Opinion
DOCKET NO. A-1622-14T3
12-20-2016
U.S. BANK NATIONAL ASSOCIATION, a national banking association, Plaintiff, v. ANGELO P. PODES and MARY PODES, individually, as bondholders and trustees of bondholders of the Duval County Housing Finance Multifamily Housing Revenue Bonds, Series 1987A; ANGELO P. PODES AND MARY PODES CHILDREN'S TRUST; ANGELO P. PODES AND MARY PODES GRANDCHILDREN'S TRUST; and STAMATINA PODES, jointly and severally, Defendants/Third-Party Plaintiffs-Appellants, v. WACHOVIA BANK, N.A., BANK OF OKLAHOMA, N.A., Third-Party Defendants, and INTERSTATE REALTY MANAGEMENT COMPANY, Third-Party Defendant-Respondent.
Diane E. Sammons argued the cause for appellants (Nagel Rice, LLP attorneys; Jay J. Rice, of counsel and on the briefs; Ms. Sammons and Randee M. Matloff, on the briefs). Diana C. Manning argued the cause for respondent (Bressler, Amery & Ross, P.C., attorneys; Ms. Manning, Benjamin J. DiLorenzo and Jenny R. Caruso, on the brief).
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
This opinion shall not "constitute precedent or be binding upon any court." Although it is posted on the internet, this opinion is binding only on the parties in the case and its use in other cases is limited. R.1:36-3. Before Judges Lihotz, Hoffman and Whipple. On appeal from Superior Court of New Jersey, Law Division, Monmouth County, Docket No. L-0289-07. Diane E. Sammons argued the cause for appellants (Nagel Rice, LLP attorneys; Jay J. Rice, of counsel and on the briefs; Ms. Sammons and Randee M. Matloff, on the briefs). Diana C. Manning argued the cause for respondent (Bressler, Amery & Ross, P.C., attorneys; Ms. Manning, Benjamin J. DiLorenzo and Jenny R. Caruso, on the brief). PER CURIAM
This matter is one of two back-to-back appeals, arising from the same litigation. Because the two appeals involve different parties and concern distinct legal claims and issues, the matters are analyzed in separate opinions.
This appeal reviews the arguments presented by third-party plaintiffs-appellants Angelo P. and Mary Podes, individually, and as bondholders and trustees of the Duval County Housing Finance Multifamily Housing Revenue Bonds, Series 1987A, and as assignees of the rights of the Bank of Oklahoma, N.A. and all bondholders (collectively the Podeses), docketed under A-1622-14. The Podeses appeal from a September 3, 2014 order granting third-party defendant Interstate Realty Management Company's (Interstate) motion in limine to strike the Podeses damage expert, because his report amounted to net opinion. Thereafter, the judge granted summary judgment and dismissed the Podeses' complaint. The Podeses also appeal from the denial of their subsequently filed motion for reconsideration. For the reasons that follow, we reverse the summary judgment dismissal and remand for reinstatement of the third-party complaint.
The actual appellants are the family trusts. Also, the notice of appeal and merits brief identify appellants as the Podeses' children, Stamatina and Peter Podes, as trustees for the four family trusts, as their parents are deceased. For simplicity, our opinion identifies the Podeses as appellants.
The facts describing the underlying dispute are necessary to understand the context of the proffered expert testimony. The controversy arose following the financial collapse of a government subsidized housing project. In August 1987, Magnolia Arms Association, Ltd. (Magnolia) purchased real property located in Jacksonville, Florida from Angelo P. Podes for $3,160,000. Magnolia was formed for the purpose of purchasing, rehabilitating, and developing a federally subsidized housing project on the property, under the United States Department of Housing and Urban Developments' Moderate Rehabilitation Program. As consideration for the purchase, Angelo acquired Housing Revenue Bonds, Series 1987A, issued by the Duvall County Housing Authority (Housing Authority), the conduit issuer. The bonds were later transferred to the Podeses' family trusts.
Under this conduit financing arrangement, the Housing Authority issued the bonds, but was not liable to the bondholders. The parties suggest this type of transaction is common because bonds issued by public entities, like the Housing Authority, are given favorable income tax status.
