Commercial Litigation and Arbitration

Damages Expert Testimony Relying Wholesale on Untested Opinions of Ultimate Party Client and Another Expert Excluded — Good Quotes

From Mooring Capital Fund, LLC v. Phoenix Central, Inc., 2009 U.S. Dist. LEXIS 117799 (W.D. Okla. Feb. 12, 2009):

Dr. Horrell is offered as a damages expert. His expert report includes various tables purporting to summarize defendants' damages in three areas, each of which is essentially an element of a "lost profits" calculation: (1) the claimed financial consequences of defendants' inability to develop 40 acres in Edmond, Oklahoma, due to Mooring's actions, (2) excess expenses defendants have allegedly incurred due to Mooring's actions, and (3) lost rental income at defendants' Norman, Oklahoma, strip shopping center due to Mooring's actions.

Dr. Horrell apparently views his anticipated testimony as including an opinion that the damages estimates reflected in his expert report reasonably estimate the damages defendants allegedly suffered because of Mooring's actions. *** Such intentions would be unremarkable for a damages expert, as experts routinely opine as to what their work reveals as the appropriate measure or extent of a party's losses. However, such estimates or opinions are normally based, at least in substantial part, on an investigation or analysis of some sort that the expert has done. Here, by contrast, it is clear the various damages estimates offered by Dr. Horrell are substantially based on, and simply recapitulations of, information he has been provided by defendants, rather than anything that he has generated or that are the result of his professional expertise.

For example, his summary of damages from the "inhibited" development of the 40 acres (i.e. inhibited by Mooring's conduct), or from the timing and impact of sales of other property owned by defendants, is entirely based on defendant Knight's projections as to how she would have developed the 40 acres and other property if the June, 2004, refinancing of defendants' debt had occurred. What defendants would have done with the loan proceeds is based on Knight's predictions. The amounts she would have derived from the initial lot sales and the assumed further development of the land and eventual sales of the remaining lots are based wholly on information Knight generated and her projections, not Dr. Horrell's. The only aspect of the "40 acres" calculation which appears to have been based on Dr. Horrell's expertise is his conclusion that rates of return of seven to nine percent on the capital "freed up" by the projected course of events are reasonable.

Similarly, the listing of "excess expenses" incurred by defendants is based entirely on information defendants provided to Dr. Horrell. The assumptions as to rental income from the shopping center reflect his wholesale adoption of certain assumptions and calculations in a 2004 appraisal done by an MAI appraiser for a bank that was considering a loan secured by the shopping center. They do not, with one exception, reflect any independent adjustment by Dr. Horrell or reflect any investigation by him of particular circumstances involving the shopping center or actual conditions in the market now or in the intervening years since the 2004 appraisal.

Defendants argue that Dr. Horrell can "rely on the data given to him by Knight to prepare his calculations." *** They assert that this court has conclusively determined that a damages expert may properly rely on facts provided by an interested party virtually without limitation. In so arguing, defendants make the rather remarkable assertion that this court has overruled a prior decision of the Court of Appeals to the contrary on that point. *** While the prospect of this court overruling the Court of Appeals is a tantalizing one, such a result is plainly beyond the powers of this court. Moreover, the conflict between the decision of this court and that of the Court of Appeals which defendants purport to identify is simply nonexistent. The decisions are wholly consistent with each other.

This court's decision *** noted that there is, in general, nothing wrong with a damages expert assuming a party can establish liability. Nothing in the Court of Appeals decision is inconsistent with that. What the Court of Appeals said in footnote 4, was that an expert's opinion may be properly excluded if he/she assumes some fact based on information from a party (as to damages or otherwise) and fails to make clear that he/she is, in fact, assuming it. The problem to which the footnote is directed is the potential for jury confusion and the lack of helpfulness of an opinion which appears to be based on the expert's findings or expertise, but is not, and is in fact based on self-serving information provided by an interested party.

