The Many Shades of Expert Testimony in Insolvency Cases

Valerie Bailey-Rihn
July 30, 2008 — 1,843 views  
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Congratulations!  You have just received a call about being an expert in bankruptcy matter.  But what type of case?  And what type of expert? Knowing the answers to these basic questions can save you and your potential client a lot of unpleasant surprises down the road. 

Type of Engagement.
In business insolvency and bankruptcy proceedings, experts are typically utilized to provide opinions on whether a business is viable, the value of the business, or the value of the lender's collateral.   These opinions can be invaluable in determining whether the proposed cash collateral agreement (financing package) will work, whether the lender is fully or partially secured, and in determining the amount of adequate protection payments necessary to compensate the lender for use of its collateral.  In addition, valuations are often used in connection with Bankruptcy Code § 363 sales (bankruptcy approved sales of assets outside the ordinary course of business) and in plan confirmations.  Obviously, the debtor's point of view on these issues is drastically different than from the creditor's side, and knowing your client's objectives is crucial.   The only way to find out is to ask the right questions.

In one case, an expert was asked to provide a financial opinion as to the possible losses of a business as a result of the business going out of business.  He prepared an impressive looking report that showed millions of dollars of losses.  Unfortunately for the expert, the business had not gone out of business and the court ruled that at best, damages were limited to lost profits as a result of certain changes implemented by a franchisor.  As a result, the expert's report was worthless at trial and excluded-forcing the party to settle on unfavorable terms.  In another case, a very impressive expert again prepared a slick report, but failed to ask key questions of the client's employees---who had knowledge of a highly specialized financial area.  Shortly before the report was due to be produced to the other side, the employees started questioning the report based on their knowledge, causing the client to question the value of the report in its entirety.  

Lessons Learned.
Ask the questions up front and get answers.  Make sure you have the information you need about what you are expected to do.  And, if you aren't comfortable with what the attorney is asking you to do, say so.  It's better to say no to the engagement than end up with a former client unhappy with a bad result.

Type of Expert.
In addition to knowing what type of engagement you have been hired for, you also need to know what type of expert role you are being asked to perform.  In general, there are two types of experts: consulting experts and testifying experts.    The difference between the two is important. 

Consulting Expert.
A consulting expert is an expert that is engaged by a party in anticipation of litigation.  See Federal Rule of Civil Procedure ("F.R.C.P.") 26(b)(4)(B).  A consulting expert possesses the same qualifications as an expert witness, but who will not be called at trial to render opinions within his/her area of expertise.  

This type of expert is important in cases involving technical or financial information that is not readily understood by the attorney.  The attorney, in essence, is hiring an expert to help formulate the case with them.   Thus, typically, a consulting expert will only be employed if the case is big enough and uncertain enough to merit the added expense.

A consulting expert is not a second class expert.  They may have the same qualifications, experience, and ability to testify as a testifying expert.  However, information shared with them by the attorney is typically privileged.  In other words, the expert and the expert's identity, opinions, and work product can only be discoverable by the other side upon a showing of exceptional circumstances.  Therefore, the expert is free to give his honest opinion, provide criticism and direction to the attorney without having this information used against the client.  The consulting expert also has the freedom to explore possibilities, to provide an accurate range of possible valuations and to help shape the attorney's direction in the case, and perhaps help identify experts that would be able to provide a testifying opinion.

A consulting expert can also review any reports provided by the opponent and provide insight into the reports to the attorney.  He/she may help prepare questions for cross-examination of the opponent's expert and also provide information concerning possible rebuttal information that should be contained in the rebuttal report.  Again, because the consulting expert's opinions, questions, and mental impressions are not discoverable, he/she has a much greater leeway to provide his/her opinions to the attorneys. 

Lessons Learned.
Consulting experts have an unique role in helping shape the case.  However, if they provide information to other experts that may be testifying, their mental impressions, opinions etc. can be discovered by the opponent.  Therefore, they should be communicating with the attorneys unless told otherwise.

Testifying Expert.
The role of the testifying expert is to provide testimony at trial or at a hearing regarding scientific, technical or other specialized knowledge to assist the jury or bankruptcy judge in understanding the evidence.  Federal Rule of Evidence ("F.R.E.") 702.  An expert witness is a person who is qualified as a expert by knowledge, skill, experience, training or education.  F.R.E. 702.  Under this flexible standard, a person may be considered an "expert" in their field without any advanced degrees.  For example, a person that routinely runs distressed companies may be equally competent to testify as to whether a financing package is feasible as a person that has numerous initials behind their name.

If an expert is expected to testify, under F.R.C.P. 26(a)(2), which is incorporated into bankruptcy adversary cases, the parties must disclose the names of any testifying expert witness to each other.   Bankruptcy adversary cases include proceedings to determine the validity, priority or extent of an interest in property and a proceeding under § 363(h) selling both the debtor's and a co-owner's interest in property. 

Note that for other types of matters, such as contested bankruptcy motions, F.R.C.P. 26(a)(2) is not applicable so that a formal report may not be necessary.  In addition, many of these situations come up quickly and the luxury of a report is not available.   In the insolvency area, these situations could include engaging an expert to testify that the proposed debtor in possession financing is infeasible and will deplete the lender's cash collateral.  The debtor's counsel may also engage an insolvency professional to testify as to the feasibility of a proposed plan of reorganization.  Both debtors and creditors may have competing experts valuing assets in the context of a § 363 sale motion or for adequate protection purposes.  However, even in these non-adversary situations, the testifying witness' name will be disclosed and if there is sufficient time, the opponent may depose the witness.