Angelo created the trusts in 1991. He transferred ownership of the bonds to four separate trusts: Angelo P. Podes Marital Deduction Trust (Part A); Angelo P. Podes Marital Deduction Trust (Part B); Angelo P. Podes and Mary Podes Children's Trust; and Angelo P. Podes and Mary Podes Grandchildren's Trust. The trustees of all four trusts were Mary Podes and her children.
The proceeds from the bond sale were used to fund a non-recourse mortgage loan made by the Housing Authority to Magnolia, the conduit borrower, which was memorialized by a loan agreement dated August 1, 1987. The mortgage provided the funds to renovate and reconstruct a 232-unit rental apartment complex, utilizing Section 8 Housing Assistance Payment certificates.
The issued bonds were secured in an Indentured Trust, dated August 1, 1987, between the Housing Authority and Florida National Bank, named as Trustee. Magnolia, not the Housing Authority, was solely liable to make payments directly to the Trustee of the Indentured Trust. The indentured Trustee was charged with overseeing distribution of interest and principal payments to the bondholders. Wachovia succeeded First Union National Bank of Florida after a merger. Plaintiff, U.S. Bank National Association purchased Wachovia's trust business and became the successor Trustee on January 1, 2006. Interstate was designated the property manager of the project, pursuant to a Management Agreement executed at the time the original loan and bond transactions were completed.
We note the early succession of Trustees is somewhat unclear from our review of the record. The August 1, 1987 Indenture of Trust named the National Bank of Florida as the Trustee. The September 1, 1995 Supplemental Indenture of Trust named First Union National Bank of Florida as Trustee.
Bank of Oklahoma became Trustee on December 15, 2006.
When biannual interest payments were not received, the Podeses contacted Wachovia, which thereafter issued payment. Plaintiff maintained Wachovia released the funds in error, noting the mortgage had been in default since November 2005; real estate taxes, insurance and other obligations incurred that year were unpaid. Plaintiff filed this action to recover $63,500, which was released to the Podeses.
Plaintiff declared default on February 15, 2006. At that time the face value of the bonds held by the Podeses was $2,540,000.
Through discovery, the Podeses learned default occurred roughly in August 2005. When the Podeses learned of the 2005 default, they sold the bonds on January 16, 2007, prior to maturity. Ultimately foreclosure was filed and the project shut-down because its low occupancy rate created an inability to realize a profit.
The Podeses filed a third-party complaint for breach of contract, breach of fiduciary duty, and other claims against plaintiffs, Wachovia, Magnolia, and Interstate. All issues were resolved except the causes of action against Interstate alleging property mismanagement, negligence, and breach of contract.
More specifically, the Podeses allege Interstate breached its obligations under the Management Agreement as well as the Management Plan incorporated into the Management Agreement. These documents also incorporated provisions set forth in a Forbearance Agreement and Supplemental Indenture of Trust executed on September 1, 1995, following a prior default, designed to avoid the acceleration of the bonds. The Forbearance Agreement retired certain bonds, reduced the interest payable, extended the maturity dates, required Magnolia's principal owner to contribute additional capital, commanded Interstate to subordinate one-half of its management fee, and added protections for bondholders, such as the right to replace the management company in the default. Also, Section 2.2(a) of the Supplemental Indenture of Trust included a sinking fund provision, which states: "the bonds shall be subject to mandatory sinking fund redemption in the years and principal amount and at the prices (plus accrued interest to the date of the redemption) set forth below." The Podeses' complaint alleged Interstate's negligent management of the property and its breach of the requirements under the Forbearance Agreement led to a default, preventing the Podeses from receiving the full value of the bonds.
Ordinarily, a borrower repays a bond by only making small interest payments over the life of the bond, and repays the principal on the maturity date. Since few borrowers have the cash flow to make a massive principal repayment on the maturity date, borrowers can utilize a sinking fund. Money placed into the sinking fund can be reinvested, and is ultimately used to redeem bonds on an ongoing basis or on the maturity date. Sinking funds are typically administered by an independent trustee. See Encyclopedia Britannica https://www.britannica.com/topic/sinking-fund.
