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December 10, 2012 Articles

Particular Evidence Problems with Appraisals, Part III: Expert Witnesses

While bankruptcy litigants need to call experts to testify about scientific issues, more frequently they call nonscientific experts.

By Hon. Pam Pepper

In Part I and Part II of this series, we’ve discussed particular evidentiary issues that arise in the context of appraisals. We discussed the fact that you need the appraiser to surmount a hearsay objection to the admission of an appraisal report because the appraiser is the custodian through whom you can establish the Rule 803(6) “records of regularly conducted activity” requirements. But it is also likely that you will need to qualify that appraiser as an expert, to be able to have the appraiser discuss the bases for his or her conclusions about valuation.

Federal Rule of Evidence 702 governs expert witnesses. To qualify a witness as an “expert,” the proponent must show that the witness has scientific, technical, “or other specialized knowledge” that will assist the trier of fact in understanding the evidence or in determining a fact at issue. The witness must be qualified as an expert “by knowledge, skill, experience, training or education.” If the proponent demonstrates these qualifications, then a witness qualified as an expert may testify to his or her knowledge “in the form of an opinion or otherwise” if:

  • the testimony is based on sufficient facts or data,
  • the testimony is the product of “reliable principles and methods,” and
  • the witness has applied the principles and methods reliably to the facts of the case.

The seminal expert witness case is Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993). This is the case in which the Supreme Court described a court’s “gate-keeping” function in deciding whether an expert witness had the expertise necessary to assist the trier of fact and whether the methods that expert used were reliable. The Daubert case involved “hard science,” of the type that a typical generalist judge might not understand without expert assistance. Several years later, the Supreme Court decided Kumho Tire Co., Ltd. v. Carmichael, 526 U.S. 137 (1999). Kumho applies the Daubert standards to all experts, not just scientific experts.

Although, on occasion, bankruptcy litigants need to call experts to testify about scientific issues, more frequently they call nonscientific experts—appraisers, accountants, realtors, business consultants. If you need to enlist the services of such a nonscientific expert, there are several issues to consider.

First, ask yourself whether you do, in fact, need to qualify the witness as an expert. Although most bankruptcy courts don’t require a separate Daubert hearing, it still takes time and effort to go through the process of convincing a judge that someone is an “expert,” particularly if the opposing side is objecting. It may not be necessary to qualify the witness as an expert. For example, if you are calling a broker to testify that a company has been on the market for two years, that the asking price has been reduced three times during that period, and that no one has made a qualifying offer, you probably don’t need to qualify the broker as an expert. The broker is not testifying about how he went about valuing the goodwill of the business or whether it is appropriate to use one valuation method over another. The broker is doing nothing more than testifying to facts of which he has personal knowledge; he is a fact witness who just happens to have some specialized knowledge as well.

Second, if you are calling a witness because he or she has specialized knowledge that would assist the judge, make sure that you know, with specificity, the topic on which you want that witness to opine. There is a common misconception that an expert can’t testify as to the ultimate issue to be decided by the trier of fact. That isn’t true across the board—the rules prohibit an expert from testifying as to the ultimate issue before the trier only if that issue is the mens rea (or lack thereof) of a criminal defendant. So it is appropriate for an expert on business valuation to testify as to his or her opinion of the value of the business.

But if you aren’t careful, canny opposing counsel can raise questions that cause the judge to question whether your expert is an expert on the topic for which you called him or her. If you call an expert to testify that mid-sized printing companies (defined as 50 or fewer employees with sales of less than $5 million per annum) usually sell for a certain price in the Pacific Northwest, then you’d best make sure that your expert has something in his or her background—experience buying or selling just those sorts of businesses or research focusing on the valuation and sale of those sorts of businesses. As stated in previous columns, a witness who has expertise in valuing accounting businesses with three or fewer employees is going to have trouble being qualified as an expert in the above scenario.

Third, be aware of any warts your expert may have. Has your witness testified in 20 previous valuation hearings? Maybe that’s good—maybe it shows experience and expertise. But maybe it isn’t so good if the witness always testifies for the debtor and always gives a significantly different value than that given by the creditors’ or the committees’ expert. Maybe it isn’t good if the reason the expert keeps getting called as an expert is because he or she has some weird, novel valuation method that constitutes a “Hail Mary” pass by the party calling the witness. Has the witness been discredited by any courts in front of whom he or she has testified? Does the witness openly advertise himself or herself as a hired gun who will do whatever the client needs to be done? Is this the witness’s first time testifying? Before you go to the time and expense of bringing an expert into court, make sure you are comfortable with the answers to these questions.

Keywords: bankruptcy and insolvency litigation, appraisal, relevance, evidence, expert, Federal Rule of Evidence 702, Daubert, valuation, Judge Pepper

Hon. Pam Pepper – December 10, 2012

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