Opinion
Civil Action No: 01-912 c/W 01-1187, Section: "R" (5)
January 4, 2002
ORDER AND REASONS
Before the Court is defendants' consolidated motion to exclude expert testimony offered by plaintiffs in opposition to motions on the pleadings or, in the alternative, for summary judgment. For the reasons stated below, the Court grants the motion.
I. Background
From about February 6, 1950 until at least April 1, 1986, Certain Underwriters at Lloyd's, London and Turegum Insurance Company (collectively "Underwriters") provided excess and/or umbrella insurance policies to The Babcock and Wilcox Company. The policies provided coverage for asbestos-related claims by individuals alleging harms caused by asbestos used by BW in boiler systems. When it appeared that the amount of asbestos claims would exhaust the aggregate limits of the underlying primary policies, Underwriters, BW, and McDermott International Inc. ("MII"), BW's parent company, entered into an agreement to settle certain coverage disputes under underwriters' policies in what they refer to as the "London Settlement Agreement" ("LSA").
The LSA is a coverage-in-place agreement that provides a mechanism for the payment of personal injury claims once the aggregate limits of the underlying primary policies are exhausted. The "Scope of Agreement" provides:
The LSA refers to BW and MII as "B W/McDermott."
This agreement sets forth an arrangement among the Parties under the Policies, by which the Insurer Parties shall reimburse BW/McDermott for amounts paid or to be paid by or on behalf of BW/McDermott for defense costs and indemnity payments attributable to past, pending and future Claims, as defined herein, subject to all of the terms and conditions, including the applicable limits, of the Policies. Pl.'s Ex. 17 at 3, ¶ 1.
The agreement assigns claims management responsibilities to BW and MII and provides that the parties were to establish. procedures for the insurers' involvement in claims handling. The "Management of Claims" provision provides:
Subject to the terms of the Agreement, BW/McDermott shall be responsible for the management of the Claims. The Parties agree to establish procedures for the involvement of the Insurer Parties in the day-to-day management of Claims, including selection and supervision of defense counsel, continuation of existing settlement agreements with plaintiff's counsel, negotiation of new agreements with plaintiff's counsel, settlement authority for Claims not within the scope of said agreements, and all other matters relating to Claims handling. Id. at 3, ¶ 2.
To carry out its management duties, BW hired Worldwide Services Company to process and to help manage the asbestos claims under the LSA. Worldwide and Underwriters, through Underwriters' counsel Tom Quinn of the law firm of Mendes and Mount, developed procedures for informing Underwriters about the handling of claims. Under the procedures developed, Underwriters approved settlements but they did not directly participate in settlement negotiations with asbestos claimants' representatives. In the ten years since the adoption of the LSA, insurers have reimbursed BW for claims of over $650 million.
On February 22, 2000, BW filed for Chapter 11 relief. BW then entered into discussions with representatives of its creditors, including the Asbestos Claimants' Committee and the Future Claims Representative (collectively "claimants") for the purpose of developing a consensual plan of reorganization. Underwriters' representatives were not invited to the negotiations between BW and the claimants, but BW's counsel notified Underwriters of developments in the negotiations and held meetings with Underwriters' counsel to discuss the negotiations.
When the parties reached an impasse in the negotiations, BW filed a motion asking the bankruptcy court to appoint a mediator. Underwriters asked the bankruptcy court for an order permitting them to participate in the mediation. The bankruptcy court rejected Underwriters' request, but the court permitted the mediator to communicate with the Underwriters at his discretion. Underwriters' counsel has since met with the mediator. On February 22, 2001, after negotiations between BW and the claimants reached a standstill, BW submitted its first Proposed Plan of Reorganization and Disclosure Statement. The Plan proposed to establish a trust into which asbestos claims would be channeled for administration and payment. Under one Plan scenario, BW and MII would assign their rights and obligations under the LSA and the underlying policies to the trust, but only so long as the assignment would not be a breach of the LSA. Under an alternative scenario, the "cramdown" option, BW and MII would retain responsibility for managing the individual asbestos claims, and they would not assign the LSA to the trust. The Plan was otherwise sketchy as to how the trust would operate, and it did not state who the trustees would be or how they would be selected. BW's plan has not been confirmed.
Underwriters then filed a suit against BW and MII seeking a declaration absolving it of its responsibilities under the LSA. Underwriters allege that BW and MII materially breached the LSA by disclosing it to the asbestos claimants and by negotiating with the claimants in Underwriters' absence. Underwriters also allege that defendants committed an anticipatory repudiation of the LSA by proposing in the Plan of Reorganization to assign the management of claims under the LSA to a claims-handling trust and by discussing certain settlement options with the claimants. Therefore, allege Underwriters, they are no longer obligated to indemnify BW and MII under the LSA.