To support their third-party complaint, the Podeses submitted three expert reports. Two reports addressed liability, and the third addressed damages. Prior to trial, Interstate moved in limine to bar the testimony of W. Heath Hawk, the Podeses' damages expert. In his July 30, 2009 report, Hawk stated his underlying assumptions, including that the Podeses' underlying claims were valid as expressed by the liability experts, and he assumed the bonds held "were not to be included in the sinking fund." He stated the amount realized were the bonds held to maturity based on an interest rate of "24.56% of par, or $1,228.06 for each $5,000.00 face bond." He then calculated the difference between that sum and what was realized by selling the bonds prior to maturity, scheduled as February 15, 2017, concluding the loss amounted to $2,862,000. During discovery, Hawk was not deposed.
Interstate's argument challenged Hawk's opinion as an inadmissible net opinion principally because the bonds were a speculative investment when purchased and there was no support for an assumption the bonds would reach maturity entitling the bondholders to full face value. Other deficiencies included: (1) Hawk failed to account for present value of the monies received on redemption or interest realized on the reinvestment of the sums received on redemption; (2) there was an absence of explanations describing a bond or how market value is calculated; and (3) the report assumed the bonds would be held to maturity allowing recoupment of full face value. As a result, Interstate asserted Hawk's analysis amounted to a mere arithmetic calculation of the difference in two numbers. During oral argument, Interstate also challenged as unsupported Hawk's unexplained assumption stating the bonds were not included in the sinking fund.
Following oral argument, the motion judge accepted Interstate's position, stating:
Nobody is disputing that the technique, methodology or procedure was incorrectly used. What [Interstate] is suggesting is that he didn't do a complete analysis, because he didn't deal with the sinking fund. He didn't deal with the present value of the money, what it would be as of even July 30, 2009. . . . Well, had the bonds been held until February 15, 2017, absent any other issues, that's what the Podeses should have gotten. The question is, is that pure speculation? Does he give the why and wherefore of his opinion, not just a mere conclusion?
. . . .
He does simple math. I get that. But he doesn't deal with the intricacies of these bonds. He just says, if you hold the bonds, you get the full amount. I don't think that's scientific at all. That's pretty simple. I think everybody who has a basic understanding, you know, even of a U.S. savings bond, you buy the bond for — $50 for $25 today, you hold it until it matures, you get $50 back. That's pretty simple. And that's basically what he says here.
But this is far more complex and he doesn't get into the whys and wherefores as to how this number comes into play. That's where I'm having a great deal of difficulty accepting that this is not a net opinion.
. . . .
So, I have to grant this motion, because I think it is a net opinion, ultimately.
The trial judge granted the motion to strike, finding Hawk's report constituted a net opinion. The lack of an expert precluded the Podeses from proving damages; therefore, the judge in turn granted Interstate's motion for summary judgment and dismissed the third-party complaint. Reconsideration was denied, and this appeal followed.
Prior to discussing the evidentiary ruling made by the reviewing judge, we address the Podeses' argument challenging the in limine procedure. Substantively, the Podeses assert Interstate's pleadings never mentioned the sinking fund, an issue they were not prepared to address, and the court erred in striking Hawk's expert testimony on this basis on the eve of trial.
This court has recently addressed the filing of in limine motions seeking to exclude trial evidence in Seoung Ouk Cho v. Trinitas Regional Medical Ctr., 443 N.J. Super. 461 (App. Div. 2015), certif. denied, 224 N.J. 529 (2016). We stated:
"Our courts generally disfavor in limine rulings on evidence questions," because the trial provides a superior context for the consideration of such issues. State v. Cordero, 438 N.J. Super. 472, 484-85 (App. Div. 2014), certif. denied, 221 N.J. 287 (2015). Although a trial judge "retains the discretion, in appropriate cases, to rule on the admissibility of evidence pre-trial," id. at 484, we have cautioned that "[r]equests for
such rulings should be granted only sparingly." Ibid. (quoting Bellardini v. Krikorian, 222 N.J. Super. 457, 464 (App. Div. (1988)); see also Biunno, Weissbard & Zegas, Current N.J. Rules of Evidence, [cmt.] 1 on N.J.R.E. 105 (2015). This is particularly true when the "motion in limine" seeks the exclusion of an expert's testimony, an objective that has the concomitant effect of rendering a plaintiff's claim futile. See Bellardini, supra, 222 N.J. Super. at 463-64.
[Id. at 470-71.]
