

Expert Testimony on “Zone of Insolvency” Rejected under Daubert as Unreliable — Phrase Has No Accepted Meaning and There Is No Accepted Methodology to Test It

Download PDF

From Kipperman v. Onex Corp., 2009 U.S. Dist. LEXIS 71666 (N.D. Ga. Aug. 13, 2009):

Logue testified that ABCO/Magnatrax was in a "zone of insolvency" at the time of the ABCO and Republic acquisitions. *** Defendants contend that this testimony is inadmissible, in part, because there is no scientifically accepted definition of, or methodology for calculating, the "zone of insolvency" among financial experts or legal scholars.

Logue does not define "zone of insolvency" in his report. Logue testified extensively to his understanding of "zone of insolvency" in his deposition. *** Logue defined the "zone" as "an inability to pay your bills when they're due, the probability of running afoul of the bank covenants, pretty small equity capital for the size of the company that you have." *** Logue could not identify any financial valuation textbook, article, or treatise defining the term "zone of insolvency," rather he claimed that it was a term of art that he has seen develop in the last year or two in contexts like this case. *** Logue had not personally seen the term used in any contemporaneous solvency valuation, but he claimed other people told him they had used it in such valuations. *** Logue testified that he had never used the term in a solvency evaluation before and that he had never been a part of a case where an expert had done so. *** Logue identified the "zone" as "subjective" and "a judgment call." ** He stated that if "solvency" was a snapshot, then one should think of the "zone" as a video camera or "a general landscape." *** The zone was a "mosaic" in which one "must consider not only today but what might happen in the not too distant future." *** Logue explained the "zone" as a range, but he admitted that he had not quantified that range in his report and he could not give a specific range. *** When asked how close to the line a company must be to be in the "zone" in a quantifiable way, Logue testified that it would differ depending on the company and the investment opportunity. ***

The court has researched the term "zone of insolvency" or "vicinity of insolvency" and finds that it arose out of a footnote in Credit Lyonnais Bank Nederland, N.V. v. Pathe Communications Corp., No. 12150, 1991 Del. Ch. LEXIS 215, 1991 WL 277613, * 34 n.55 (Del Ch. Dec. 30, 1991) addressing the decision-making process of directors in a financially strained company. The court can find no opinion written since Credit Lyonnais which has explicitly defined "zone of insolvency," and rather repeatedly sees this term referred to as "hazy," "ill defined," or "confusing." In re Teleglobe Communications Corp., 493 F.3d 345, 356 n.9 (3rd Cir. 2007); Production Resources Group, L.L.C. v. NCT Group, Inc., 863 A.2d 772, 790 n.56 (Del. Ch. 2004).

The court finds that Logue's testimony that ABCO/Magnatrax was in the "zone of insolvency" at the time of the ABCO and Republic acquisitions is unreliable. Logue has admitted that his conclusions as to the "zone" cannot be tested because they are based upon a subjective judgment call. Logue further admits that he has never seen the term in an article or treatise related to valuations and that he has not personally seen his peers use it in valuations. Logue contends that he is aware of other professionals using it but cannot point specifically to any work by other experts that he has reviewed. Logue cannot quantify the term in any way, and although he appears to contend in parts of his testimony that the zone is "a range," he admits in later portions that he is unable to provide Defendants with such a range or indicate any particular rate of error in calculating such a range. Aside from Logue's testimony, the court's own exploration of the case law makes clear that there is no generally accepted meaning for the term "zone of insolvency."

The court finds that any testimony regarding a "zone of insolvency" is unreliable and will not allow Plaintiff to rely on any testimony by Logue that the Debtors were in a "zone of insolvency." This holding does not prevent Plaintiff from offering testimony that the Debtors could not pay their debts when due, were statutorily "insolvent," or that they had unreasonably small amount of capital in which to operate their business; it merely prevents Plaintiff from using the term "zone of insolvency."

