JOAN N. ERICKSEN, District Judge.
Plaintiff Dietz
Presently before the Court are two motions seeking to exclude expert testimony: (1) a motion filed by Defendants Irwin L. Jacobs, Jacobs Management Corporation, Jacobs Trading, LLC, John Paul DeJoria Family Trust, and Operation Bass, Inc. to exclude the testimony of Harold A. Schaeffer and (2) a motion filed by Plaintiff to exclude the testimony of Arthur H. Cobb. For the reasons stated below, the Defendants' motion is denied and the Plaintiff's motion is granted in part and denied in part.
In Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579, 597 (1993), the Supreme Court confirmed that the Federal Rules of Evidence "assign to the trial judge the task of ensuring that an expert's testimony both rests on a reliable foundation and is relevant to the task at hand." More specifically, Federal Rule of Evidence 702 governs the admissibility of expert testimony. It provides that a
Fed. R. Evid. 702.
The factors that a district court may consider in making reliability and relevancy determinations include: "(1) whether the [expert's] theory or technique can be or has been tested; (2) whether the theory or technique has been subjected to peer review or publication; (3) whether the theory or technique has a known or potential error rate and standards controlling the technique's operation; and (4) whether the theory or technique is generally accepted in the scientific community." Russell v. Whirlpool Corp., 702 F.3d 450, 456-57 (8th Cir. 2012) (citing Daubert, 509 U.S. at 593-94). But the "evidentiary inquiry is meant to be flexible and fact specific, and a court should use, adapt, or reject Daubert factors as the particular case demands." Unrein v. Timesavers, Inc., 394 F.3d 1008, 1011 (8th Cir. 2005). As long as the expert's proffered testimony appears reliable and relevant, no single requirement for admissibility exists. Id.
The "traditional and appropriate means of attacking shaky but admissible evidence" are "[v]igorous cross-examination, presentation of contrary evidence, and careful instruction on the burden of proof." Daubert, 509 U.S. at 596. The Daubert inquiry should therefore focus on "principles and methodology" rather than on the "conclusions that they generate." Daubert, 509 U.S. at 595. Similarly, the factual basis of an expert's opinion generally "goes to the credibility of the testimony, not the admissibility, and it is up to the opposing party to examine the factual basis for the opinion in cross-examination." Bonner v. Isp Techs., 259 F.3d 924, 929-30 (8th Cir. 2001) (internal quotation marks omitted).
With these principles in mind, the Court turns to each of the two motions.
Harold A. Schaeffer has over 40 years of experience in the credit and banking field and is president of D & H Credit Services Inc. Docket No. 15-2 at 7.
Defendants' motion focuses on Mr. Schaeffer's opinions related to certain defenses under 11 U.S.C. § 547(c) to the Trustee's claims seeking to avoid preferential transfers. Under 11 U.S.C. § 547(b), a trustee may "avoid" certain preferential transfers made by a debtor in the time leading up to the debtor's bankruptcy filing and when "a preferential transfer is avoided, the transferee generally must disgorge the amount of the transfer and return it to the debtor's estate." Gulfcoast Workstation Corp. v. Peltz (In re Bridge Info. Sys.), 447 F.3d 1076, 1079 (8th Cir. 2006). Certain transfers, however, may not be avoided by the trustee. For example, the provisions of § 547(c)(1) and (c)(4) protect from avoidance transfers made in connection with "new value" to the debtor that meet certain conditions. The provision of § 547(c)(2) prevents avoidance of a transfer made in the "ordinary course of business" and specifically
Before certain amendments to § 547 in 2005, the "or" between the text that is now labeled (A) and (B) in § 547(c)(2) was an "and" and a showing on both conditions had to be made to establish the ordinary course of business defense. See, e.g., Gulfcoast, 460 F.3d at 1079. Following the 2005 amendments, a party asserting the defense can prevail by demonstrating either one. Stevenson v. Turowski & Son Funeral Home, Inc. (In re Nowlen), 452 B.R. 619, 621 (Bankr. E.D. Mich. 2011). The transferee bears the burden of establishing the ordinary course of business defense by a preponderance of the evidence. Gulfcoast, 460 F.3d at 1079. No precise legal test exists for the ordinary course of business defense and "the court must engage in a peculiarly factual analysis." Harrah's Tunica Corp. v. Meeks (In re Armstrong), 291 F.3d 517, 527 (8th Cir. 2002) (internal quotation marks omitted). Condition (A) has been referred to as a "subjective" prong and condition (B) as an "objective" test. The objective prong "requires the transferee to prove that the business terms are in accordance with industry practice, not simply that they are in accordance with the practice between the debtor and the transferee" and the transferee is required to "produce evidence of an independent, objective standard of the practices of the relevant industry." Gulfcoast, 460 F.3d at 1079.
