Secretary of Labor, U.S. Department of Labor v. Wilmington Trust, N.A. et al, No. 1:2017cv01755 - Document 42 (N.D. Ohio 2019)
Court Description: Opinion & Order signed by Judge James S. Gwin on 1/18/19. The Court, for the reasons set forth in this order, denies defendants' motion to exclude the Krillenberger reports and testimony and denies plaintiff's motion to exclude the Rule report and testimony. (Related Docs. 31 and 33 ) (D,MA)
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Secretary of Labor, U.S. Department of Labor v. Wilmington Trust, N.A. et al UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF OHIO -----------------------------------------------------------------: R. ALEXANDER ACOSTA, : U.S. SECRETARY OF LABOR, : : Plaintiff, : : vs. : : WILMINGTON TRUST, N.A., et al., : : Defendants. : : ------------------------------------------------------------------ Doc. 42 CASE NO. 1:17-CV-1755 OPINION & ORDER [Resolving Docs. 31, 33] JAMES S. GWIN, UNITED STATES DISTRICT JUDGE: In this case, Plaintiff Department of Labor alleges that Defendant Wilmington Trust ( W“lm“n’ton ) violated the Employee Retirement Income Security Act.1 It argues that Wilmington unlawfully caused Defendant Graphite Sales, Inc. Employee Stock Ownership Plan to overpay for an employee stock ownership purchase of Graphite Sales, Inc. s outstanding stock. Defendant Wilmington now moves under Federal Rule of Evidence 702 to exclude the Plaintiff s experts reports and testimony.2 Plaintiff likewise moves to partially exclude the De‘endant expert s rebuttal report and test“mony under Rules 403 and 702. 3 For the following reasons, the Court DENIES De‘endant s motion and DENIES Pla“nt“‘‘ s motion. 1 Codified in part at 29 U.S.C. ch. 18. Doc. 33. Plaintiff opposes. Doc. 36. Defendant Wilmington Trust replies. Doc. 38. 3 Doc. 31. Defendant Wilmington Trust opposes. Doc. 35. 2 Dockets.Justia.com Case No. 1:17-cv-1755 Gwin, J. I. Background Graphite Sales, Inc. ( Graph“te ) is a graphite processing company. In 2011 Graphite engaged Defendant Wilmington as trustee for its newly-created Employee Stock Ownership Plan (the Plan ). On Au’ust 31, 2011, w“th W“lm“n’ton s approval, the Plan purchased all of Graphite s stock for $16 million. As part of this deal, selling shareholders received stock warrants for an 18% equity stake in Graphite. Also, two Graphite officers received stock appreciation rights for a 10% Graphite equity interest, and Huntington Capital Investment Company received rights to a 7% equity stake in the company. This lawsuit turns on the proper valuation of Graphite. At the time of the sale, the firm Stout, Risius and Ross ( Stout ) appraised the company. Plaintiff seeks to introduce expert reports and testimony from James A. Krillenberger cr“t“c“z“n’ Stout s appraisal.4 Defendant Wilmington seeks to introduce a rebuttal report and testimony from their own expert Mark A. Rule.5 II. Discussion Both parties argue that the other s“de s expert report should be (at least part“ally) excluded under Federal Rule of Evidence 702, that provides in relevant part that A witness who is qualified as an expert by knowledge, skill, experience, training, or education may testify in the form of an opinion or otherwise if: (a) the expert's scientific, technical, or other specialized knowledge will help the trier of fact to understand the evidence or to determine a fact in issue; (b) the testimony is the based on sufficient facts or data; (c) the testimony is the product of reliable principles and methods6 4 Doc. 31-2. Doc. 31-1. 6 Fed. R. Evid. 702. 5 2 Case No. 1:17-cv-1755 Gwin, J. In conducting its Rule 702 inquiry, the Court cons“ders whether the expert s test“mony has been tested, is the subject of peer review and publication, has a permissible error rate, ‘ollows establ“shed standards, and rece“ves ’eneral acceptance w“th“n a relevant sc“ent“‘“c commun“ty. 7 At this gatekeeping stage, the Court focuses on principles and methodolo’y, not the conclus“ons that they ’enerate. 