Feltman v. Culmin Staffing Grp., Inc. (In re Corporate Res. Servs., Inc.)
Docket: Case No. 15-12329 (MG) (Jointly Administered); Adv. Pro. Case No. 18-01008 (MG)
Court: United States Bankruptcy Court, S.D. New York; August 22, 2019; Us Bankruptcy; United States Bankruptcy Court
James S. Feltman, the Chapter 11 trustee, has filed a motion to strike the expert opinions and testimony of James D. Gardner, presented by Culmin Staffing Group, Inc., in the ongoing adversary proceeding. Culmin opposed this motion, and the Trustee responded, reiterating previous arguments. The case revolves around the valuation of CRS's Florida business, transferred to Culmin under a prepetition Asset Purchase Agreement dated March 2, 2015. The Trustee's expert, Manish Kumar, estimated the going concern value of the business at $9.2 million to $11.6 million and the orderly liquidation value at $4.0 million to $5.5 million, while Culmin is alleged to have paid only $4,700 plus a $25,000 escrow that was never released.
Gardner's report, submitted on May 13, 2019, criticized the Goldin Report and asserted a valuation of only $113,000 for the assets, which the Trustee argues is unreasonably low given the business's previous revenue of approximately $38 million and EBITDA of $2 million. The Court has granted the motion to strike Gardner’s valuation due to flawed methodology, particularly his reliance on EBITDA data from an unfamiliar source without independent verification. However, the motion was denied concerning Gardner's critique of the Goldin Report's analysis. The Trustee contends Gardner lacks qualifications relevant to the staffing industry and claims his relationship with Culmin's CEO, Jeff Raymond, undermines his credibility as an expert.
The Gardner Report has been criticized for several key issues: it only values customers retained by Culmin rather than the assets acquired under the Asset Purchase Agreement (APA), employs inconsistent valuation dates to produce a lower valuation, presents false claims regarding termination letters to APA customers, and fails to include essential information and disclosures mandated by valuation standards and the Federal Rules of Civil Procedure. In his deposition, Gardner acknowledged that his valuation relied on an EBITDA range from an article without verifying its methodology.
Culmin's opposition counters that Gardner drew on over 45 years of experience in corporate finance and valuation, stating his qualifications, including degrees from Wartburg College, Fairleigh Dickinson University, and Stanford University. He has conducted around 75 valuations for a venture capital firm and has extensive experience reviewing business plans and financial analyses.
The court finds Gardner's critique of the Goldin Report to be relevant and within the scope of permissible expert testimony, allowing the trier of fact to determine its credibility. However, Gardner's own valuation opinion does not meet the standards for expert testimony established by Daubert, leading to a partial grant of the Daubert motion against him.
Motions in limine are designed to streamline the trial process by allowing the court to preemptively rule on the relevance of certain evidence related to issues set for trial, aiming to avoid lengthy arguments during the trial itself. Evidence should only be excluded if it is clearly inadmissible on all potential grounds. The court may defer judgment on such motions until more factual context is available during the trial.
According to Federal Rules of Evidence, Rule 401 defines relevant evidence as that which can make a fact more or less probable and is consequential to the case. The threshold for relevance is low, and evidence does not need to be conclusive to be considered relevant.
Rule 702 allows for opinion testimony from witnesses qualified as experts based on their knowledge, skill, experience, training, or education. Such testimony must be based on a reliable foundation and relevant to the case, following the Daubert standard, which requires a preliminary assessment of the scientific validity of the methodology used. The Second Circuit emphasizes that reliability is evaluated based on the sufficiency of facts or data, the reliability of principles and methods applied, and the appropriate application of these methods to the case facts. Courts may exclude expert testimony if the expert did not conduct the tests themselves and instead relied on others' work.
Expert reports can be excluded if the expert fails to independently verify the data they rely upon. In *In re Rezulin Prod. Liab. Litig.*, a doctor's failure to measure liver enzymes led to the exclusion of their expert report. Similarly, in *JRL Enterprises, Inc. v. Procorp Assocs. Inc.*, an expert was excluded for not conducting independent analysis of a report. The *TK-7 Corp. v. Estate of Barbouti* case emphasized that experts must demonstrate the reliability of their bases for opinions, particularly when relying on another expert's calculations without investigation. In this case, Gardner based his valuation on EBITDA multiples from an article by authors he did not know, raising hearsay concerns. For expert opinions to satisfy Evidence Rule 703, they must rely on information considered reliable by others in the field, not merely on the assertion of an individual expert. Dr. Boswell's reliance on the Werber study lacked sufficient validation, as he could not adequately assess its reliability, and there was no evidence that other experts would endorse it for estimating lost profits in an unestablished business. The court must ensure that experts do not circumvent hearsay rules by relying on unverified sources.
The appellants' argument regarding the appropriateness of the Werber projections under Rule 703 lacks support in the record. Testimony must be relevant to assist the trier of fact in understanding evidence or determining facts in issue, as established in Daubert. The assessment of expert testimony's reliability requires a preliminary evaluation of the scientific validity of the reasoning or methodology applied to the facts. Daubert outlines factors pertinent to this reliability, including the testability of the theory, peer review status, known error rates, maintenance of operational standards, and acceptance within the scientific community; however, these are not definitive criteria. Kumho Tire Co. extends Daubert's application to technical or non-scientific expert testimony. The burden of proof for admissibility rests on the party seeking to introduce the expert evidence. Expert opinions must include an explanation of the conclusions drawn and the methodologies used. Minor flaws in reasoning do not necessitate exclusion unless significant enough to undermine the expert's conclusions. Traditional methods such as cross-examination and contrary evidence presentation remain effective for challenging expert testimony. Relevance must be established, though it is a low threshold, and both parties can present evidence supporting their case theories. The Trustee's motion to strike Gardner's testimony is based on his purported lack of experience in litigation valuation. However, Gardner's substantial experience in financial analysis and valuation services meets the necessary criteria for expert testimony in this case.
Critiques of Gardner's testimony focus on the weight rather than admissibility of his expert opinion. Gardner's lack of specific expertise in valuing staffing companies does not disqualify him, as established in case law such as Stagl v. Delta Air Lines and Washington v. Kellwood Co., which emphasize that general qualifications are sufficient for expert testimony. Gardner's deposition supports Culmin's argument regarding the flaws in Kumar's valuation methodology, notably that Kumar improperly valued all customers previously supported by CRS instead of just those retained by Culmin. Gardner also criticized Kumar's projected revenue growth assumptions.
While the Trustee can challenge Gardner's assumptions, his testimony offers a legitimate theory for the case that can be evaluated by the trier of fact. Criticism of Kumar and the Goldin Report is admissible, but Gardner's reliance on EBITDA multiples from an external article without independent verification disqualifies his opinion on value. The Tenth Circuit's ruling in TK-7 Corp. reinforces this conclusion. The Trustee's motion to strike Gardner's testimony is partially granted and partially denied; Gardner may testify against the assumptions and conclusions of the Goldin Report and Kumar, while specific objections will need to be resolved at trial. Furthermore, the Trustee's claims of Gardner's conflict of interest are not disqualifying but can be used for cross-examination. Rule 703 allows experts to base opinions on facts or data they are aware of or have observed, provided that such data has probative value that outweighs any prejudicial effects.