Mr. Schaeffer's expert reports respond to the reports of Defendants' expert, Guy Davis, on their defenses to the Trustee's claims under §§ 547-548. Mr. Davis's report concerning the claims against JMC is the only report submitted in connection with the present motion and so the Court focuses on the two experts' analyses as to JMC for background purposes. In relevant part, the reports address certain transfers from debtor Genmar Holdings to JMC during the one-year period before Genmar Holdings' bankruptcy filing.
For the ordinary course of business defense, Mr. Davis's report presents an analysis under the subjective prong of § 547(c)(2). He used invoices reflecting the payment history between Genmar Holdings and JMC to determine the ordinary payment time range or "grace period" from the invoice date to payment date. Docket No. 22-1 at 17-19. He then referenced industry statistics on typical payment ranges from the Risk Management Association (RMA) to "corroborate" the results and contends that they generally support his analysis of the standard range between the parties, i.e. the standard subjective range. Id. at 19. He then applied the transfers at issue from the preference period to separate out the ones within the standard subjective range and those outside of it to arrive at his conclusion of the amount subject to recovery after accounting for the ordinary course payments. Id. at 20. He next did a new value assessment to reach his final figures. Id.
Mr. Schaeffer's report presents the analysis under each of the two prongs of § 547(c)(2), i.e. the subjective and objective prongs. Although the complete reports with exhibits were not submitted, the main report regarding payments from Genmar Holdings to JMC reflects that Mr. Schaeffer did a similar analysis to Mr. Davis's based on the parties' payment history, but using slightly different numbers to arrive at the typical subjective payment period range. Docket No. 22-4 at 15-17. Mr. Schaeffer then analyzed the transfers at issue from the preference period to determine the payments that would fall outside the typical range, and in his opinion, therefore would not qualify for an ordinary course of business defense. Id. That forms the subjective prong analysis in Mr. Schaeffer's report. Id. The report next uses the RMA figures to set the typical industry payment date range and analyzes the transfers at issue against the industry range to arrive at the amounts that were not in the ordinary course by industry standards. Id. As to new value, Mr. Schaeffer adopted the position that JMC should not be entitled to any credit because it "is impossible to calculate the new value to which Defendant may be entitled under the Bankruptcy Code." Docket No. 22-4 at 15. He nonetheless computed the final amount "[i]f the Court determines that the Defendant has adequately proved its new value defense." Id. at 10.
So the expert reports differ in that Mr. Davis does not proffer a separate calculation under the objective prong for JMC, even though he did the analysis as a check on his subjective-prong numbers, while Mr. Schaeffer does put forward the objective prong calculation. Both experts, nonetheless, arrive at numbers that are fairly close to each other. The total transfers from Genmar Holdings to JMC for potential § 547 consideration amounted to $3,044,151 for the one-year period prior to filing of the bankruptcy petition. Mr. Davis concludes that after excluding ordinary course payments, the amount for further consideration is $1,612,185 and Mr. Schaeffer concludes it to be $1,626,206 (subjective prong) or $1,541,108 (objective prong). Docket Nos. 22-1 at 20, 22-4 at 10. After the new value analysis, Mr. Davis arrives at an amount of $313,293 and Mr. Schaeffer's amount is $313,307 (both prongs), although he maintains the position that the new value exemption should not be applied. Docket Nos. 22-1 at 20, 22-4 at 10.
Mr. Schaeffer's expert report for Defendant Operation Bass similarly presents his analysis of its § 547 defenses. The report covers transfers to Operation Bass from all five debtors. Docket No. 15-2 at 11-12. For each debtor, Mr. Schaeffer computes the amount that he contends can be avoided by the Trustee under the subjective prong and under the objective prong of § 547(c)(2). Id. It also presents the amounts that would be recoverable "[i]f the Court determines that the Defendant has adequately proved its New Value Defense." Id.