Defendants and intervenor-defendants filed motions for judgment on the pleadings or, in the alternative, for summary judgment. In opposition to the motions, Underwriters submitted the expert testimony of Professor Neil Doherty and Michael Sheppard. The testimony of each expert is intended to demonstrate how an assignment of defendants' management responsibilities under the LSA to a bankruptcy trust would render it impossible for defendants to fulfill their contractual obligations to Underwriters. See Pl.'s Opp. Mot. to Exclude at 4-5. Defendants filed this consolidated motion to exclude the expert testimony from consideration by the Court.
The claimants moved to exclude the expert testimony by adopting the arguments set forth in defendants' consolidated motion.
II. Discussion
A. Legal Standard
Rule 104 of the Federal Rules of Evidence provides that the district court shall determine preliminary questions regarding the qualifications of witnesses. See FED.R.EVID. 104(a); United States v. Nichols, 169 F.3d 1255, 1263 (10th Cir.), cert. denied, 120 S.Ct. 336 (1999) (" Daubert challenges, like other preliminary questions of admissibility, are governed by Fed.R.Evid. 104."). Rule 702 governs the admissibility of expert witness testimony. See Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579, 587, 113 S.Ct. 2786, 2794 (1993). The rule permits an expert witness "qualified . . . by knowledge, skill, experience, training, or education" to testify when specialized knowledge will assist the trier of fact to understand the evidence or to determine a fact in issue. FED.R.EVID. 702. In Daubert, the Supreme Court held that Rule 702 requires the trial judge to act as a "gatekeeper" to ensure that "any and all [expert] testimony or evidence admitted is not only relevant, but reliable." 509 U.S. at 589, 113 S.Ct. at 2795. See Kumho Tire Co., Ltd. v. Carmichael, 526 U.S. 137, 147-49, 119 S.Ct. 1167, 1174 (1999) (clarifying that Daubert gatekeeping function applies to all forms of expert testimony).
The district court has considerable discretion to admit expert testimony under Rule 702 and will be reviewed on appeal only for abuse of discretion. See General Electric Co. v. Joiner, 522 U.S. 136, 138-39, 118 S.Ct. 512, 515 (1997); Seatrax, Inc. v. Sonbeck Int'l., Inc., 200 F.3d 358, 371 (5th Cir. 2000) (citations omitted). "If the basis for an expert's opinion is clearly unreliable, the district court may disregard that opinion in deciding whether a party has created a genuine issue of material fact." Munoz v. Orr, 200 F.3d 291, 301 (5th Cir. 2000) ( citing Berry v. Armstrong Rubber Co., 989 F.2d 822, 824 (5th Cir. 1993), cert. denied sub nom, Cooper v. Armstrong Rubber Co., 510 U.S. 1117, 114 S.Ct. 1067 (1994). The Court's gatekeeping function does not replace the traditional adversary system and the role of the jury within that system. See Daubert, 509 U.S. at 596, 113 S.Ct. at 2798. As the Supreme Court noted in Daubert, "[v]igorous cross-examination, presentation of contrary evidence, and careful instruction on the burden of proof are the traditional and appropriate means of attacking shaky but admissible evidence." Id.
The Court's gatekeeping function thus involves a two-part inquiry into reliability and relevance. Because the Court concludes that the testimony of the proposed experts must be excluded as unreliable, it will not address the relevance issue.
1. Reliability
The reliability inquiry requires the Court to assess whether the reasoning or methodology underlying the expert's testimony is valid. See Daubert, 509 U.S. at 589, 113 S.Ct. at 2795. The aim is to exclude expert testimony based merely on subjective belief or unsupported speculation. See id. at 590, 113 S.Ct. at 2795. The party offering the testimony bears the burden of establishing its reliability by a preponderance of the evidence. See Moore v. Ashland Chemical Inc., 151 F.3d 269, 276 (5th Cir. 1998) ( citing In re Paoli R.R. Yard PCB Litigation, 35 f.3d 717 (3d Cir. 1994)).
Daubert identified a number of factors useful in analyzing reliability of an expert's testimony, including testing, peer review and publication, evaluation of known rates of error, and general acceptance within the scientific community. See id. at 592-94, 113 S.Ct. at 2796-97. In Kumbo Tire, the Supreme Court emphasized that the test of reliability is "flexible" and that Daubert's list of specific factors does not necessarily nor exclusively, apply to all experts in every case. 526 U.S. at 150, 119 S.Ct. at 1175. See also Seatrax, 200 F.3d at 372 (reliability is a fact-specific inquiry and application of Daubert factors depends on "nature of the issue at hand, the witness's particular expertise and the subject of the testimony"). Nevertheless, in the vast majority of cases, the district court should first consider the Daubert factors before addressing whether other factors are relevant to the particular case. See Black v. Food Lion, Inc., 171 F.3d 308, 311-12 (5th Cir. 1999); see also Watkins v. Telsmith, 121 F.3d 984, 991 (5th Cir. 1997) (regardless of basis of expert's opinion, Daubert's non-exclusive factors are relevant to initial reliability assessment). The overarching goal "is to make certain that an expert, whether basing testimony on professional studies or personal experience, employs in the courtroom the same level of intellectual rigor that characterizes the practice of an expert in the relevant field." Kumho Tire, 526 U.S. at 152, 119 S.Ct. at 1176.
