Rule 701 vs. 702 — Lay vs. Expert Opinion — Accountant’s Testimony as to Lost Profits of Client = Lay Opinion — Valuation Distinguished — Business vs. Land Value

Ryan Dev. Co., L.C. v. Indiana Lumbermens Mut. Ins. Co., 2011 U.S. Dist. LEXIS 123524 (D. Kan. Oct. 25, 2011):

Defendant[’s] next argument is that several of Plaintiff's witnesses should not have been allowed to testify because their testimony was not lay opinion but expert testimony. Defendant first raised the issue in its motion in limine before trial asserting that expert testimony from Plaintiff's accountants should be precluded because they were not previously disclosed as experts. The Court granted Defendant's motion in limine agreeing that these witnesses could not testify as experts but noting that they could testify as fact witnesses as they were the individuals who gathered and compiled the information to submit to Defendant supporting Plaintiff's insurance claim.

At the beginning of trial, Defendant raised an objection to one of Plaintiff's exhibits arguing that it was improper expert testimony. Plaintiff asserted that it was every proof of loss, and supporting document, submitted to Defendant, and Plaintiff's accountants prepared the document. The Court overruled Defendant's objection determining that Plaintiff's accountant testimony was merely a compilation of the items submitted in support of the proofs of loss and only involved a mathematical computation. During trial, Defendant also raised a continuing objection to Plaintiff's accountants' witness testimony arguing that it was improper expert testimony.

Federal Rule of Evidence 701 provides that if a witness is not testifying as an expert, the witness' testimony is limited to those opinions "which are (a) rationally based on the perception of the witness, (b) helpful to a clear understanding of the witness' testimony or the determination of a fact in issue, and (c) not based on scientific, technical, or other specialized knowledge within the scope of Rule 702." "When the subject matter of proffered testimony constitutes 'scientific, technical, or other specialized knowledge,' the witness must be qualified as an expert under Rule 702." [Footnote 10. LifeWise Master Funding v. Telebank, 374 F.3d 917, 929 (10th Cir. 2004) (citing Fed. R. Evid. 702).] There is no distinction "between expert and lay witnesses, but rather between expert and lay testimony." [ Footnote 11. Fed. R. Evid. 701 (advisory committee notes) (emphasis in original).]

Defendant directs the Court to a recent Tenth Circuit opinion, James River Insurance Co. v. Rapid Funding, LLC, [2011 WL 4860188 (10th Cir. Aug. 29, 2011),] in which the Circuit determined that the district court erroneously admitted a witness's valuation testimony as lay opinion because it was actually expert opinion. The testifying witness was the owner of a complex of apartment buildings, had experience in real estate, and had personally inspected the property. The witness' apartment complex burned down, and he submitted an insurance claim that the building had an actual cash value of approximately $4.4 million. At trial, the district court did not allow his testimony under Fed. R. Evid. 702 or Daubert because his method was not sufficiently reliable but allowed it as lay opinion testimony under Fed. R. Evid. 701. The district court gave a limiting instruction to the jury that the witness' testimony was lay, and not expert, opinion.

In making the determination that the witness' testimony was expert opinion, rather than lay opinion, the Circuit noted four factors. First, the Circuit determined that the witness did not qualify under Fed. R. Evid. 701 because his testimony was not common and involved technical judgment in determining depreciation and deterioration. The Circuit discussed the difference between common observations, i.e., opinion testimony, and technical judgments, i.e., expert testimony. It concluded that simple mathematical, statistical determinations constituted lay opinion testimony. Testimony based on sophisticated growth rates and S-curves fell under expert testimony as it involved specialized knowledge that could not be reached by an ordinary person.

Second, the witness' calculations were based in part on his professional experience in real estate. Third, the witness relied on an outside expert's 1,525 page technical report using specialized accounting calculations in determining the valuation. Finally, the Circuit noted that "the Federal Rules of Evidence generally consider landowner testimony about land value to be expert opinion." The Circuit found Fed. R. Evid.701's advisory committee's note allowing business owners to testify as to the value of their business inapplicable because the witness was not testifying as to the value of the business or projected profits but instead was opining about property value. Accordingly, because the witness' testimony was based on specialized and technical knowledge, the Circuit determined that the district court abused its discretion in allowing the witness's valuation testimony as lay testimony.

In this case, in contrast to the wit ness in James River, Plaintiff's accountants' testimony did not involve technical judgment. Instead, the testimony was based on their personalized knowledge of the company, including Plaintiff's books, documents, and tax returns. These witnesses compiled the information and documents sent to Defendant in support of the proofs of loss submitted. Although they were accountants, they did not testify as to special accounting procedures or complicated, specialized methods used to calculate the loss. They simply testified that they compiled information taken from Plaintiff's documents, such as the total amount of payroll paid out over several months, and input this data into a form provided by Defendant. The computation involved simple mathematical equations.

To the extent the testimony in this case may have involved testimony by the accountant as to lost income, this also contrasts with James River in which the testimony related to property valuation. The Federal Rules of Evidence consider property valuation testimony expert opinion. [Footnote 25. See Fed. R. Evid. 702 advisory committee's note.] Several courts have determined that "a lay witness accountant may testify on the basis of facts or data perceived in his role as an accountant based on his personal knowledge of the company." [Footnote 26. First Annapolis Bancorp, Inc. v. United States, 72 Fed. Cl. 204, 207 (2006) (citing Teen-Ed, Inc. v. Kimball Int'l, 620 F.2d 399, 403-04 (3d Cir. 1980)).] As noted above, Plaintiff's accountants had personal knowledge of the business, and they performed straightforward calculations. As such, the Court denies Defendant's motion on this ground because Plaintiff's accountants did not provide expert testimony.

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