The Defendants seek to exclude Mr. Schaeffer's opinions in their entirety. Docket No. 13 at 18-19. They contend that Mr. Schaeffer's opinions are unreliable and make three arguments for exclusion. None of them, however, warrant precluding Mr. Schaeffer from testifying.
Defendants contend that Mr. Schaeffer's reliance on data from RMA's yearly report to determine industry norms on the "payment date range," without any independent validation or additional evidence renders his opinion unreliable. Id. at 10-13. They note that the RMA characterizes its statistics as providing "general guidelines" and not "absolute industry norms." See id; Docket No. 15-7 at 4. They contend that other courts have found that RMA data is not entitled to much weight. Docket No. 13 at 11-13.
While Defendants point to certain caveats that RMA included in its publication "The Annual Statement Studies: Financial Ratio Benchmarks, 2009-2010," the same document also claims that RMA is the "most respected source" of industry information and that "[f]or over 88 years, RMA's Annual Statement Studies® has been the industry standard for comparison financial data." Docket No. 15-7 at 3. As the Trustee notes, experts have used RMA data in other cases and contexts without the mere fact of that use rendering the expert testimony inadmissible. See, e.g., Blue Cross & Blue Shield of Minn. v. Wells Fargo Bank, N.A., Civ. No. 11-2529, 2013 U.S. Dist. LEXIS 78018, at *10-11, *22-24 (D. Minn. June 4, 2013) (declining to exclude expert testimony that used RMA data); Barber v. Murphy (In re Patriot Seeds, Inc.), No. 03-84217, 2010 Bankr. LEXIS 294, at *61-72 (Bankr. C.D. Ill. Jan. 20, 2010) (considering expert testimony that relied on RMA data, but ultimately finding it insufficient to meet the transferee's burden of making a showing on the objective prong of § 547(c)(2) because it did not correspond to the relevant narrow industry). Even in the case that Defendants cite in which Mr. Schaeffer's opinion was ultimately excluded by a bankruptcy appellate panel for grounds inapplicable here, the bankruptcy judge called the RMA "a well-established source for credit information."
Defendants point to several cases that they contend support their position. But none of those cases stand for the proposition that use of RMA data by itself renders an expert opinion inadmissible. Docket No. 13 at 10-13. They only show that certain applications of RMA data may be inappropriate in the context of a case or insufficient to meet a party's burden of proof under the circumstances involved. In Coleman v. American Concrete, Inc. (In re Sportsman's Link, Inc.), No. 07-10454, 2011 Bankr. LEXIS 2588, at *8-15 (Bankr. S.D. Ga. May 24, 2011), the bankruptcy judge primarily criticized an expert's methodology of valuing a debtor's inventory by reducing its balance sheet value to yield the industry norm in turnover ratio, as measured by RMA data. Significantly, the judge did not strike the expert's testimony as requested, but found it was entitled to "little weight" because of the methodology and its failure "to answer the crucial question of how inventory which [the expert] valued at $245,291.00 in December of 2007 sold for $960,105.19 in October of 2008." Coleman, 2011 Bankr. LEXIS 2588, at *14-15. In Lightfoot v. Amelia Maritime Services (In re Sea Bridge Marine, Inc.), 412 B.R. 868, 875-76 (Bankr. E.D. La. 2008), the bankruptcy court found the transferee's expert's analysis of the then-required objective prong of the "ordinary course of business" exception too "one-dimensional" and insufficient "to establish the industry practice with regard to marine fuel supply credit arrangements," because it only focused on the industry receivables collection period. The court did not find the testimony inadmissible because the expert had reviewed RMA data, but concluded that the defendant had failed to establish an industry benchmark to meet its burden of proof of establishing the ordinary course of business exception. Lightfoot, 412 B.R. at 876. In Terry Manufacturing Co. v. Bonifay Manufacturing (In re Terry Manufacturing Co.), 332 B.R. 630, 633-34 (M.D. Ala. 2005), the court did not exclude any testimony or criticize reliance on RMA data, but rather accepted statistics from RMA and another source as evidence of the industry payment period range in making a determination that the relevant periods for the debtor and defendant were significantly beyond the normal industry range.