Share this article:

Facebook
Twitter
LinkedIn
Email

Recent Posts

Inherent Power Sanctions — Dismissal for Threatening Defendant and Magistrate Judge — No First Amendment Right to Threaten Violence

RICO: Domestic Injury — Delivery of Fraudulently Non-Conforming Goods FOB Los Angeles for Shipment to China Means Injury Arose Domestically When Purchaser Took Title —Other Relevant Factors Include That The Non-Conforming Goods Were Sourced and Made in the U.S. and The Racketeering Activity (Mail/Wire Fraud) Occurred in, and Was Directed from, the United States — Irrelevant to Domestic Injury Inquiry Whether Property Is Tangible or Intangible — 7th Circuit’s “Injury-Felt” Test of Domestic Injury Rejected by Supreme Court — RICO Standing Requires Concrete Financial Loss, Not Merely Injury to Valuable Intangible Property Interest (9th Circuit)

RICO Causation: Parents of Children with Disabilities Deprived In-Person Education and Services during the Pandemic Were Not Causally Injured by Teachers’ False Assurances to Federal Authorities That IDEA-Complaint Policies Were in Place, Which Caused Funds to Issue But Not to the Benefit of the Disabled Children — Damages Too Indirect — Proper Plaintiff Is U.S. Government — Private Injunctive Relief Under RICO Uncertain in Third Circuit

Sanctions: Rule 37(b)(2) Dismissal — Sixth Circuit Factors

Inherent Power Sanctions — Extrajudicial Misconduct: Sanctions Power Extends to Conduct Intended to Sabotage Court’s Ability to Adjudicate the Case Before It, Here, By Commencing State Court Actions Seeking to Enjoin the Federal Plaintiffs from Proceeding with Their Federal Litigation — Sanctions Fee Awards: The Factors Used For Calculating A Fee Award To A Prevailing Party Do Not Govern — Under Goodyear, the Relevant Inquiry Is Whether There Is A Sufficient Causal Link Between The Sanctioned Misconduct And The Fees Awarded

RICO: Members of Association-in-Fact Enterprise Must Act with a Common Purpose—Mere Allegation That Various Defendants Agreed at Different Times to Engage in Various Fraudulent Schemes Does Not Plausibly Support the Essential Inference, That They Acted with s Sufficiently Common Purpose

RICO Causation: (1) State’s Misrepresentation to Federal Government That It Was Providing Plaintiffs with Mandated Special Education Did Not Cause Plaintiffs’ Injury Because The Failure to Provide The Education Was Not Caused by the Fraud on the Federal Government — (2) The Three Factors for Assessing RICO Causation — (3) Limits of the Second Circuit’s Decision in Alix v. McKinsey That Causation Can Be Established Where A Fraud On The Judiciary “Or Other Governmental Entity” Resulted In A Resource Going To Someone Less Deserving

Rule 41(b): Five Factors to Be Weighed in Deciding Whether Dismissal Is Appropriate (Second Circuit) — Is A Finding of Bad Faith or Fault Required if Dismissal Is Without Prejudice? — Undecided If Truly Without Prejudice But It Is Required If the Without Prejudice Dismissal Will Act as a Dismissal on the Merits (Here, Because of the Statute of Limitations) — Failure To Consider A Lesser Sanction Than Dismissal Is Generally An Abuse Of Discretion

Spoliation Sanctions/Mootness: Stipulation Resolving “All Pending Discovery Disputes,” Which Are Enumerated, Does Not Moot Subsequent Sanctions Motion for ESI Spoliation — Postjudgment Sanctions Order Is Appealable When District Court Has Finally Disposed of Both Liability and Amount

Rule 37 Default Judgment Sanction: (1) Default Judgment Appropriate Only As a Last Resort, When Less Drastic Sanctions Would Not Ensure Compliance with the Court’s Orders — (2) Default Judgment Sanction Requires Willful or Bad Faith Failure to Obey Discovery Order — (3) Fugitive Defendant’s Failure to Appear at Court-Ordered, Remote Deposition Despite Court Warning That Sanctions Could Follow Disobedience Warrants Default Judgment — (4) District Court Afforded Wide Discretion in Interpreting Its Own Orders — (5) Filing a Notice of Appeal from a Non-Appealable Order (Here, a Discovery Order) Does Not Deprive the District Court of Jurisdiction over the Case

Archives
New York Attorneys JHA handles range the gamut of complex financial and commercial litigation and arbitration, including securities, RICO, corporate and contract disputes, credit default swaps, derivatives, and class, mass, and derivative actions. The firm also represents law firms in major disputes.
New York Attorneys JHA handles range the gamut of complex financial and commercial litigation and arbitration, including securities, RICO, corporate and contract disputes, credit default swaps, derivatives, and class, mass, and derivative actions. The firm also represents law firms in major disputes.

New York Office

© 2024 Joseph Hage Aaronson LLC  
Disclaimer | Attorney Advertising Notice | Legal Notice