Resignation by an expert does not render a pending Daubert challenge moot: 2nd Circuit

A reliable methodology and a firm factual foundation are two of the most essential prerequisites in any expert witness testimony. The Second Circuit Court’s decision to affirm the exclusion of the corporate restructuring expert witness in the case of Buckley v. Deloitte & Touche USA LLP was therefore not surprising, given that the expert report lacked both.

Details of the case

This tort and contract action arose out of the auditing work done jointly by Defendants Deloitte & Touche USA LLP and Deloitte & Touche LLP on behalf of Plaintiff DVI, Inc., a now-defunct health care finance company. Dennis J. Buckley, bankruptcy trustee of DVI, Inc., asserted that it was Defendants’ conduct that caused the Plaintiff’s collapse. Defendants sought to get Plaintiff’s corporate restructuring expert witness excluded and also moved for summary judgment. The New York District Court excluded the expert report, saying it lacked the factual foundation and reliable methodology that made opinion testimony useful to a jury. Further, since the Plaintiff failed to come forward with any admissible evidence upon which a jury could find that Defendants caused the Plaintiff’s injuries, the district court granted summary judgment in Defendants’ favor. Plaintiff appealed.

The corporate restructuring expert witness

The Plaintiff’s corporate restructuring expert witness, who specialized in crisis management, financial advisory services and bankruptcy consulting activities, submitted a report opining on (1) “the appropriate course of action that the company and its Board of Directors … should have taken” and (2) what the “financial condition of the company could have been” had Deloitte not breached its duties.

He analyzed the Plaintiff’s hypothetical response to the discovery of the loan loss reserve issue on each of four “breach dates” (i.e., the dates DVI filed its audited financial statements, which, according to Buckley, were not in accordance with GAAP) – focusing in particular on what would have happened if Defendant had reported that Plaintiff had “materially understated” its loan loss reserve. His conclusion was that had Defendants correctly reported that Plaintiff’s loan loss reserve was materially understated on the first three breach dates, Plaintiff would have adopted successful restructuring plans and continued as a going concern. For the fourth date, however, the expert opined that Plaintiff was “probably too weak to be able to effectuate a successful restructuring” and instead, could have been liquated at a value sufficient to satisfy all “domestic secured creditors” and produce $184 million for “domestic unsecured creditors.”

Second Circuit’s review for abuse of discretion

As a preliminary matter, the Court of Appeals rejected Buckley’s argument that, since the corporate restructuring expert witness had purportedly resigned as Plaintiff’s expert before Defendant’s motion to exclude his testimony was decided, the relief requested in that motion was moot and granting it was an abuse of discretion. The Court further went on to say that

Notwithstanding that the expert had resigned, at least in theory he could have later agreed to testify at trial. Deloitte was therefore entitled to a ruling on whether [the expert's] testimony was inadmissible. And if Buckley’s point is that the district court should have considered [the expert's] testimony out of the case, then Buckley could not rely on it to defend against Deloitte’s motion for summary judgment. To the extent Buckley argues that the district court should have granted him a continuance or modified the summary judgment schedule so that he could obtain a new expert witness, he did not request such relief despite having an opportunity to do so, and there is no basis for concluding that the district court abused its discretion in declining to grant such relief sua sponte.

As to the merits, for substantially the same reasons as those stated in its decision, the district court did not abuse its discretion in excluding [the expert’s] report as lacking a sufficient factual basis. The district court acted well within its discretion in excluding these opinions as unduly speculative, as “there is simply too great an analytical gap,” [General Elec. Co 522 U.S.] between the principal bases for the opinions [the expert’s] experience as a restructuring expert and DVI’s financial statements-and the opinions themselves. While Buckley argues that the district court’s decision “sets an impermissible hurdle that no plaintiff asserting claims of auditor liability…ever could surpass,” this argument overlooks the fact that the district court identified several specific examples of types of evidence that [the expert] could have incorporated into his report to lend factual support to his opinions.

Granting of Defendants’ summary judgment motion was also held appropriate because in absence of the expert’s opinions, there was insufficient evidence to permit a reasonable juror to find the Defendants liable.

Conclusion

The New York District Court’s judgment was affirmed by the United States Court of Appeals for the Second Circuit.

**Written for the web by the EWG Editorial Team

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