The question therefore is whether Mr. Schaeffer's particular application of the RMA data in the context of the present case renders his opinion on the objective prong of the analysis under § 547(c)(2) so unreliable as to be inadmissible. The Court does not find that it does. Defendants' expert used the RMA data as a "sanity check" for his subjective prong analysis. While Mr. Davis did not use the RMA data in the same way as Mr. Schaeffer, because Mr. Davis did not proffer calculations under the objective prong, Mr. Davis's reference to the data nonetheless confirms that he did not find any issues with it that might render it inappropriate for consideration in the context of this case. Moreover, the number resulting from Mr. Schaeffer's analysis under the objective prong for JMC does not deviate greatly from the numbers that both experts arrived at under the subjective prong.
The section of the RMA report that Defendants quote in its entirety lists several reasons why the data "may not be fully representative of a given industry." Docket Nos. 13 at 3 (emphasis added), 15-7 at 4-5. Defendants have not identified any basis for finding that any of the potential issues with RMA data in fact are present in the data set on which Mr. Schaeffer relied to such an extent that renders his opinion unreliable. While additional sources of information might strengthen or increase the persuasive power of his analysis under the objective prong, the Court does not find that his reliance on RMA data alone, to determine the typical industry payment date range, renders that determination and the resulting calculation "so fundamentally unsupported" such that Mr. Schaeffer's testimony must be excluded. See Bonner, 259 F.3d at 929-30.
Defendants criticize Mr. Schaeffer's use of a standard deviation of 1 in his calculation of the normal payment period range for his calculation under the subjective prong of the ordinary course of business exception of § 547(c)(2). To calculate the subjective grace period range based on the debtor and transferee's transaction history, both Mr. Schaeffer and Mr. Davis did the following: took certain payment time periods from historical transactions between the parties; found the median time period of days X; and then determined the two numbers that are a particular standard deviation away from X in either direction to arrive at the minimum and maximum values that make up the range. Mr. Schaeffer used a standard deviation of 1, while Mr. Davis used a standard deviation of 1.5.
Defendants contend that Mr. Schaeffer lacked any legitimate explanation for his choice of a standard deviation of 1. In his report, Mr. Schaeffer noted that his consulting company has used that deviation in over 400 some cases and it "is generally considered to provide a more accurate assessment of what is the ordinary payment range." Docket No. 22-4 at 15-16. At his deposition Mr. Schaeffer confirmed his opinion that it is a conservative and reasonable approach. Docket No. 15-4 at 12. In other words, in his professional judgment and based on his experience, he considered a standard deviation of 1 to be appropriate.
Defendants do not point to any basis for finding that determination unreasonable or otherwise unreliable. Their expert, Mr. Davis, used a standard deviation of 1.5 with a claim that "[i]t is common for statisticians to use 1.5 standard deviations to measure statistically significant departures from the mean." Docket No. 22-1 at 19. While the experts disagree on the appropriate standard deviation to use, Mr. Schaeffer's use of a more conservative number does not appear unreasonable. Defendants do not point to any material that suggests otherwise.
With its last criticism, Defendants levy three different complaints against Mr. Schaeffer's proposed testimony. But none of them amount to anything more than disagreements about the evidence and his evaluation of it. The first two will be more appropriately handled through "[v]igorous cross-examination, presentation of contrary evidence, and careful instruction on the burden of proof." Daubert, 509 U.S. at 596. The last one is a non-issue.
Defendants first fault Mr. Schaeffer's analysis of management fees from Genmar Holdings to JMC. Docket No. 13 at 15-16. Apparently JMC employees performed various administrative and management tasks for Genmar Holdings and other businesses. JMC did not charge fees on an hourly or itemized task basis. Rather, Mr. Schaeffer's report describes testimony that at the end of the year JMC estimated the amount of time employees spent on work for Genmar Holdings and attributed an annual fee to Genmar Holdings. Docket No. 22-4 at 15. Mr. Davis treated that fee as payment for "new value" and divided up the annual amount evenly over the relevant time period to determine the value that JMC provided to Genmar Holdings. Docket No. 22-1 at 20. Mr. Schaeffer, however, took the position that such treatment incorrectly assumes that JMC's work for Genmar was distributed evenly over the year. Docket No. 22-4 at 15. While Defendants contend that the evidence supports a different conclusion, they have not shown an unreliability resulting in Mr. Schaeffer's position that warrants excluding his testimony.
