Opinion
No. 215-2011-CV-00537
03-06-2013
Nicholas O'Rourke v. Burke and Hotchkiss, PLLC
ORDER
The Plaintiff, Nicholas O'Rourke ("O'Rourke"), brings this action against the Defendant, Burke and Hotchkiss, PLLC, alleging legal malpractice. The Plaintiff asserts that the Defendant law firm failed to perfect the lending shareholders' security interests in New York Bagels & Café, Inc. ("New York Bagels") and, due this failure, when New York Bagels filed for bankruptcy, the bankruptcy trustee was able to take possession of all of the business's assets. Without the Defendant's failure, the Plaintiff asserts that the shareholders would have maintained any secured assets, shed the business's unsecured debt, and would have been free to continue operating the reorganized business. The Defendant has filed three Motions in Limine. For the reasons stated in this order, the Defendant's Motions in Limine Numbers 1 and 2 are GRANTED. Ruling on the Defendant's Motion in Limine No. 3 is DEFERRED.
I
In Defendant's Motion in Limine 1, the Defendant seeks to preclude testimony from one of the Plaintiff's experts, attorney Jennifer Rood. Specifically, the Defendant asserts that Attorney Rood's purported testimony regarding the existence of an attorney/client relationship between the parties should be excluded. The Court agrees.
In New Hampshire, expert testimony is admissible so long as it will aid the jury in understanding the evidence or making a decision on a pertinent issue. N.H. R. Evid. 702; Freeman v. Scahill, 92 N.H. 471, 471 (1943); Rau v. First Nat. Stores, 97 N.H. 490, 495 (1952); State v. Gourlay, 148 N.H. 75, 81 (2002). The admissibility of expert testimony in New Hampshire is often said to be within the discretion of the court. Rau, 97 N.H. at 495; Johnston by Johnston v. Lynch, 133 N.H. 79, 80 (1990) (citation omitted). The threshold question "is whether the witness, by either study or experience, has knowledge on the subject matter of his or her testimony so superior to that of people in general concerning it that his or her views will probably assist the triers of fact." Gourlay, 148 N.H. at 81.
However, a witness, expert or otherwise, may not testify to conclusions of law. Saltzman v. Saltzman, 124 N.H. 515, 524 (1984). In Salzman, the New Hampshire Supreme Court, although only addressing the issue of a police officer testifying on the issues of fault and causation noted:
A witness may not testify to an opinion or conclusion which contains matters of law. On mixed questions of law and fact, the jury, after being properly instructed by the court as to the law, can draw the required conclusion from the facts as well as can the expert, so that the opinion of the witness, be he expert or layman, is superfluous in the sense that it will be of no assistance to the jury.Id. at 524-25 (citation and quotation omitted). Where the evidence available to the jury is the same evidence the expert uses to render an opinion about a conclusion based in law, the expert's testimony will not assist the jurors in their search for the truth and the opinion must be excluded. See Johnston, 133 N.H. at 88.
While an expert may testify to questions of foreign law as a question of fact, U.S. v. Pre-Columbian Artifacts, 845 F. Supp. 544, 546 (N.D. Ill. 1993), allowing an expert to testify to questions of domestic law is inconsistent with the role of the judge and jury, and is considered reversible error. See, e.g., Greenberg Traurig of New York, P.C. v. Moody, 161 S.W.2d 56, 90-99 (Tex. Ct. App. 2005). As the court noted in Burkhart v. Washington Metropolitan Area Transit Authority, 112 F.3d 1207, 1213 (D.C.Cir. 1997), "[e]ach courtroom comes equipped with a 'legal expert' called a judge, and it is his or her province alone to instruct the jury on relevant legal standards." See also U.S. v. Cross, 113 F.Supp.2d 1282, 1284 (S.D. Ind. 2000).
In the instant case, Attorney Rood is expected to testify to the law regarding when an attorney-client relationship is formed and then apply the facts of this case to the law. See Defendant's Motion in Limine No. 1, Exh. A at 3. This is impermissible. As Attorney Rood states in her expert report, "An attorney client relationship is created when (1) a person seeks advice or assistance from an attorney, (2) the advice or assistance sought pertains to matters within the attorney's professional competence, and (3) the attorney expressly or impliedly agrees to give or actually gives the desired advice or assistance." Wyatt's Case, 159 N.H. 285, 300 (2009). While this statement of the law is correct, the Court will instruct the jury as to the law, and the application of the facts of the case to this law is solely within the province of the jury.
Moreover, Attorney Rood's expert opinion on this topic is not admissible because the determination of whether an attorney-client relationship exists is determined from the perspective of the client. "Consultation with the intent of seeking legal advice is the fundamental basis of the attorney-client relationship." In re Bruzga's Case, 162 N.H. 52, 58 (2011) (citation omitted). This testimony is more appropriately elicited at trial from percipient witnesses.
