Judge plays business valuation expert witness in DC

Accounting by a JudgeExpert witnesses, at times, overstep their boundaries and usurp the role of the Court by offering legal conclusions in their testimonies. But vice versa? A judge in DC Bankruptcy Court recently faced this unusual allegation of usurping the role of a business valuation expert witness in the case of Alberts v. HCA, Inc.

Background of the case

As a trustee for The DCHC Liquidating Trust, Plaintiff Sam J. Alberts initiated an adversary proceeding in the bankruptcy court against Defendants Hospital Corporation of America, Inc., alleging that HCA’s sale of Michael Reese Hospital to DCHC was a “fraudulent transfer” because Reese Corp. did not receive reasonably equivalent value for the price it paid. The allegedly excess price was now sought to be avoided and recovered by the Plaintiff. After a five week bench trial, Judge Teel issued a 192–page statement wherein he calculated the fair market value of Reese Hospital as $68.6 million, concluded that Reese Corp. received reasonably equivalent value, and entered judgment in favour of the Defendants.

Plaintiff appealed to the US District Court, District of Columbia, alleging inter alia, that the bankruptcy court had erred when, in the course of concluding that the Hospital’s net working capital could be treated as a surplus asset and added to the Hospital’s projected income from operations, the court employed an asset valuation method that was not supported by or consistent with any party’s expert or any learned treatise and was not subject to evaluation under the Federal Rules of Evidence.

Did the Judge really usurp the role of the business valuation expert witness?

It was frequently suggested by the Plaintiff all throughout the appeal that since the bankruptcy court treated the $20.6 million capital transfer differently than both parties’ business valuation experts, the bankruptcy court must have done something wrong. The Plaintiff also alleged that Judge Teel essentially acted as an expert witness without first ensuring that his expert testimony was reliable per Daubert and Kumho. Therefore according to Plaintiff his decision “should be reversed because, even if the bankruptcy court’s methodology potentially could have merit …, the court deprived the Trustee of important procedural protections when the court substituted its own expert opinion for the opinions of testifying experts. In proceeding as it did, the bankruptcy court prevented the Trustee from challenging the business valuation methodology that was ultimately used to deny Trustee’s claim.”

The US District Court held:

…complaint that Judge Teel somehow acted as an expert witness with an idiosyncratic and untested methodology was self-defeating and without merit. The role of a bankruptcy court judge was not simply to pick which expert the judge liked most and then credit that expert’s testimony fully. He may decide to credit or discredit, in whole or in part, the testimony of any expert witness, and decide the case on the evidence. To the extent Judge Teel did anything ‘creative’ in his income valuation analysis, or departed from the testimony of the experts, it was because the experts and witnesses failed to give Judge Teel the tools he needed to derive an income valuation.

The Court also added that it was wrong for the Plaintiff to suggest that Judge Teel committed reversible error when he found, contrary to two expert witnesses, that the record did not support incorporating the $20.6 million into a discounted cash flow analysis, and instead treated the amount as a non-operating surplus asset. He had acted well within his role as fact finder when he credited the expert testimony in part and decided the case on what he thought comported with the evidence and facts.

The ruling

After reviewing the record on appeal, the underlying decisions of the bankruptcy court, and the parties’ briefs, the US District Court found that Judge Teel had correctly ascertained the controlling law and did not commit clear error in his factual findings. Furthermore, to the extent he committed any reversible error regarding his treatment of the net working capital, such error was harmless. Henceforth the judgment of the bankruptcy court was affirmed.

** Written for the web by the EWG Editorial Team

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4 Responses so far.

  1. An Engineer says:

    Who needs Experts?

  2. Armand Musey says:

    Not sure what the issue is. I spent a summer in law school working for a bankruptcy judge. Bankruptcy judges perform valuation analysis all the time. Sometimes they adjust the numbers used by the experts on one or both sides, sometimes they even do a complete valuation themselves in their opinion. This is standard procedure in bankruptcy court. The whole reason there for having a separate bankruptcy court is that the judges are, or at least they are supposed to be, experts in valuation and other related areas of business analysis needed to adjudicate these cases.

    • Ashish Arun says:

      Agree, thats precisely why the United District District Court overruled the Plaintiff’s objections and affirmed the decision of the Bankruptcy judge.