Next, Defendants criticize Mr. Schaeffer's evaluation of certain evidence related to Defendant Operation Bass. Docket No. 13 at 16-18. Defendants question Mr. Schaeffer's assessment of a "check-swap" between Genmar Holdings and Operation Bass for $1,252,478.52. According to Mr. Schaeffer's review of the evidence, Operation Bass provided money to Genmar Holdings for the stated purpose of covering the rent on leased tournament boats and awards. Docket No. 15-2 at 12. Similarly, he found that Genmar Holdings provided money to Operation Bass for the stated reason of payment of advertising expenses and sponsorship fees. Id. Defendants point to testimony that the swap was part of an arrangement needed to address some sales tax laws implicated by a fishing tournament organized by Operation Bass. Docket Nos. 13 at 6, 15-4 at 22. So, according to the Defendants, the payments were for a tax benefit, which presumably they contend would be new value under the contemporaneous exchange provision of § 547(c)(1). Mr. Schaeffer, however, took the position that the stated purposes show that the payments were "in payment of unrelated debts owed that existed prior to the respective payments, these payments cannot be part of a contemporaneous exchange defense." Docket No. 15-2 at 11. Defendants also disagree with Mr. Schaeffer's evaluation that Operation Bass's collection efforts from third parties differed from its collection effort from Genmar Holdings.
Finally, Defendants contend that Mr. Schaeffer did not treat the subjective and objective prongs as alternative options for a defendant to establish an ordinary course of business defense as the law allows, but rather assumed that both must be met. Docket No. 13 at 18. This argument is unsubstantiated. Given that it is Defendants' burden to establish a § 547(c)(2) defense, they may choose to proceed under either the subjective or objective prong. Thus, their expert might only need to address one. In contrast, Plaintiff would need to be ready to respond to a defense raised under either prong. Consequently, it was appropriate for Mr. Schaeffer's report to conduct an analysis under both.
Defendants have not presented any arguments that warrant excluding Mr. Schaeffer's testimony for lack of reliability.
Arthur C. Cobb is a certified public accountant and president of Cobb & Associates, Ltd. Docket No. 20-2 at 55. He provided an expert report at the request of certain Defendants in connection with their defenses to the Trustee's claims of preferential and fraudulent transfers. Docket Nos. 20-1, 20-2. The Trustee's motion does not question his qualifications, but seeks to exclude his testimony for lack of reliability.
Arthur C. Cobb provided an expert report on or around October 11, 2012 to rebut the
Trustee's contention that the debtors were insolvent at the time of certain transfers that the Trustee seeks to avoid. One of the showings that the Trustee must make to avoid a transfer under 11 U.S.C. § 547(b) is that the debtor was insolvent at the time of the transfer. See 11 U.S.C. § 547(b)(3); Clay v. Traders Bank of Kansas City, 708 F.2d 1347, 1349 (8th Cir. 1983). Similarly, under 11 U.S.C. § 548 a fraudulent transfer may be avoided under certain scenarios, one of which includes the requirement that the debtor "was insolvent on the date that [the] transfer was made or [the] obligation was incurred, or became insolvent as a result of such transfer or obligation."
Under the Bankruptcy Code's definition, an entity debtor, other than a partnership or municipality, would be deemed "insolvent" if the sum of its debts is greater than all of its "property, at a fair valuation, exclusive of—(i) property transferred, concealed, or removed with intent to hinder, delay, or defraud such entity's creditors; and (ii) property that may be exempted from property of the estate under section 522 of this title." 11 U.S.C. § 101(32). In the context of a going concern, the "fair valuation" represents the "fair market price of the debtor's assets that could be obtained if sold in a prudent manner within a reasonable period of time to pay the debtor's debts." Lawson v. Ford Motor Co. (In re Roblin Indus.), 78 F.3d 30, 35 (2d Cir. 1996). If, however, the debtor is in such distress that it is no longer viable, the liquidation value of its assets may more accurately reflect a fair valuation. See Beckman v. Von Christierson (In re CSI Enters.), 220 B.R. 687, 690 (Bankr. D. Colo. 1998). A variety of valuation methodologies have been used to determine fair value of a going concern. See Iridium IP LLC v. Motorola, Inc. (In re Iridium Operating LLC), 373 B.R. 283, 344 (Bankr. S.D.N.Y. 2007) (identifying the approaches of "(a) actual sale price, (b) discounted cash flow method, commonly referred to as DCF, (c) adjusted balance sheet method, (d) market multiple approach, (e) comparable transactions analysis, and (f) market capitalization").