These principles, as applied to this case, mean essentially this: it is perfectly appropriate for Dr. Horrell to assume, for purposes of his calculations, that defendants can establish liability against Mooring. What he may not do, and what Mooring argues he has done here, is to assume the accuracy of defendants' damages calculations or claims and then testify so as to suggest the conclusions are his or that he has determined, based on his experience and expertise, that those calculations are correct or reasonable. ***

Boiled down to essentials, it appears that the opinions Dr. Horrell seeks to offer, explicitly or implicitly, which arguably rely on his expertise are these: (1) that the defendants could have earned seven to nine percent on funds available to them in the 2004-2011 time frame, (2) that the shopping center would have generated net revenues equal to that projected in the 2004 appraisal, and (3) that defendants' estimates of future real estate sales activity or of "excess" expenses or the like are reasonable. Apart from these matters, Dr. Horrell's contribution essentially consists of doing mathematical calculations: (1) assuming all of the information defendants provided him as to development plans, hoped-for results, and "excess expenses" is accurate, and assuming the accuracy of net shopping center revenues as projected by defendants, how much extra money would defendants have had available for investment? and (2) assuming the rates of return indicated, what were defendants' lost profits due to not having the extra funds available to them for investment? ***

With respect to the first category or opinion referenced above — that defendants (or at least someone in the real estate development business in Norman, Oklahoma) could have achieved rates of return on invested capital in the range of 7-9% in the indicated years — the court concludes defendants have not made a sufficient showing to allow Dr. Horrell's opinions to be admitted. His area of expertise is essentially that of a statistician or mathematician applying the principles of those disciplines in various business and economic settings. His background and training are not in real estate development, real estate appraisal, or real estate finance. As a result, he lacks the actual or first-hand experience needed to support (absent some further investigation or inquiry) an opinion as to the investment results a real estate developer in the Norman area could have expected to achieve in the various years. He does have an impressive level of education and experience with statistics generally and broad experience applying statistical methods and principles in a variety of factual contexts. He plainly has the knowledge and intellect to apply his training in a variety of contexts when and if he does the necessary investigation and research. The problem is that he appears not to have done that in this case. He did not review economic indicators for the Norman area or elsewhere. He did not investigate the nature of the rental market there or elsewhere. He did not analyze indicators of the financial results for real estate developers in the area. Rather, he testified that his opinion on this issue is based on "30 years of experience looking at various business entities and the discount rates that are appropriate," *** with some consideration given to the assumptions in the 2004 appraisal done by someone else. ***

Whatever may have been the standard in the pre-Daubert era, it is clear that an expert's opinions are not admissible merely because the expert says, in effect, "trust me, I know." General Elec. Co. v. Joiner, 522 U.S. 136, 146 (1997) (opinion evidence not admissible where it is "connected to existing data only by the ipse dixit of the expert.") Here, with the exception of some reliance on the 2004 appraisal, Dr. Horrell's basis for his opinion as to rate of return is simply undisclosed. In those circumstances, there is no way to test his underlying assumptions or to evaluate them in any objective sense. It does not suffice for him to simply invoke experience or judgment without more.

Dr. Horrell's apparent reliance, at least in part, on the 2004 appraisal does not solve the problem. It is true that an expert may rely on facts and opinions not otherwise admissible if they are information of a type reasonably relied on by experts in that particular field. Fed.R.Evid. 703. That may include reliance on the opinions of other experts so long as it does not involve the wholesale adoption of another expert's opinions without attempting to assess the validity of the opinions relied on. In re TMI Litig., 193 F.3d 613, 715-16 (3d Cir. 1999) (concluding blind reliance by expert on other expert's opinion was flawed methodology under Daubert); TK-7 Corp. v. Estate of Barbouti, 993 F.2d 722, 732-33 (10th Cir. 1993) (expert opinion that relied on another expert's report was excluded when the testifying expert showed no familiarity with the methods and reasons underlying the hearsay report and no basis for the other report's reliability was demonstrated). Here, Dr. Horrell's references to the 2004 report do not suggest that he made any systematic effort to evaluate the methods employed in the appraisal or to evaluate its applicability to the present circumstances. His reference to the 2004 report, which it appears he did not read in its entirety, *** does not provide a basis for admitting an opinion that is otherwise conclusory ipse dixit. In any event, the court concludes plaintiffs' motion should be granted insofar as it seeks to exclude opinion testimony from Dr. Horrell which essentially addresses what a real estate developer in the area could have expected as a reasonable rate of return during the referenced period.

To the extent that Dr. Horrell seeks to offer an opinion as to the reasonableness of the 2004 estimate of net lease revenues from the shopping center, the second category of damages he addressed, the result is the same. There is no indication that he has any particular background in real estate leasing operations or that he undertook any investigation to independently determine what the leasing activity for a shopping center of this sort in this location would have generated. Instead, he has wholly adopted the projections in the 2004 appraisal. As noted above, an expert may not simply repeat or adopt the findings of another expert without attempting to assess the validity of that expert's opinions. Thus, any opinion testimony as to what lease revenues from the shopping center would have been in various circumstances, or as to the reasonableness of the 2004 report's assumptions, must be excluded.

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