The Court finds Michael Sheppard's testimony unreliable for the following reasons. Sheppard used no apparent methodology to endow his opinion with the necessary "indicia of reliability" Skidrnore v. Precision Printing and Packing Incorporated, 188 F.3d 606, 618 (5th Cir. 1999). Sheppard's central theory is that the trust proposed in the Plan will be comprised of trustees who will be aligned with the interests of asbestos claimants to the detriment of Underwriters' interests. See Pl.'s Ex. 13 at 3; Sheppard Deposition at 131-139. The Plan to which Sheppard refers, however, does not provide for the appointment of any particular trustees. Sheppard acknowledges that he "didn't see anything" in the Plan that impacted the independence of the trustees. See id. at 138. Further, the Plan itself is not a final product, and it contains little by way of operational detail. Rather, the Plan is a work in progress. Accordingly, Sheppard states that "[t]here's always a chance that my opinion would be different based on the actual plan that's approved by the court. . ." Id. In fact, when discussing the one trust that Sheppard participated in, the Dalkon Shield Trust, Sheppard states that the trustees involved in that trust were able to maintain their independence from claimants. See id. at 131-132. Sheppard's opinion on the future conduct of the trustees in this case, therefore, is not based on facts in the record, but rather, it is based on unfounded speculation about the future conduct of unknown individuals. See Guillory v. Domitar Indus., 95 F.3d 1320, 1330-31 (5th Cir. 1996) (affirming district court's exclusion of expert testimony based on facts not in the record and speculation designed to bolster proponent's position).
Although Underwriters submit Sheppard as an experience-based expert from his work in the field of bankruptcy trusts, Sheppard did not follow any procedure that indicates that he exercised "the same level of intellectual rigor that characterizes the practice of an expert in the relevant field." Kumho, 526 U.S. at 152, 119 S.Ct. at 1176 (listing helpful inquiries for evaluating methodology of experience-based expert); Skidmore, 188 F.3d at 618. Sheppard merely speculates on the future conduct of the trustees based on his initial and unverified premise that the process of appointing trustees "is basically corruptive." (Sheppard Deposition at 94). See Munoz, 200 F.3d at 301 (expert's testimony in Title VII civil rights action properly excluded because expert "began his analysis with the assumption that [the defendant's] promotion system discriminated against Hispanic males, an indicator that (the expert] lacked the necessary objectivity to make his testimony credible"). Aside from his experience at the Dalkon Shield Trust, which he states is set up "completely different" from an asbestos trust ( see id. at 53), Sheppard gathered information from conversations with individuals who were somehow involved in asbestos trusts. See id. at 18-19, 53-57. At no point did Sheppard attempt to verify the claims made by the "experts" he consulted, nor did he review information supplied by his "experts" in preparation for his report in this case ( see id. at 83-86). See Munoz, 200 F.3d at 301-302 (lack of reliability found where plaintiff's expert relied on plaintiff's compilation of data and failed to verify information presented to him).
Additionally, Sheppard did not test his hypothesis against the actual efforts of asbestos trusts or apply it to the facts of this case. See St. Martin v. Mobil Exploration Producing Inc., 224 F.3d 402, 405-06 (5th Cir. 2000) (despite fact that expert had not tested his hypothesis, testimony properly admitted when expert made direct observations of area and activities at issue). For example, Sheppard states in his report that "the nature of the trustees' legal obligations and their likely alliance with claimants' attorneys necessarily means that they would deny or challenge the severity of fewer claims than a tort system defendant like BW." Pl.'s Ex. 13, Sheppard Rpt. at 3. Sheppard, however, never looked at claims disallowance rates or the average amounts of claims payments made by other asbestos bankruptcy trusts. See id. at 75-76. He did not even review any data on how BW handled asbestos claims before it filed for bankruptcy relief. See id. at 156. He merely took his one experience at the Dalkon Shield trust, in which he says that the trust denied fewer claims than the debtor did on its own before it entered bankruptcy ( see id. at 155), and his recollection of some unverified information he received from his "experts," and speculated on the future of a trust about which he had little information besides what he was told by Underwriters' attorneys. See Seatrax, 200 F.3d at 372 (accounting expert properly excluded for failure to conduct independent analysis of company's gross sales figures); Watkins, 121 F.3d at 992 (expert properly excluded for lack of empirical support); Rosado v. C.J. Deters, 5 F.3d 119, 124 (5th Cir. 1993) (accident reconstruction expert properly excluded where "he could not independently establish the necessary physical and mathematical bases for his opinion").
