"A Pox On Both Your Houses": NY's Judge Stan Bernstein Next Tosses Plaintiff's Business Valuation Expert in Another "Must Read" Decision
Last December, I reported here on NY Bankruptcy Judge Stan Bernstein's "must read" opinion in Chartwell Litigation Trust v. Addus Healthcare, Inc. (In re Med Diversified, Inc.), 334 B.R. 89 (Bankr. E.D.N.Y. 2005) (pdf), in which he barred the defendants' valuation expert, Scott Peltz, from testifying in a $7.5 million fraudulent transfer case, finding both that Mr. Peltz failed to qualify as a business valuation expert and that his testimony was unreliable "because he did not employ the same level of intellectual rigor that characterizes the practice of an expert in the field of business valuation."
With no one left to rebut the plaintiff's proposed valuation expert, one would have expected that the post-confirmation litigation trust would be laughing all the way to the bank, but last week, in this written opinion, Judge Bernstein put a pox on the plaintiff's house by equally ripping the plaintiff's expert, Robert Cimasi, and finding that his testimony and report also were "fundamentally unreliable." Chartwell Litigation Trust v. Addus Healthcare, Inc. (In re Med Diversified, Inc.), 2006 WL 2242288 (Bankr. E.D.N.Y. 8/2/06). In reaching this conclusion, Judge Bernstein pulled no punches, writing:
The Court now turns to the defendants' cross-motion in limine to deny admission of the expert report and testimony of Cimasi on the ground that in applying the standard methodologies for an enterprise valuation of Addus, he exhibited such a deliberate, manifest, pervasive, and systematic bias in selecting his data points, in adjusting the data points, and in assigning weights to the data points in order to drive his valuation opinion toward its lowest levels that his report and testimony have to be excluded as fundamentally unreliable.
After reviewing all of the evidence, the Court has determined to grant the defendants' cross-motion in limine and exclude Cimasi's expert testimony and report. As this memorandum amply attests, the deliberate, manifest, pervasive and systematic bias on Cimasi's part in applying the standard methodologies for estimating the total enterprise value of Addus warrants disqualifying him and his report on the principal ground of unreliability. The Court has taken considerable pains to point out the myriad ways in which Cimasi deliberately drove his adjustments of the discount rate and other variables toward the lowest order of value in order to accomplish his client's implicit bidding, notwithstanding his protestations of objectivity. Perhaps this memorandum of decision may assist other bankruptcy courts in framing their decisions on motions in limine under the evolving standards of disqualification of purported non-scientific expert witnesses under the United States Supreme Court's Kumho decision with respect to financial matters....
This Court is not prepared to adopt the suggestion in the plaintiffs' supplemental memorandum that it should either change the assigned weights or adopt the highest of the three values. Either the valuation is reliably prepared or it is not; this Court does not serve to control against the plaintiffs' expert witness' bias in order to save its case in chief. If a court of record cannot rely upon its "officers" to ensure it that their retained experts prepare valuation reports in as objective and unbiased manner as can reasonably be achieved under the current state of the appraisal art, then those officers will suffer the adverse consequences from an excess of vigorous advocacy that impairs the truth-seeking duties of the court. The whole point of experts is to assist the court in determining the relevant facts, not in adding to the court's burden in having to redeem unreliable testimony by its own lights....
Plaintiffs' counsel argues in its supplemental post-trial memorandum that this Court should undertake to redeem Cimasi's report by substituting [another expert's] computation of EBITDA and ignoring the negative adjustments to the discount rate and then running the substituted variables in the formula.... [I]t is not the function of this Court to fix the errors in an expert's report in order to save it for purposes of admission. Either the expert properly applies the standard methodologies or he does not. If he does, the report may be admitted. If he does not, it cannot be admitted....
Under the totality of the circumstances, this Court does not believe that it falls within the sound exercise of its discretion to redo Cimasi's patently unreliable report. This may be a stiff dose of medicine for the plaintiffs to swallow, but it should serve as a warning to other litigants in future constructive fraudulent transfer cases to make sure that their experts apply the standard methods correctly lest they find their experts' reports denied admission. For if they do not heed this stricture, they may not have any evidence in the record to sustain their burden of proof to avoid the alleged constructive fraudulent transfers.
Judge Bernstein's opinion methodically dissects Mr. Cimasi's application of standard valuation methodologies (such as benchmarking, discounted cash flows, guideline company valuations, and direct comparable transactions) to the facts of the case, pointing out the perceived flaws in each opinion advanced.
In the end, regardless of whether one thinks Judge Bernstein went too far, all would agree that his two disqualification opinions in this litigation are "must reads" for every bankruptcy litigator.
Here are links to Mr. Cimasi's expert report, to the defendants' motion to exclude Mr. Cimasi, to the plaintiff's memorandum in support of Mr. Cimasi, and to the hearing transcripts before Judge Bernstein on the motion to exclude Mr. Cimasi (Parts 1 (direct), 2 (direct), 3 (direct & cross), & 4 (wrap-up)).