If F.R.C.P. 26(a)(2) is applicable and unless otherwise stipulated or ordered by a court, the disclosure of the names of the expert witnesses that will testifying at trial must also be accompanied by a written report.  This report is one of the most crucial parts of the litigation process.  And, unlike in the case of a consulting expert, the other side has the ability to discover the information upon which the expert relied on in preparing his or her report. 

As a result, it is important for experts to become involved in the case early on in order to know the deadline for the report.  Courts vary in their position, but most federal courts will not allow an expert to modify his/her report after the report deadline is due.  The only exception to this is if the court sets a deadline for the initial report from the proponent of the report, a deadline for the opponent of the report to respond to the report, and a rebuttal deadline for the proponent of the report to rebut the opposition to the report. 

The report must contain (i) a complete statement of all opinions the witness will express and the basis and reasons for them; (ii) the data or other information considered by the witness in forming them; (iii) any exhibits that will be used to summarize or support them; (iv) the witness' qualifications, including a list of all publications offered in the previous ten years; (v) a list of all cases in which, during the previous four years, the witness testified as an expert at trial or by deposition; and (vi) the statement of the compensation to be paid for the study and testimony in the case.

The more complete and accurate the expert's opinion is in the beginning, the more likely it will be persuasive at trial.  There is nothing worse than an expert providing a report that is not very well thought through and after his/her deposition, attempting to revise the report to take into account questions that the opposing counsel asked during the examination.  If the court will not allow him/her to amend the report, he/she will be subject to the same sort of piercing examination at trial.

In addition, if the expert is relying on data or information compiled by other individuals in the office, the expert better make sure that he or she knows what the other individuals did and that they did an accurate job pursuant to reasonable industry standards.  Nothing is more embarrassing than having opposing counsel show an expert his or her report that contains numerous mistakes and adding errors in it.

The independent testifying expert also has to look at how many times he has testified on behalf of a certain type of a party.  The more times the expert has testified on behalf of one side (debtor or creditor) and for particular law firms may impact on his or her credibility.  This is further compounded if the expert is charging a high hourly rate. 

Finally, testifying experts need to be aware that everything that they receive from counsel, everything that they discuss with counsel, and everything they discuss with their clients is discoverable and will be asked for by the other side.  All their drafts, notes and memorandum are also discoverable.  Therefore, they need to be much more cautious than a consulting expert as to what they document in their file, and/or whether they save drafts of their report.  Many experts have a standard practice of not saving drafts and only saving the final product.  In addition, to the extent they are in conversations with the attorney and the client, they should not take notes.  These notes are discoverable and have caused at least one expert to be discharged from his engagement when his notes reflected a concern about the client's position.

Lessons Learned.
Be prepared to defend your opinion and understand the difference between your opinion and the opponent's report.  The more prepared you are before your deposition or testimony the better off you will be to respond to the expected attacks on your credibility.   In addition, the more rounded your experience is, the better off you will be as to any bias claims. 

The Daulbert Issue.
Even if you are named as a testifying expert, it is possible that the other side may move to have you disqualified as an expert claiming that your testimony is too speculative. In Daubert v. Merrel Dow Pharmaceuticals, Inc. 509 U.S. 579 (1993) and under F.R.C.P. 702, expert testimony is admissible if (1) the testimony is based on sufficient facts and data, (2) the testimony is a product of reliable principles and methods, and (3) the witness has applied the principles and methods reliably to the facts of the case.  Some courts look to see: (1) whether the method consists of a testable hypothesis; (2) whether the method has been subject to peer review; (3) the known or potential rate of error; (4) the existence and maintenance of standards controlling the technique's operation; (5) whether the method is generally accepted; (6) the relationship of the technique to methods which have been established to be reliable; (7) the qualifications of the expert witness testifying based on the methodology; and (8) the non-judicial uses to which the method has been put.   In other words, expert testimony must be both relevant and reliable.

If the bankruptcy judge is deciding the matter, he or she may allow the testimony, even if there is some concern about the relevancy or the reliability of the testimony, because he or she is less likely to be persuaded by it than a jury.  However, the better practice is to have a bullet proof report from the start.

Lessons Learned.
To the extent that insolvency experts are using appraisal methods regularly used in the industry for valuations, they should be not subject to a successful Daubert motion.  However, the more speculative the opinions are or the more they digress from the industry norms, the more likely they will come under attack.  Even if the expert survives a Daubert motion, the expert will face stiff cross-examination and better be prepared to defend his or her opinions against a claim that they are unreliable and/or irrelevant to the proceeding at hand.

Experts come in all shapes and sizes.  To determine whether you are a good fit for an engagement ask these questions up front:  Who do you represent?  Who are the other significant parties involved in the litigation?  What is your client's position on the expected subject of my opinions? What would you like me to do?  Is it expected that I will be testifying?   What is the purpose of my testimony?    What limitations, if any, has the Court, the law, or anyone else placed on the subject of my testimony?  What opinions, if any, do the other parties have in the litigation regarding the subject matter?  Is a report required?  If so, when is it due?  Who will be answering my questions as I go along?   The answers to these questions will give you a good sense of what the case is all about and your role in it.

Valerie Bailey-Rihn


Professional Experience Valerie Bailey-Rihn, a partner in the Madison office, concentrates her practice in the areas of commercial and business litigation, ERISA litigation, consumer litigation arising under federal and state regulations, and creditors' rights/bankruptcy.