The testimony of Professor Doherty is similarly unreliable. Professor Doherty is a financial economist who specializes in risk management in the field of insurance. See Doherty Deposition at 8. Like Mr. Sheppard, Professor Doherty uses no apparent methodology in rendering his opinions. He performs no studies and relies on none. He does no tests, looks at no claims data, does no mathematical modeling, and analyzes no other asbestos bankruptcies. He does not have a final plan of reorganization to analyze or a history of claims management under a trust. His basic premise is that once BW sought relief under Chapter 11, its interests diverged from Underwriters'. Since BW is entitled to seek Chapter 11 relief, the relevance of that conclusion is questionable. Underwriters have simply hired a person with admittedly solid credentials as an economist to speculate for them.
Professor Doherty starts from the initial premise that "firms take a declining interest in their liabilities as they approach insolvency." See Pl.'s Ex. 12, Doherty Report at 4. He cites his own book for support of his theory. See id. at 4, n. 2. There is no indication that the theory has been subjected to peer review. See Daubert, 509 U.S. at 593, 113 S.Ct. at 2797. From this initial assumption, he states that because "BW's net worth [was moving] closer to zero, its economic interest and continued defense of these claims began to wane." See id. He concludes that under the proposed Plan, BW appears to wish to maximize the value of the policies to use as a bargaining tool, and then leaps to the conclusion that "[c]onsequently, BW can no longer fulfill its role as claims manager." Id. at 2. Professor Doherty's assessment of incentives and the conclusion he reaches are not linked by methodology but by speculation. Further, Professor Doherty does not rely on facts to reach his conclusion. First, Doherty never confirmed whether BW's net worth was moving closer to zero. See Doherty Deposition at 130-135. He admitted that "I don't have data to back that statement." Id. at 131. His conclusion that a "wedge" was driven between BW and insurers ( see Pl.'s Ex. 12, Doherty Rpt. at 4) likewise is not based on evidence in the case. See id. at 138. Second, Professor Doherty fails to consider that the Plan does not flesh out how the trust will be managed or that the Plan is merely a proposal that is subject to negotiation and change. He acknowledges that he did not consider whether Underwriters could have an opportunity to participate in the development of the final plan and in its ultimate approval. See id. at 109-10. Indeed, he treats these key players in the bankruptcy like a potted plant. Third, although Doherty states that economists look at "things which are often considered to be noneconomic" when they analyze a party's economic interests, he failed to do any analysis of noneconomic issues with respect to the incentives and interests of the parties in this case as they relate to the LSA. Id. at 125-26. Rather, Doherty's understanding of the parties' expectations and obligations under the LSA, which he concludes are compromised by BW's bankruptcy, comes solely from information supplied by Underwriters' counsel. See id. at 74-75.
professor Doherty's deposition, the following exchange occurred:
Q: Do you have any evidence then that any wedge was driven between the interests of BW and its insurers prior to the bankruptcy filing?
A: In a strict sense of evidence, no. As a matter of deduction, if liabilities were increasing, given anything else that's going to happen, that is going to lead to a reduction in net worth. And we know from financial analysis that the incentive to invest in protection against liabilities tends to decline the lower the level of net worth.
Q: And, once again, those are general conclusions that you subscribe to?
A: That would be a general conclusion that would apply to BW and to any limited liability corporation.
Q: And as I understand it, you've done nothing in the way of any empirical analysis to test that conclusion as it applies to BW?
A: As it applies to BW, no. Doherty Deposition at 138.
Finally, Doherty says that if he were to make a study of how asbestos trusts function, he would look at how other asbestos trusts operated before rendering an opinion on how the BW proposed asbestos bankruptcy trust will operate. See id. at 183. He did not take his own advice. He never analyzed how other asbestos trusts functioned in the past. Doherty uses a general theory about incentives to make predictions about future events in a complex behavioral context, but he provides no methodological foundation to confirm the reliability of his theory as a predictor of the results he posits. This is the type of "opinion evidence that is connected to existing data only by the ipse dixit of the expert," and it lacks sufficient reliability to be admitted in this case. Kumbo, 526 U.S. at 157, 119 S.Ct. at 1179 ( quoting Joiner, 522 U.S. at 146, 118 S.Ct. at 519). In all, the Court finds that the experts proffered by Underwriters do not meet the reliability prong of the Daubert test.
III. Conclusion
For the reasons stated above, the Court GRANTS the motions to exclude the expert testimony of Professor Doherty and Michael Sheppard.