Finally, for the sake of completeness, here are the links to the plaintiff's motion to exclude Mr. Peltz (including Exhibit A-Peltz Deposition Excerpts, Exhibit B-Addus Financials, Exhibit C-Peltz expert report, and Exhibit D-Graph Applying Opinion to Facts), to the defendant's response and supplemental response in support of Mr. Peltz, and to the hearing transcripts before Judge Bernstein on the motion to exclude Mr. Peltz (Parts 1 (direct), 2 (direct & cross), & 3 (cross & redirect)).
© Steve Jakubowski 2006
Not familiar with the case but the excerpts quoted make a lot of sense and I agree this is a must read for bankruptcy trial lawyers.
I represented a major party in the main bankruptcy case. Witnessed this judge. By far, the worst bankruptcy judge in the Court. Short tempered. Ill-considered. Rude to parties. Arrogant.
These decisions do not come as a surprise given the writer.
I have been before Judge Bernstein (not to be confused with the excellent Judge Bernstein from the SDNY), and I have to admit that he is, in my humble opinion, the second worst bankruptcy judge I have ever seen. He is always ill-prepared and has an uncanny ability to defy logic. Its better to rely on the better bankruptcy judges from SDNY (Drain; Gropper; Gonzalez, etc.).
Was this decision an attack on an appraiser, or, in light of the previous decision regarding the opposing expert, an attack on the business appraisal field as a whole?
I think the answer is that it's an attack on the appraiser, the business appraisal field as a whole, and -- implicitly -- the horses these experts rode in on (i.e., the lawyers). However, in my view (and I think the view of many), most judges out there will admit the testimony and reports of both sides and view the two opinions like the two sides of a goalpost (to use Judge Coar's analogy) in between which the judge's valuation ruling will fall.
It has to be obvious to any reader from even a cursory review of the trial transcripts that, right from the outset, this judge expressed that he had an agenda and a mission - clearly a self-aggrandizing, attention-grabbing attempt to put business valuation, as a discipline, on trial. The transcripts reveal that he didn't allow either side to put their case on in any semblance of an orderly fashion - asked most of the questions, answered most himself, railed from the stand about business valuation as a "recent development" - disfavored in his mind in contrast to real estate appraisal and accounting, and decried the use of generally accepted benchmarking databases such as Ibbotson, Integra, RMA, and other transactional databases widely used in the finance world and business valuation profession. Point after point in his order is contradicted by the transcripots and report on the record. This appears to have been a power trip by this judge from start to finish - Stan Bernstein as Moses handing down Daubert and Kumho (related to business valuation) to the bankruptcy courts, without any regard for who he hurt - the parties, the attorneys, the experts, the business valuation profession, or the reputation of the courts.
As evidence of Bernstein's bizarre trial conduct and pronouncements, consider his order in light of the following excerpts from the trial transcripts:
THE COURT: "Since this particular issue has not been discussed by any other bankruptcy court, this Court has taken the pains to present a comprehensive analysis of the gatekeeper function in the hope that it may be useful to other bankruptcy judges, the business bankruptcy bar, and, tangentially, the bankruptcy law professoriat" [Order Disqualifying Peltz - Page 3].
THE COURT: "Perhaps this memorandum of decision may assist other bankruptcy courts in framing their decisions on motions in limine under the evolving standards of disqualification of purported non-scientific expert witnesses under the United States Supreme Court - Kumho decision with respect to financial matters." [Order Disqualifying Cimasi - Pg 4, Paragraph 2]
THE COURT: "This [business valuation] is a very recent development of concepts dating as early as FIREA, which is no -- is far less than 20 years old. I can't give it the kind of weight of a specialized skill set that I should find persuasive in trying to determine whether there was a fraudulent transfer here - I have a discreet understanding of my limitations, but I also have an understanding of what my experience tells me in having listened for the past 30 years to appraisers, and while they may not bear all the credentials and all the publications [as Cimasi], I have yet to find an appraiser of value of non-real estate that ever says anything that's cogent and persuasive. Go ahead. I'm always willing to be persuaded." [Cimasi Trial Transcript 8-29-05 Pgs 219, Line 22-25-Page 220, Lines 1-4]
THE COURT: "I'd love to finally found an appraiser who convinces me that through a rigorous application of a methodology, that person can effectively value a company. Several have tried. None have succeeded, no one as sophisticated as you, but in the universe of companies rather than real estate projects or cash flows, the science isn't there yet...because I'm testing it at every single conceivable angle simply because I have a tremendous degree of skepticism." [Cimasi Trial Transcript 8-29-05 Pg 224, Lines 11-19]