8 A. The Court Will Not Exclude Krillenberger s Expert Reports and Testimony Defendant Wilmington broadly contends that Krillenberger's views are untethered to accepted valuation methodology—that he is trying to pass off his individual say-so as expert testimony. Defendant seizes Krillenberger s depos“t“on remarks that he "could not speak for the entire [valuation] industry" on particular topics9 as evidence that his views are pure speculation. O‘ course, Kr“llenber’er s concession that other valuation experts might interpret the same facts differently does not mean that his own interpretation is made up. And upon closer scrutiny, De‘endant s motion simply quarrels with Krillinberger's conclusions—how he chose between competing methodologically valid approaches and how he applied those approaches to the facts—rather than showing that those conclusions are unscientific.10 De‘endant s objections go to weight, rather than Rule 702 admissibility.11 Crossexamination at trial will afford Defendant ample opportunity to pick out purported 7 United States v. Mallory, 902 F.3d 584, 592 (6th Cir. 2018) (quoting Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 579, 593-4 (1993)). 8 Daubert, 509 U.S. at 594. 9 Doc. 33-2 at 24. 10 See In re Scrap Metal Antitrust Litig., 527 F.3d 517, 529 (6th C“r. 2008) ( The task ‘or the d“str“ct court “n dec“d“n’ whether an expert's op“n“on “s rel“able “s not to determ“ne whether “t “s correct. ). 11 Id. at 530 (weaknesses “n the ‘actual bases o‘ an expert w“tness s op“n“on go to weight rather than admissibility). 3 Case No. 1:17-cv-1755 Gwin, J. methodological errors and to present any ev“dence contrary to Kr“llenber’er s adm“ss“ble opinions.12 i) Method Objections Firstly, Defendant takes issue with Krillenber’er s v“ew13 that Stout should have used multiples of revenue and EBITDA14—not multiples of EBIT15 and EBITDA—to value Graphite. Defendant argues that this contradicts a cited treatise, because the treatise says that Kr“llenber’er s pre‘erred approach “s appl“ed most frequently to start-up companies and to service businesses 16 and Graphite is neither. Defendant is wrong. The cited treatise passage explicitly contemplates that Kr“llenber’er s approach might be used in circumstances other than start-ups and service companies. Krillenberger also op“nes that Stout erred by us“n’ the ex“t method “nstead o‘ the Gordon Growth Method under the D“scounted Cash Flow valuat“on method.17 Defendant argues that Krillenberger s criticism is wrong, because several treatises permit either method. Even if true, this argument does not go to admissibility because it simply takes “ssue w“th how Pla“nt“‘‘ s expert chose amon’ accepted valuat“on methodolo’“es. Finally, Defendant argues that Krillenberger was wrong to consider stock warrants and stock appreciation rights in valuing Graphite.18 This was wrong, Defendant argues, because Krillenberger admitted at his deposition that the warrants could be considered part Daubert, 509 U.S. at 596 ( V“’orous cross-examination, presentation of contrary evidence, and careful instruction on the burden of proof are the traditional and appropriate means of attacking shaky but admissible ev“dence. ). 13 Doc. 31-2 at 15. 14 Earn“n’s be‘ore “nterest, tax, deprec“at“on and amort“zat“on. 15 Earn“n’s be‘ore “nterest and tax. 16 Doc. 33-10 at 9 (emphasis added). 17 Doc. 31-2 at 23. 18 Id. at 28. 