We repeated our rebuke regarding misuse of in limine motions filed on the eve of trial, and emphasized such motion tactics shall not be utilized to secure summary judgment resulting in the dismissal of a plaintiff's case or the suppression of a defendant's defenses. Id. at 471. We emphasized a court should not consider a motion which in essence seeks summary judgment, but does not comply with the form and notice requirements of Rule 4:46-1, requiring: "All motions for summary judgment shall be returnable no later than 30 days before the scheduled trial date, unless the court otherwise orders for good cause shown." Ibid.
Here, plaintiff's complaint and the Podeses' third-party complaint were filed in 2007. Trial on remaining claims was scheduled for December 2013, but adjourned until March 3, 2014. The in limine motion to bar Hawk's testimony was filed in February 2014. We might agree the successive adjournments of trial allowed the Podeses to prepare and meet Interstate's arguments attacking Hawk's opinion obviating any due process concerns. However, the insertion of the argument regarding the sinking fund was newly raised during oral argument on the in limine motion, heard on the date assigned for trial, and not presented in the motion papers.
Accompanying the notice of motion was counsel's affidavit itemizing and attaching more than seven hundred pages of relevant documents and a brief. The sinking find is not mentioned in the pleadings. Further, the opinion of plaintiff's economic expert, who submitted a report two years after Hawk's report and adopted by Interstate, made no mention of the sinking fund. The trial court's consideration of the argument stating Hawk failed to explained the sinking fund raised solely at argument, implicates due process concerns addressed in our earlier opinions. Klier v. Sordoni Skanska Const. Co., 337 N.J. Super. 76, 84 (App. Div. 2001).
A portion of the brief was included in the appendix. --------
Nevertheless, our conclusion to reverse the summary judgment dismissal rests on more clear cut grounds. Initially, we review the reasons identified for rejecting Hawk's expert testimony. See Estate of Hanges v. Metro. Prop. & Cas. Ins. Co., 202 N.J. 369, 384-85 (2010) ("As a practical matter, a trial court confronted with an evidence determination precedent to ruling on a summary judgment motion squarely must address the evidence decision first.").
"The admission or exclusion of expert testimony is committed to the sound discretion of the trial court." Townsend v. Pierre, 221 N.J. 36, 52 (2015). As such, we accord deference to the trial court's grant of a motion to strike expert testimony, "reviewing it against an abuse of discretion standard." Id. at 52-53 (quoting Pomerantz Paper Corp. v. New Cmty. Corp., 207 N.J. 344, 371-72 (2011)).
Expert testimony is admissible in the following circumstances:
(1) the intended testimony must concern a subject matter that is beyond the ken of the average juror; (2) the field testified to must be at a state of the art that such an expert's testimony could be sufficiently reliable; and (3) the witness must have sufficient expertise to offer the intended testimony.See also Agha v. Feiner, 198 N.J. 36, 53 (2015).
[DeHanes v. Rothman, 158 N.J. 90, 100 (1999) (quoting State v. Kelly, 97 N.J. 178, 208 (1984)).]
Our analysis also is framed by N.J.R.E. 702 and N.J.R.E. 703. The former establishes when expert testimony is permissible and requires the expert be qualified in his or her respective field. The latter mandates that any expert opinion "be grounded in 'facts or data derived from (1) the expert's personal observations, [] (2) evidence admitted at the trial, or (3) data relied upon by the expert which is not necessarily admissible . . . but which is the type of data normally relied upon by experts.'" Townsend, supra, 221 N.J. at 53 (quoting Polzo v. Cnty. of Essex, 196 N.J. 569, 583 (2008)).
"The net opinion rule is a 'corollary of [N.J.R.E. 703] . . . which forbids the admission into evidence of an expert's conclusions that are not supported by factual evidence or other data.'" Id. at 53-54 (alterations in original) (quoting Polzo, supra, 196 N.J. at 583); accord Vuocolo v. Diamond Shamrock Chem. Co., 240 N.J. Super. 289, 300 (App. Div.) (barring expert testimony "based merely on unfounded speculation and unquantified possibilities"), certif. denied, 122 N.J. 333 (1990). Therefore, an expert is required to "'give the why and wherefore' that supports the opinion, 'rather than a mere conclusion.'" Townsend, supra, 221 N.J. at 54 (quoting Borough of Saddle River v. 66 E. Allendale, LLC, 216 N.J. 115, 144 (2013)). The net opinion rule directs experts must "be able to identify the factual bases for their conclusions, explain their methodology, and demonstrate that both . . . are reliable." Id. at 55 (citation omitted). In short, the rule invokes "a prohibition against speculative testimony." Harte v. Hand, 433 N.J. Super. 457, 465 (App. Div. 2013) (quoting Grzanka v. Pfeifer, 301 N.J. Super. 563, 580 (App. Div. 1997), certif. denied, 154 N.J. 607 (1998)). This results because a speculating expert "ceases to be an aid to the trier of fact and becomes nothing more than an additional juror," Jimenez v. GNOC, Corp., 286 N.J. Super. 533, 540 (App. Div.), certif. denied, 145 N.J. 374 (1996), affording no benefit to the fact finder, N.J.R.E. 702.