THE COURT: "I'm just letting you hear this preliminary observation...I don't have the confidence in the markets that Adam Smith or Mr. Cimasi had. If I had such confidence in the public markets, I wouldn't be in business. So the markets don't operate rationally. They don't operate efficiently. There's all kinds of insider information, all kinds of insider trading, all kinds of abuses. So in the real world of the real investors there's a very high error rate, and yet he wants me to look into this hypothetical rational world that presumably has been formed by empirical reality, and it's not consistent with my understanding of how the world works, although I readily concede that a bankruptcy always -- a bankruptcy judge always look at it at the worst end possible because all we deal with is failures, not successes, but if someone's going to come in here and tell me that in the context of where we have a badly managed company that isn't properly accounting for its receivables, isn't properly covering for its reserves or workers compensation through Mr. Nielson, with respect to a company that's insolvent and overpays for its assets, I'm trying to understand where in this whole process Mr. Cimasi fits in, and how he's going to be able to shed light in determining the ultimate question whether or not there's a recovery for $7 1/2 million or more, and I can go through all these levels of analysis, but I'm telling you, he's not advancing the ball. He keeps dropping yardage, to use those common phrases from the ongoing fall. He's got the shoulders of Chad Pennington at this point. I want him to zero in on target, hit the end, and do it in a way that I can see the ball flow from his hand into the receiver's hands, and the reason I say this is because a lot of our district judges like football. So with that I'm going to quiet myself. You ask him all the questions, and then I'm going to turn it over to Ms. Wheeler. [Cimasi Trial Transcript 8-29-05 - Page 148-150]
Excerpts from the transcript of the 11/23/05 trial testimony of Scott Peltz, the first expert (for Defendants) that Judge Bernstein excluded as a witness, show that on 11/23/05, Judge Bernstein ruled, "on the record" during Peltz's appearance, and following the testimony of Cimasi (Plaintiff's witness) that he denied the Defendant's Motion in Limine to exclude Cimasi, to wit:
[From 11/23/05 Peltz Trial Testimony]
THE COURT: "All right. Thank you. Mr. Strub, you can go on if want to quote, 'create a record,' but having listened to this carefully as I did to Mr. Strub, and having reviewed the exhibits, I don't see a failure on grounds of relevancy and reliability and personal qualifications to grant the motion in limine to strike or to preclude Mr. Cimasi from testimony or having once testified in connection with his voir dire and going further, that I should now strike his entire testimony. I think he does have the qualifications as an expert in this industry. I think he testified to that very extensively. I think he does have all kinds peer-granted recognitions, although I do think It's a rather small, select, self-validating society, but he did seem to apply it as evidence of his expertise. I think the rest of it goes to his weight, and I have some considerable difficulties giving credibility to some of his calculations, some of which are based on points raised legitimately by Mr. Peltz. So I'm going to deny the motion in limine. I don't think Mr. Peltz's rebuttal testimony has invalidated, as it were, the report of Mr. Cimasi or his testimony, but at the end of the day when I make a determination of the contributions by each witness to this quest for the truth or our proxy for the truth through out adversary proceeding, I'll take some of these points into consideration, and I'll explain them, and I assume that in the proposed findings of fact and conclusions of law, Ms. Murch and her colleagues will try to put these into their view of what the proposed findings and facts -- proposed findings of fact and conclusions of law ought to be, and what issues I should consider in the memorandum of law. So that's my disposition at this point, but if you think it's necessary to push the matter further through your cross examination of Mr. Peltz, I'll allow you to do that until 2:00 o'clock."
MR. STRUB: "Okay, Judge."
THE COURT: "It's up to you, Mr. Strub."
MR. STRUB: "I will, just because of the Court's comment about some of the concerns about Mr. Cimasi's calculations based on some of the testimony that Mr. Peltz gave, I do want to clarify some portions of Mr. Peltz's testimony. It's definitely not going to take until 2:00. Hopefully this is not going to take longer than half an hour."
THE COURT: "All right. Go ahead. But you understand my ruling, Ms. Murch?"
MS. MURCH: "Yes, I do, Judge."
THE COURT: "All right."
Bernstein then proceeded to issue his subsequent 8/2/06 Memorandum of Decision and Order issuing the motion in limine excluding Cimasi's testimony, to wit:
[8-2-06 Bernstein Order Disqualifying Cimasi]
"The Court now turns to the defendants' cross-motion in limine to deny admission of the expert report and testimony of Cimasi on the ground that in applying the standard methodologies for an enterprise valuation of Addus, he exhibited such a deliberate, manifest, pervasive, and systematic bias in selecting his data points, in adjusting the data points, and in assigning weights to the data points in order to drive his valuation opinion toward its lowest levels that his report and testimony have to be excluded as fundamentally unreliable. After reviewing all of the evidence, the Court has determined to grant the defendants' cross-motion in limine and exclude Cimasi's expert testimony and report."
Aside from the other obvious inconsistencies between the substance of Bernstein's 8/2/06 order excluding Cimasi's testimony and the transcripts and reports on th erecord of this case, the above transcript excerpts beg the question as to what transpired between those dates that caused this complete change. Some agenda was afoot here.
What was the amount of the ordered settlement in this case? It appears both sides spent huge dollars and neither won!
The settlement ordered was in the amount of 4.5 million.