The Trustee here seeks to avoid various transfers occurring between June 2007 and May 2009, and he contends that the debtors were insolvent during that time period. Genmar Holdings filed for bankruptcy on June 1, 2009. In his expert report, Mr. Cobb summarizes his opinions that during the period from June 2007 to May 2009, Genmar Holdings was a "going concern" and its assets exceeded its liabilities such that it was not insolvent. See Docket No. 20-1 at 4-5. His report also references the financial situation of each of the other Defendants, i.e. the subsidiaries or related entities to Genmar Holdings. See Docket No. 20-2 at 27-68.
For Genmar Holdings, Mr. Cobb's report presents a primary solvency analysis incorporating an adjusted balance sheet approach. Docket No. 20-1 at 49-50 ("We have analyzed Genmar's reported Balance Sheets and other documents and information to identify assets and liabilities and to estimate fair valuation" and "have adjusted Genmar's reported Balance Sheet as of May 30, 2009 ... to reflect certain estimates of fair valuation."). For his balance sheet analysis, Mr. Cobb started with Genmar Holding's balance sheets created in accordance with Generally Accepted Accounting Principles ("GAAP"). See id. at 52-53. He then made upward adjustments for the numbers as of May 30, 2009 in two asset categories: (1) land, buildings, and operating equipment and (2) trade names, trademarks, and intellectual property. See Docket No. 20-1 at 53. He added $21,514,000 to the first category and $142,611,000 to the second in order to reflect their "fair" rather than "book value." Id. Under the Bankruptcy Schedules, Genmar Holding's liabilities exceeded its assets by $68,208,112 as of June 1, 2009. Mr. Cobb concluded that his two adjustments to the balance sheet numbers results in Genmar's assets exceeding its liabilities by $95,916,888 as of June 1, 2009.
Mr. Cobb's report also includes a brief section titled "VALUATION" in which he states that Genmar Holding's "[a]ssets at fair value were analyzed by application of the discounted cash flow approach to valuation." See Docket No. 20-2 at 24-26. The section starts by describing a valuation for the "Boat Group" as of June 30, 2007 conducted by a third party. Id. at 24. Without any specification of numbers used in the calculations, under a subsection titled "Discounted Cash Flow," the report states that "[r]epresentative estimates of prospective cash flow indicate generation of earnings and indicate equity value (assets exceed liabilities), including in the range of greater than approximately $50,000,000 as of May 30, 2009." Id. at 25. The section goes on to discuss in general terms the reasons to expect amounts that contribute to value to increase and for those that detract from value to decrease for Genmar Holdings. Id. at 25-26.
The Trustee seeks to exclude Mr. Cobb's testimony at trial on Daubert grounds. For purposes of his Daubert motion, the Trustee does not fault Mr. Cobb's "going concern" analysis. Rather, the Trustee focuses on and contends that the valuation part of Mr. Cobb's solvency analysis is so unreliable that his opinions must be excluded. The Trustee contends that Mr. Cobb's solvency analysis of Genmar Holdings and any testimony as to the solvency of its subsidiaries should be excluded. Mr. Cobb's analysis of Genmar Holdings' assets and liabilities under each of the two approaches used—adjusted balance sheet and discounted cash flow—will be evaluated first, followed by a review of his treatment of the subsidiary debtors.
Under the adjusted balance sheet approach, the debtor's reported balance sheets are used as a starting point. See, e.g., Silverman v. Paul's Landmark, Inc. (In re Nirvana Rest.), 337 B.R. 495, 506 (Bankr. S.D.N.Y. 2006). But balance sheets often only reflect the "book value" of items and may not cover the appropriate mix of items to capture a fair valuation of the debtor and so adjustments, additions, and deletions may be necessary. See Orix Credit Alliance v. Harvey ex rel. Lamar Haddox Contractor (In re Lamar Haddox Contractor), 40 F.3d 118, 121 (5th Cir. 1994) (explaining that "[f]inancial statements reflect the book value of assets, ordinarily the cost of the property reduced by accumulated depreciation," and fair value "is not determined by asking how fast or by how much it has been depreciated on the corporate books," but by estimating the market value of the debtor's assets); In re Merry-Go-Round Enterprises, Inc. v. The CIT Group/Commercial Serv., Inc., 229 B.R. 337, 342-343 (Bankr. D. Md. 1999) (discussing some of the reasons balance sheets in accordance with GAAP do not correspond to the fair valuation of a debtor's assets and liabilities as referenced by the language of 11 U.S.C. § 101(32)).