Importantly,
[t]he net opinion rule is not a standard of perfection. The rule does not mandate that an expert organize or support an opinion in a particular manner that opposing counsel deems preferable. An expert's proposed testimony should not be excluded merely "'because it fails to account for some particular condition or fact which the adversary considers relevant.'" Creanga, supra, 185 N.J. at 360 (quoting State v. Freeman, 223 N.J. Super. 92, 116 (App. Div. 1988), certif. denied, 114 N.J. 525 (1989)). The expert's failure "to give weight to a factor thought important by an adverse party does not reduce his testimony to an inadmissible net opinion if he otherwise offers sufficient reasons which logically support his opinion." Rosenberg v. Tavorath, 352 N.J. Super. 385, 402 (App. Div. 2002) (citing Freeman, supra, 223 N.J. Super. at 115-16). Such omissions may be "a proper 'subject of exploration and cross-examination at a trial.'" Ibid. (quoting Rubanick v. Witco Chem. Corp., 242 N.J. Super. 36, 55 (App. Div. 1990), modified on other grounds, 125 N.J. 421 (1991)); see also State v. Harvey, 151 N.J. 117, 277 (1997) ("'[A]n expert witness is always subject to searching cross-examination as to the basis of his opinion.'" (quoting State v. Martini, 131 N.J. 176, 264 (1993))).
[Townsend, supra, 221 N.J. at 54-55.]
Further, because an expert may testify to "the logical predicates for and conclusions from statements made in [a] report." McCalla v. Harnischfeger Corp., 215 N.J. Super. 160, 171 (App. Div.), certif. denied, 108 N.J. 219 (1987), courts must remain mindful of the Supreme Court's caution against barring an expert report, particularly if doing so will be dispositive of a case, when the expert has not had the opportunity to explain his opinions through testimony.
Although the parties did not request a Rule 104 hearing, we hold that it was plain error for the trial court not to conduct an evidentiary hearing in order to determine the reliability of plaintiffs' expert testimony. We fully agree with the Third Circuit's observation in In re Paoli [R.R. Yard PCB Litig.], 916 F.2d [829,] 854 [(3d Cir. 1990)] (internal citations omitted):
The adversarial process upon which our legal system is based assumes that a fact finder will give the parties an adequate opportunity to be heard; if it does not, it cannot find facts reliably. Thus, the detailed factual record requirement, firmly entrenched in our jurisprudence, requires adequate process at the evidentiary stage, particularly when a summary judgment may flow from it.
Moreover, although the need for a hearing is remitted to the trial court's discretion, in cases in which the scientific reliability of an expert's opinion is challenged and the
court's ruling on admissibility may be dispositive of the merits, the sounder practice is to afford the proponent of the expert's opinion an opportunity to prove its admissibility at a Rule 104 hearing.
[Kemp ex rel. Wright v. State, 174 N.J. 412, 432-33 (2002) (alteration in original).]
Following our review, which is guided by these standards, we conclude the judge mistakenly barred Hawk's testimony as net opinion. First, there is no challenge to Hawk's qualifications; the depth of experience in municipal bond purchasing, selling and research, as well as his experience with numerous transactions similar to this matter, demonstrated his expertise.
Second, Hawk's report contained the foundation for his opinion, stating it was based on the bond documents establishing the price of the bonds, their maturity date, and interest rates. Further, he referenced the loan agreement, Indenture of Trust, and Forbearance Agreement to describe the transaction. The documents of record served as the foundation of Hawk's damage conclusion, from which he provided "the why and wherefore" of his calculations.