12 4 Case No. 1:17-cv-1755 Gwin, J. o‘ the transact“on s ‘“nanc“n’.19 However, in the same testimony Krillenberger insisted that the there “s an add“t“onal mot“vat“on ‘or the warrants20—namely, that the warrants were a ‘orm o‘ cont“n’ent cons“derat“on and that they should have been included in the purchase price.21 Defendants will have to chance to show that Krillenberger is wrong about this at trial; here, they do not show that this view lacks sufficient facts or departs from accepted principles and methodologies. ii) Application Objections Defendant takes “ssue w“th Kr“llenber’er s cr“t“cal assessment o‘ Stout s revenue projections. It states that Krillenberger gave insufficient weight to the Graphite mana’ement team s pro”ect“ons and ignored three pieces of evidence: a 2011 sixth-month Qual“ty o‘ Earn“n’s report, a 2011 due d“l“’ence call w“th Graphite management, and Graphite s actual 2011 performance.22 Again, these purported errors would not show that Kr“llenber’er made up h“s own revenue pro”ect“ons or that his methods are not sound. Defendants do not argue, much less demonstrate, that accepted valuation principles compel Krillenberger to weigh the evidence differently or take this evidence into account. De‘endant ‘urther ar’ues that Kr“llenber’er was wron’ to cr“t“c“ze Stout s select“on of guideline companies and Stout s use of the twenty-day average stock price for purposes of the Guideline Company Method valuation method. Wilmington says that these criticisms are contradicted by Kr“llenber’er s own analys“s on other top“cs, and that there is no reason to use his preferred method. However, these purported selection errors do not 19 Doc. 33-2 at 61. 20 Id. 21 Doc. 31-2 at 28. 22 Although it does not matter here, the Court notes that Graphite s actual 2011 per‘ormance “s irrelevant. Kr“llenber’er s report cr“t“c“zes Stout s valuat“on on the ‘acts known at the time of valuation. 5 Case No. 1:17-cv-1755 Gwin, J. even remotely suggest that Kr“llenber’er s op“n“on lacks a firm methodological basis. Defendant simply quibbles with how he applied his methods to the facts at hand, a complaint that goes to weight. Finally, Defendant argues that Krillenberger erroneously cr“t“c“zed Stout s appl“cat“on o‘ a 10% control prem“um to the ’u“del“ne compan“es stock pr“ces. Krillenberger supposedly erred because he only ‘ocus[ed] on one o‘ the ten control factors identified in valuation literature.23 Again, this application error would not show that Kr“llenber’er s views are inadmissible. B. The Court W“ll Not Exclude Rule s Expert Report and Test“mony Plaintiff moves under Rules 403 and 702 to exclude Wilmington expert Mark Rule s rebuttal report and testimony, to the extent that they relate to damages methodology. Pla“nt“‘‘ ar’ues that Rule s proposed but-‘or dama’es methodolo’y is inadmissible because it usurps the Court s role in determining the correct legal standard for damages.24 Pla“nt“‘‘ s argument fails. Rule s report assesses potent“al dama’es by compar“n’ what the Plan paid for Graphite stock with the fair market value of the stock on the date of the transaction.25 This is the same methodology used by Pla“nt“‘‘ s expert Krillenberger,26 and the same methodology endorsed by the Sixth Circuit in Chao v. Hall Holding Co.27 23 Doc. 34 at 13. 24 See CMI-Trading, Inc. v. Quantum Air, Inc., 98 F.3d 887, 890 (6th Cir. 1996) (holding that the Court, and not an expert, has sole responsibility regarding legal issues), abrogation recognized on other grounds by Morales v. Am. Honda Motor Co., Inc., 151 F.3d 500 (6th Cir. 1998). 25 See Doc. 31-1 at 8. 26 See Doc. 31-2 at 4 (comparing the fair market value of Graphite common stock to the purchase price). 27 285 F.3d 415, 423 (6th Cir. 2002) (calculating damages by taking the d“‘‘erence between the amount pa“d by the [employee stock plan] and the fair market value of the stock as determined by the district court ). 6 Case No. 1:17-cv-1755 Gwin, J. Plaintiff takes “ssue w“th Rule s conclus“on that the Kr“llenber’er report ‘a“led to correctly apply this accepted methodology to the facts at hand. This argument goes to weight, not admissibility, and Plaintiff can explore it further at trial. III. Conclusion For the foregoing reasons, the Court DENIES De‘endant s motion to exclude the Krillenberger reports and testimony and DENIES Pla“nt“‘‘ s motion to exclude the Rule report and testimony. s/ Dated: January 18, 2019 James S. Gwin JAMES S. GWIN UNITED STATES DISTRICT JUDGE . 7
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