The Trustee argues that Mr. Cobb's balance sheet analysis of Genmar Holdings should be excluded because Mr. Cobb used a flawed methodology, or in the alternative, because Mr. Cobb's upward adjustment of two categories of assets was "illogical and unreliable." See Docket No. 18 at 20-31. In making his methodology argument, the Trustee contends that Mr. Cobb's approach fails to meet the valuation standards of the American Institute of Certified Public Accountants' ("AICPA") for two reasons. Id. at 20-24. But neither of the arguments warrants exclusion.
First, the Trustee contends that AICPA requires a valuation professional doing a valuation to reach a "conclusion of value" or a "calculated value" of the business and Mr. Cobb did not do so for Genmar Holdings. Docket No. 18 at 16-17. In particular, the Trustee notes that Mr. Cobb did not reach a specific conclusion about the amount by which he believes that Genmar Holdings' assets exceeded its liabilities, but only concluded that the company's assets exceeded its liabilities. But the issue to which Mr. Cobb's testimony relates is that of solvency in the context of 11 U.S.C. §§ 547-548 and the Trustee does not point to any case or other authority
Second, the Trustee argues that Mr. Cobb essentially used the "book values" of the assets and liabilities rather than the fair market value, because he only adjusted two asset values. Docket No. 18 at 24-26. But even though Mr. Cobb only made two adjustments, he did consider and conclude that for the other categories, the reported values represent the fair value. Consequently, the Court does not find the methodology flawed, even if his conclusions may be open to valid challenges. Cf. Premier Entm't Biloxi LLC v. U.S. Bank Nat'l Assoc. (In re Premier Entm't Biloxi LLC), 445 B.R. 582, 638-40 (Bankr. S.D. Miss. 2010) (reviewing, with approval, an expert's application of the adjusted balance sheet approach in which two notable adjustments to the GAAP-compliant balance sheet values had been made). To the extent the Trustee contends that other adjustments should have been made or that the amount of the adjustments should have been different, those are issues for cross-examination and presentation of contrary evidence so that the jury can reach its decision on insolvency of Genmar Holdings.
After raising his methodology challenges, the Trustee also contends that Mr. Cobb's particular application of the adjusted balance sheet approach was unreliable. In particular, the Trustee questions the appropriateness of the timing of the appraisals Mr. Cobb used in adjusting the value of the real estate and intellectual property asset categories. See Docket No. 18 at 26-31. These challenges relate to the factual bases of Mr. Cobb's opinion and generally such challenges go to the credibility, and not admissibility, of the expert's testimony. Bonner, 259 F.3d at 929-30. The Trustee raises some valid criticisms about the factual bases for Mr. Cobb's adjustments, but they will be more appropriately directed to the jury at trial.
The Trustee contends that Mr. Cobb's discounted cash flow analysis cannot be shown to be reliable, because he does not provide any numbers used to reach his determination of an equity value "greater than approximately $50,000,000 as of May 30, 2009" for Genmar Holdings. See Docket No. 18 at 15-20. The Trustee also argues that Mr. Cobb references inadequate sources of data for his discounted cash flow analysis. Id. A discounted cash flow analysis entails estimating the periodic cash flow that a company will generate over a discrete time period, determining the "terminal value" of the company at the end of the period, and discounting each of the cash flows and terminal value to determine the total value as of the relevant date. See Bank of Am. v. 203 N. LaSalle St. Pshp., 195 B.R. 692, 696 (N.D. Ill. 1996); Tronox Inc. v. Kerr McGee Corp. (In re Tronox Inc.), 503 B.R. 239, 316-17 (Bankr. S.D.N.Y. 2013). An appropriate discount rate needs to be used to discount the projected cash flows and terminal value. See Bank of Am., 195 B.R. at 696. An appropriate rate may be the projected weighted average cost of capital for the company. See In re Mirant Corp., 334 B.R. 800, 817 (Bankr. N.D. Tex. 2005).