The net opinion rule "does not mandate an expert organize or support an opinion in a particular manner, which opposing counsel deems preferable. Further, an expert's proposed testimony should not be excluded merely 'because it fails to account for some particular condition or fact which the adversary considers relevant.'" Townsend, supra, 221 N.J. at 54 (quoting Creanga, supra, 185 N.J. at 360). In this regard, it cannot be ignored that Hawk's opinion addressed damages, not liability. His assumption the Podeses would have held all bonds to maturity may be attacked and even shown to be flawed, but that premise does not erase the factual basis for his damage calculation.
Simply because the opinion may be subject to attack on cross-examination for not including other meaningful considerations also does not make it a net opinion. Rosenberg, supra, 352 N.J. Super. at 402 (quoting Rubanick, supra, 242 N.J. Super. at 55); see also Glowacki v. Underwood Mem'l Hosp., 270 N.J. Super. 1, 16-17 (App. Div. 1994) (declining to strike economic expert's testimony as a net opinion for purportedly failing to make "valid assumptions as to the rates of interest and inflation" as "any shortcoming in his method of analysis was explored and it was for the jury to determine the weight his opinion should receive"). In our review, Interstate's challenges merely highlight possible weaknesses in Hawk's opinion.
We conclude the trial judge's determination also improperly relied on Interstate's representations suggesting the sinking fund was determinative. However, the applicability of the sinking fund was never developed or asserted. Unlike the expert in Townsend who assumed a fact expressly contradicted by the evidence of record, Hawk's assumption related to the sinking fund was uncontroverted. Although the Forbearance Agreement required the sinking fund to be established, whether it was or whether the Podeses' bonds were redeemed from such a fund, is not in evidence. Charles Gleason, the expert relied upon by Interstate, who incidentally utilized many of the same numbers as Hawk, did not refute Hawk's assumption regarding the sinking fund or even mention how or why the sinking find matters to refute the Podeses' claimed loss.
Moreover, Interstate's arguments do not explain how the existence of the fund impacts Hawk's assessment; Interstate simply suggests it makes a difference.
We also reject the suggestion Hawk failed to explain the nature of bonds in his report. His expertise allows him to address such issues which fall within the scope of his report. McCalla, supra, 215 N.J. Super. at 171 ("[T]he logical predicates for and conclusions from statements made in [an expert] report are not foreclosed").
The judge was also mistaken by suggesting Hawk's calculation was "simple math." The underlying transaction in this matter was a complex, dynamic real estate venture being funded through conduit financing using bonds. The responsibilities of the many parties alone was unquestionably beyond the ken of the average juror. N.J.R.E. 702. As we noted, Hawk's opinion is sufficiently supported by facts and data in the record from the sophisticated loan and bond documents. He used the par value of the bonds, the applicable interest rate, and maturity and default dates culled from the documents to reach his conclusion. Scully v. Fitzgerald, 179 N.J. 114, 129 (2004). These are not facts captured within the ordinary ken of the average juror.
If issues were in doubt affecting admissibility, a N.J.R.E. 104 hearing should have been held. "The Rule 104 hearing allows the court to assess whether the expert's opinion is based on scientifically sound reasoning or unsubstantiated personal beliefs. . . . [During which] an expert must be able to identify the factual basis for his conclusion, explain his methodology, and demonstrate that both the factual basis and underlying methodology are scientifically reliable." Kemp, supra, 174 N.J. at 427. Otherwise, "[i]f the evidence affords a basis for estimating the damages with some reasonable degree of certainty, it is sufficient." Tessmar v. Grosner, 23 N.J. 193, 203 (1957) (citation omitted). The evidence is designed to lay "a foundation which will enable the trier of facts to make a fair and reasonable estimate." Lane v. Oil Delivery, Inc., 216 N.J. Super. 413, 420 (App. Div. 1987).
For the reasons stated, we conclude summary judgment must be vacated and the September 3, 2014 order is reversed. This conclusion obviates the necessity of addressing the Podeses' remaining arguments. We remand for further proceedings following reinstatement of the third-party complaint.
Reversed and remanded. We do not retain jurisdiction. I hereby certify that the foregoing is a true copy of the original on file in my office.
CLERK OF THE APPELLATE DIVISION