For these reasons, Defendant's Motion in Limine Number 1 must be GRANTED.
II
In Motion in Limine 2, the Defendant seeks to preclude the Plaintiff's expert, Ernest Tyler, CPA, from testifying to: (1) his analysis and conclusion regarding the going concern value of the assets in question; (2) his analysis and conclusion regarding the depreciated value of the business's assets; and (3) his analysis and conclusion regarding the value of certain other assets. In general, the Defendant seeks to preclude this testimony because it is not "based upon sufficient facts or data" and it is not "product of reliable principles and methods." RSA 516:29-a. The Plaintiff, on the other hand, asserts Mr. Tyler's testimony is reliable and that the Defendant's concerns go to the weight and credibility of Mr. Tyler's proffered testimony. The Court will address each category of testimony in turn.
First, the Court agrees with the Defendant that Mr. Tyler may not testify to his analysis and conclusions regarding the going concern value for the assets in question. Under New Hampshire Rule of Evidence 702, "[i]f scientific, technical, or other specialized knowledge will assist the trier of fact to understand the evidence or to determine a fact in issue," a qualified expert "may testify thereto." To meet this standard, "expert testimony must rise to a threshold level of reliability to be admissible." Baker Valley Lumber, Inc. v. Ingersoll-Rand Co., 148 N.H. 609, 613-14, citing State v. Cressey, 137 N.H. 402, 405 (1993). In Baker Valley, the New Hampshire Supreme Court adopted the test for reliability enunciated in Daubert v. Merrill Dow Pharmaceuticals, Inc., 509 U.S. 579, 593-94 (1993). Subsequent to its adoption, the test was codified in RSA 516:29-a, which provides:
I. A witness shall not be allowed to offer expert testimony unless the court finds:
(a) Such testimony is based upon sufficient facts or data;
(b) Such testimony is the product of reliable principles and methods; and
(c) The witness has applied the principles and methods reliably to the facts of the case.
Here, Mr. Tyler, a certified public accountant, purports to use the "going concern methodology" in order to value New York Bagels "as an active business with future earning power as opposed to liquidation value of the business of its assets." Plaintiff's Objection, 7; citing Black's Law Dictionary, 7th Ed.; James S. Queenan, Jr., Standards for Valuations of Security Interest in Chapter 11, 92 Com. L.J. 18, 19, 38-47 (1987). As the United States Supreme Court stated over 100 years ago, "the commercial value of property consists [0f] the expectation of income from it". Galveston, Harrisburg and San Antonio Railway Company v. Texas, 210 U.S. 217, 226 (1908). According to the expert that Tyler references in his expert report as authoritative, James S. Queenan, the going concern methodology centers on the idea that "generally a business is considered to have a value that is dependent upon its ability to earn a profit." Queenan, 92 Com. L.J. at 39. In Queenan's methodology to determine the going concern for a business, he states that an expert should consider that:
[e]arnings of the five previous years are usually most influential in fixing a dollar amount to earning capacity. But a longer period is appropriate if the business is subject to cyclical variations which are not reflected on the earnings of the previous five years .... Normally, rather than taking a simple average of past earnings, the earnings of more recent years are given a greater weight.Id. Caution should be taken when making "long-range projections of substantial earnings for a business currently suffering losses or making only a small profit, on the ground that such projections are largely speculative." Id. at 40.
When examining Mr. Tyler's analysis of the "going concern" value for New York Bagels, it becomes apparent that he did not apply the Queenan methodology which he asserts is authoritative, to the facts at hand. First, in determining the going concern value, Tyler did not consider any period of time near five years for his valuation. Rather, he only considered one year of business—June 2009 through June 2010—in which New York Bagels actually lost $283,187.
Moreover, and perhaps obviously, now and at the time of Tyler's analysis, New York Bagels was no longer "an active business." In the years prior to New York Bagels' bankruptcy, it "had a weekly cash flow that was 'basically a little over break even.'" Defendant's Motion in Limine No. 1, 10, citing Deposition of Nicholas O'Rourke. In fact, the business never generated sustained earnings. Based on these circumstances, the Court cannot find that, per Daubert, Tyler applied the principles and methods of Queenan's going concern methodology reliably to the facts of this case.
Apart from his failure to apply the principles of the Queenan analysis in a reliable manner, the basis of Tyler's opinion is speculative. For his analysis, Tyler assumed that if the Defendants did perfect the security interests and the business was able to continue, several changes would have been made to increase profits. These changes included, among other things: a different rental location at a lower price; elimination of the retail portion of the business, requiring less operation space, lower labor costs, and lower utility bills; a smaller menu; and reduced deliveries. Based on these facts, Tyler projected the business's income and annual net income. Ultimately, Tyler concluded that the "going concern" value for the business, based on these facts, is $448,000.
Tyler's calculation for damages based on valuation of a going concern is ultimately based upon lost profits. It is true that "the law does not require absolute certainty for recovery of damages." Petrie-Clemons v. Butterfield, 122 N.H. 120, 125 (1982). However, "[w]here operations have never commenced, evidence of expected profits has generally been considered incompetent because speculative." Van Hooijdonk v. Langley, 111 N.H. 32, 34 (1971)
Even if Tyler had followed Queenan's methodology, under settled New Hampshire law his calculations cannot be said to be based on "sufficient relevant data." Rather, Tyler's opinion is based entirely upon speculation. It is not a going concern analysis; it is based on the business starting over, essentially with a new business model. Tyler assumes in his expert report that the new business would have a substantially different business model from the old business. He assumes that the business would move from its current location to an "outlier town" with reduced rental expense. Tyler Expert Report, page 5. Although the corporation operated a retail restaurant, Tyler's report envisioned operating the business only as a wholesale business. Id. He then calculated labor costs, utility costs and other expenses in line with this new and different business model. Id. This testimony, under the standard employed to review awards for lost profit damages, would be incompetent. Therefore, Tyler cannot base an award for loss of value of a business, which in turn is based on the income stream from that business.
Compare Van Hooijonk v. Langley 111 N.H. at 34, where the Court allowed a lost profit claim projected over four years where the seasonal business had operated profitably for the two months of the first season, and the operation was expected to continue in the same location, using the same business model.
In order for an expert's testimony to be sufficiently reliable, there is a "necessity of a connection between the expert's testimony and the facts of the case." Grimes v. Hoffmann-LaRoche, Inc., et al, 907 F.Supp. 33, 35 (D.N.H. 1995). The expert cannot just rely on "stature alone" but rather, "is a conduit of facts" for the jury. Porter v. Whitehall Lab., Inc., 791 F.Supp. 1335, 1343 (S.D. Ind. 1992), aff'd, 9 F.3d 608 (7th Cir. 1993). Ultimately, while the going concern methodology is reliable, "it cannot reliably be applied to the facts in issue" and was not applied to the facts in issue. Grimes, 907 F.Supp. at 34-35. For these reasons, Tyler may not testify to his going concern analysis and his conclusion therefrom.
While a property owner's determination as to the value of his property is not to be considered in determining the fair market value of an asset, see Trustees of Phillips Exeter Academy v. Exeter, 92 N.H. 477, 482-485 (1943), a property owner may give opinion testimony regarding the value of his own property. See McNamara v. Moses, 146 N.H. 729, 732-733 (2001). Therefore, while the expert's testimony is excluded here, O'Rourke may provide opinion testimony as to the value of the business.
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Similarly, Tyler may not to testify to his analysis and conclusion regarding the depreciated value of the business's assets. The purpose of an award of damages in a tort case is to place the plaintiff in the position he would have been in but for the tort. Smith v. Cote, 128 N.H. 231, 243 (1986). As Defendant notes "[d]etermining the depreciated book value of an asset is essential for tax purposes and useful for accrual basis accounting... [but] the cost paid for an asset when new, less depreciation based on the length of its useful life, says very little about the asset's current fair market value". Defendant's Motion in Limine 2, pp.2-3. Admission of such testimony could mislead a lay jury.
Finally, the Tyler report sets forth no basis from which the Court can find that Tyler has the expertise to value the business's claim against its designer, and the value of its Rabbinical Certificate and its laboratory report concerning the nutritional value of the business's products as assets sought to be secured by O'Rourke. Tyler cannot testify to these subjects. Therefore, Defendant's Motion in Limine No. 2 is GRANTED.
III
In Defendant Motion in Limine 3, he seeks to preclude admission of any "Quickbooks data" and any testimony relevant thereto on the grounds that the Plaintiff cannot lay the appropriate foundation for the admissibility of this evidence pursuant to the exception to the hearsay rule for business records in New Hampshire Rule of Evidence 803(6). The Plaintiff contends that the Defendant's arguments go to the weight of the evidence and not its admissibility and further asserts that the basis for the Defendant's arguments in this motion is hearsay (an unsworn interview with the corporation's former bookkeeper).
The Court reserves ruling on this Motion in Limine for trial where it will be more appropriately determined after consideration of whether a proper foundation for the admissibility of such evidence is laid.
SO ORDERED.
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Richard B. McNamara,
Presiding Justice