The Trustee correctly notes that Mr. Cobb's report does not disclose the values that Mr. Cobb used for his discounted cash flow calculation. In particular, the report does not show the projected periodic cash flows, the terminal value, or the discount rate that Mr. Cobb used to reach his conclusion that the value of Genmar Holdings was at least $50 million. At his deposition, Mr. Cobb testified that he made a number of "projections that varied by the top line revenues" and discussed several considerations. See Docket No. 20-5 at 5-6 (Cobb Dep., 176-179). He could not recall the discount rate used. Id. at 7 (Cobb Dep., 181). Defendants have not pointed to any place where Mr. Cobb actually shows his calculations either during discovery or in response to the present motion. Thus the reliability of his calculation cannot be assessed by the Court and has not otherwise been shown by the Defendants. The lack of information also limits the Trustee's ability to reasonably probe or counter Mr. Cobb's claim in a particularized manner. The omission cannot be overlooked, especially because Mr. Cobb's discounted cash flow analysis is for Genmar Holdings' value as of May 30, 2009—a point in time when its bankruptcy filing was imminent. Docket No. 20-5 at 15 (Cobb Dep., 215:5-17). Therefore, the Court will exclude Mr. Cobb's testimony regarding his discounted cash flow analysis and his resulting determination of a value of at least $50,000,000. To be specific, Mr. Cobb may not testify to the content of the "valuation" section presented on pages 82 to 84 of the report. See Docket No. 20-2 at 24-26.
The Trustee seeks to preclude Mr. Cobb from testifying regarding the solvency of the debtor entities related to Genmar Holdings, arguing that Mr. Cobb did not conduct a solvency analysis of each of them separate from that of the parent company. Docket No. 18 at 31-33. At his deposition, Mr. Cobb stated that "as went Genmar Holdings, I believe so go[] the subsidiaries." Docket No. 20-3 at 6 (Cobb Dep., 18:1-6). He acknowledges that he only "generally" analyzed the assets-versus-liabilities position of the subsidiaries. Id. at 6-7 (Cobb Dep., 20:5-21:4). His report lists the subsidiaries' reported numbers for stockholder equity and intercompany balances for 2008 and 2009. See Docket No. 20-2 at 27, 41-51. At his deposition, he explained that those numbers show that assets exceeded liabilities for the subsidiaries. See Docket No. 20-5 at 8 (Cobb Dep., 186-188).
The statutory language of 11 U.S.C. §§ 547 and 548 implies that the insolvency showing that the Trustee must make for his claims of preferential and fraudulent transfers is with regard to the particular debtor that made the challenged transfer. Thus, to the extent the Trustee seeks to avoid a transfer from a particular subsidiary of Genmar Holdings, it is the solvency of the subsidiary that is at issue. See 11 U.S.C. §§ 547-548; Am. Classic Voyages Co. v. JP Morgan Chase Bank (In re Am. Classic Voyages Co.), 367 B.R. 500, 503 n.5 (Bankr. D. Del. 2007) (noting that it is the transferor entity's solvency that is relevant to the preference analysis). Moreover, a parent company's solvency does not necessarily imply solvency of its subsidiaries. Askanase v. Fatjo, 130 F.3d 657, 669-70 (5th Cir. 1997).
Defendants have not shown that Mr. Cobb conducted a solvency analysis that passes the Daubert check for the individual debtors other than Genmar Holdings. Mr. Cobb's report acknowledges that typically balance sheets prepared in conformance with GAAP "do not include all assets, property, and liabilities, debts, and do not include assets at fair valuation," and only provide a "starting point." Docket No. 20-1 at 49. But for the subsidiaries, the report only quotes financial statement numbers without analysis reflecting the absence of any need for further adjustments. The Defendants have also not pointed to any analysis by Mr. Cobb that shows that in the context of this case he determined, with verifiable reliability, that the solvency of the parent company does imply the solvency of any individual subsidiary. The Court will therefore preclude him from providing testimony on the solvency question for the individual debtor entities other than Genmar Holdings.
Based on the files, records, and proceedings herein, and for the reasons stated above, IT IS ORDERED THAT:
