KATHERINE B. FORREST, District Judge.
In April 2009, plaintiff Development Specialists, Inc., as the Plan Administrator for the now defunct law firm, Coudert Brothers LLP ("Coudert"), brought a one-count action for so-called negligent appraisal against Weiser Realty Advisors LLC ("Weiser"), Gerald R. Sanders and John W. Houck. Defendants have now moved for summary judgment and to exclude the testimony of plaintiff's appraisal expert. For the reasons set forth below, both motions are GRANTED.
Founded in 1853, Coudert was a storied, international law firm headquartered in New York. In August 2005, faced with declining profitability, the equity partners of the firm voted to wind up its affairs. (Decl. of Charle B. Keefe in Opp. to Defs.' Mot. for Summary Judgment ("Keefe Decl.") at ¶¶ 3, 8; Pl.'s Response to Defs.' Rule 56.1 Statement (" 56.1 Response") No.2.) At the time, the firm was also considering a potential sale of its New York practice to the law firm Baker & McKenzie. (56.1 Response No.2.)
While the firm was contemplating a transaction with Baker & McKenzie, Coudert engaged Weiser to provide a valuation of Coudert's remaining interest in the lease for its New York City office space at 1114 Avenue of the Americas (the "Grace Building"). (Id. Nos. 1-2.) Weiser was made aware that Coudert was considering a merger or consolidation with Baker & McKenzie when it was retained. (See Compl. at ¶ 72; Answer at ¶ 72.) Coudert's lease was for floors 4, 37 and 40-45 of the Grace Building and expired May 30. 2013. (Compl. at ¶ 29; Answer at ¶ 29.) At the time of the appraisal, Coudert was subleasing portions of its premises on the 37, 40, 41 and 45
Weiser issued its Complete Appraisal in a Self-Contained Report of the Leasehold Estate Held by Coudert Brothers LLP on August 19, 2005, valuing the leasehold interest at $18 million as of September 1, 2005. (Id. 6; Decl. of William J. Kelly in Support of Mot. for Summary Judgment ("Kelly Decl,") Ex. C.) In its cover letter to that report, Weiser stated that its valuation was based on the following considerations:
(Kelly Decl. Ex. C at DSI 742.) According to the report, Weiser used those considerations to determine the fair market rental rate for the leased premises. It then took the cash flows that would be generated at that market rental rate, subtracted the current contractual cost to lease the space (i.e. the rent Coudert was actually paying) and added the risk-adjusted profits attributable to the portions of the space being sub-leased to determine the total cash flow benefit of the leasehold position. Finally it calculated the present value of the aggregate cash flows. (See id. at DSI 759, 771.) Weiser certified that its appraisal technique accorded "with the Uniform Standards of Professional Appraisal Practice as promulgated by the Appraisal Standards Board of the Appraisal Foundation and adopted by the Appraisal Institute, and the Code of Professional Ethics of the Appraisal Institute." (Kelly Decl. Ex. C at DSI 747; see also Compl. at ¶ 66.) Weiser also certified that "[t]he statements of fact contained in this appraisal and upon which the analyses, opinions, and conclusions expressed herein are based are true and correct." (Kelly Decl. Ex. C at DSI 747.)
Weiser's report clearly reflects its awareness — alleged by plaintiff in the First Amended Adversary Complaint ("Complaint") (see Compl. ¶ 72) — that at the time of the appraisal Coudert was looking to merge with or be acquired by another firm who would assume the lease. (See id. at DSI 767 ("the space is well suited to the use of an acquiring entity"), 769 (presuming that "the acquiring entity will take the space in its entirety, rather than attempting to sublease, or otherwise dispose of portions of the space"), 771 ("We believe that the terms of the lease give the tenant the right to merge or be acquired without any obligation arising to the landlord for a sharing of revenue of profits. ...").)
Shortly after Weiser issued its report, Baker & McKenzie entered into an agreement to take over much of the Coudert office space in New York. Although initially planned as a sublease of the space, the final agreement was a three-way transaction involving the landlord, whereby Baker signed a direct lease. As part of the transaction, Coudert received approximately $16 million for its lease interest, of which $8 million went to the landlord consistent with Coudert's lease. (See 56.1 Response No. 16.)
In September 2006, Coudert filed for bankruptcy protection. (Id. at 17; compl. at ¶ 1.) The Bankruptcy Court appointed an examiner, former New York City Controller Harrison J. Goldin, to investigate, among other things, Coudert's pre-petition transactions, including the sale of its offices. (See Decl. of John G. McCarthy in Opp. to Defs.' Mot. for Summary Judgment ("McCarthy Decl.") at Exs. 1-2.) The report submitted by the Examiner on that part of his investigation evaluates the Weiser appraisal in light of independent market data and concludes that the market rent Weiser used was "on the higher point" of "the then prevailing market range." (Kelly Decl. Ex. E at 37-38.)
Defendants engaged the valuation firm of Duff & Phelps, and specifically Managing Director Brian E. Ginsburg, a certified real estate appraiser and member of the Appraisal Institute, to review and opine on Weiser's appraisal report. (Kelly Decl. Ex. D at 3; see also 56.1 Response No. 21.) Ginsburg's report begins with a discussion of the Uniform Standards of Professional Appraisal Practice ("USPAP"), which he states are "generally considered the quality control standards applicable for appraisal analysis in the United States, including real property." (Kelly Decl. Ex. D at 5-6.) According to Ginsburg, USPAP requires that the appraiser "be familiar with and correctly utilize valuation methods that are acceptable to both other appraisers and the intended users of the appraisal." (Id. at 6.) The commonly accepted professional standards for determining the fair market value of a leasehold interest, Ginsburg continues, are: (1) analysis of the contract rent as of the valuation date; (2) collection of comparable lease data; (3) projection of market rental rates for a period consistent with the lease term; and (4) discounted cash flow analysis based on a comparison of the contract rate and the market rental rate over the lease term. (Id. at 7-8.)
After laying out the applicable standards, Ginsburg evaluates Weiser's adherence to each of those standards. (Id. at 8-9.) He concludes that Weiser "follow [ed] the most commonly accepted professional standards in leasehold valuation," "applied the valuation methods needed to result in a credible and adequately reliable value relative to the intended use, and users, of the Appraisal Report," and "conducted its valuation of the leasehold estate of Coudert in accordance with USPAP as promulgated by [The Appraisal Foundation], and did not depart from the standards set forth in USPAP." (Id. at 9-10.)
For its part, plaintiff engaged the firm of Kahn, Hoffman & Hochman, LLP, through its partner Enid Hoffman, to review Weiser's report and conduct an independent appraisal of the Coudert leasehold position. (See Kelly Decl. Ex. F.) Hoffman also prepared a rebuttal report in response to Duff & Phelps's report. (See Kelly Decl. Ex. G.) Unlike Ginsburg, neither Hoffman nor her partner were certified real estate appraisers. (See Kelly Decl. Ex. H at 33:22-34:5.) Hoffman does not identify any particular professional standard for valuing leasehold estates in either of her reports, other than citing Internal Revenue Service Revenue Ruling 59-60 for several general valuation guidelines applicable to all closely-held businesses. She states that pursuant to Revenue Ruling 59-60, "the valuation of closely-held companies should consider the most applicable valuation procedures for the type of company as well as the nature of the stock being valued" but then fails to specify what "the most applicable valuation procedures" are in this case. (Kelly Decl. Ex. F at 4-5; see also Ex. H at 95:10-17 ("Q: What is Revenue Ruling 5960? A: That's the IRS ruling that you consider the most applicable valuation method for you. It doesn't specifically identify which valuation. It was just the most applicable.").)
In her initial report, Hoffman concludes that while Weiser's cash flow projections "would be accepted in their final form as complete and correct []," its valuation "does not produce the entire economic benefit to the landlord" because the building's value would have increased as a result of a potential sale or refinancing of the building. (Id. at 7, 11.) Hoffman's appraisal uses the Weiser cash flow projections but then applies an income capitalization method purportedly to calculate the added value due to "the availability of additional financing and possible sale." (Id. at 7.) She takes "the annualized 4
Hoffman's rebuttal report reaches a difference conclusion. While it characterizes the cash flow analysis done by Weiser and confirmed by Duff & Phelps as "mathematically correct," it takes issue with two of Weiser's assumptions (in addition to Weiser's "basic premise that the total value of the lease is the discounted value of the increased cash flow," which Hoffman disputed in her initial report). (Kelly Decl. Ex. G at 1.) The first assumption relates to the cash flows attributable to the Thyssen Citgo Petcoke Corporation sub-lease, which, according to Hoffman (without explanation), should be "mark[ed] [] to a market rate lease and adjust [ed] for operating escalators." (Id.)
The second assumption is that smaller office spaces typically lease for slightly less per square foot than larger spaces. Hoffman concludes that because there was an 8% vacancy rate in the midtown office market in July 2005 (she incorrectly says the "1995 Midtown market") and no new space on the market, there were limited opportunities for large tenants to rent "high floor, well configured, well appointed class A space" and so any such space would have rented at a higher price. (Id. at 2.) Hoffman does not explain how she concludes from the 8% figure — which says nothing about the size or quality of the available space — that the vacant space is disproportionately small or of lesser quality. Based on her revision of Weiser's assumption, Hoffman adds $3.00 per square foot to the net rent calculated by Weiser, which addition she states would yield "an extra $386,571 per year for a present value of $18,284,835 using Weiser's 4.5% discount rate." (Id. (emphasis added).) Hoffman does not indicate in her report how an extra $386,571 per year for each of the remaining eight years on Coudert's lease could come to more than $18 million. Nonetheless, she determines that Weiser's discounted cash flow analysis should have yielded $36 million in value, not $18 million. (Id. at 2-3.)
On Hoffman's income capitalization point, her rebuttal report uses a different capitalization rate than her initial report — 5.5% instead of 5.25% — but provides no explanation for the change. (Compare id. at 2 with Kelly Decl. Ex. F at 11.) The rebuttal report also points to the October 2006 sale of the Grace Building for $998,669,016 as "proof of [the income capitalization] theorem." (Id. at 2-3.) "Assuming the building was sold at a 5.5% cap rate," Hoffman asserts, the net operating income attributable to the whole building would be $54,926,796. The portion of that income attributable to the Coudert lease, she states, is 5.38%, using what she says is Weiser's projection of the yearly cash flows from the lease. (Id.) Based on that share, she calculates the portion of the total October 2006 sale price of the Grace Building that corresponds to the Coudert lease, which portion she determines to be $53,716,255. (Id.) Lastly, "[s]ince the typical sale analysis runs for 11 years," she reduces that amount by 3/11 or 27.27% — presumably because as of September 2005 there were approximately 8 years left on the Coudert lease — to find a rounded value of $39 million for the leasehold interest. (Id.) Hoffman's rebuttal report offers both that figure and the $36 million figure from the augmented cash flows as her final valuation.
Hoffman was deposed on February 10, 2011. (See Kelly Decl. Ex. H.) When she was asked at the beginning of the deposition whether she had examined the Weiser appraisal for each of the errors alleged in the Complaint, she said that she had not. (Id. at 13:11-14.) She also failed to identify any professional standards upon which she had relied, despite being asked to do so three separate times.
(Id. at 25:10-30:15 (emphasis added).) Hoffman subsequently admitted that she had not considered whether Weiser's appraisal departed from any professional standards when she wrote her reports or prepared for her deposition. Indeed, she conceded that she had not even reviewed those standards prior to doing her valuation or giving testimony.
(Id. at 54:23-57:17.) As for her report, Hoffman stated that it is not an "appraisal report" and therefore need not utilize the USPAP standard. (Id. at 34:22-35:9.)
Instead, Hoffman testified that her approach of calculating the value of the leasehold interest to the landlord (see id. at 85:23-86:2) was an idea that she and her late partner came up with.
(Id. at 19:8-20:16 (emphasis added).) Hoffman acknowledged several times that she was not aware of the negotiations between Coudert and Baker & McKenzie regarding assumption of the leases when she wrote either of her reports. (Id. at 51:6-12; 86:3-20; 113:2-9.)
Hoffman also admitted that the $5 to $8 million difference in valuation between her first report ($31 million) and her second report ($36 to $39 million) was not the result of any new information or materials made available to her in the interim. (Id. at 46:2-47:19; see also 120:17-121:4 (describing why she provided "a range" of value in her rebuttal report).) While she testified that the second report was the correct one, she acknowledged that she had taken no steps to withdraw the first report or to advise anyone that the later one was more accurate. (Id. at 119:18-120:16.)
Discussing the $18 million in additional income Hoffman's rebuttal report derives from revising Weiser's assumption that larger office spaces would fetch slightly less rent, Hoffman testified that the $18 million was not based only on the eight years left in Coudert's lease. Rather, she explained, that figure is the amount of additional income that will be earned "over a 40-50 year period." When defense counsel clarified that such amount included income collected "[o]ver an extended period of time going well beyond the lease," Hoffman responded "Oh, absolutely." (Id. at 92:13-20.)
The parties spend a fair amount of briefing on both the motions to exclude and for summary judgment arguing a question irrelevant to the ultimate decision on either motion: Whether plaintiff's action is for appraisal malpractice or negligent appraisal. (Defs.' Reply Mem. Summary Judgment at 4-5; Defs.' Reply Mem. Exclude at 6-7; Pl.'s Mem. Opp. Exclude at 10-11; Pl.'s Mem. Opp. Summary Judgment at 4-5.) However characterized, the question raised by the Complaint — and the focus of the record before the Court — is whether defendants failed to exercise due care when they appraised Coudert's lease interest in the Grace Building. (See Compl. at ¶¶ 75-76.) In support of its affirmative position and in opposition to defendants' motion for summary judgment, plaintiff has proffered Hoffman's reports and deposition testimony (see Kelly Decl. Exs. F, G), which reports and testimony defendants now seek to exclude under Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993).
Under Daubert, the district court has an obligation to act as a gatekeeper with respect to expert testimony, whether proffered at trial or on a motion for summary judgment. See, e.g., Major League Baseball Props., Inc. v. Salvino, 542 F.3d 290, 311 (2d Cir. 2008); Raskin v. Wyatt Co., 125 F.3d 55, 66 (2d Cir. 1997). As the Supreme Court stated in Kumho Tire v. Carimichael, 526 U.S. 137 (1999):
Id. at 152. Bearing on the reliability part of the gatekeeping function are the factors identified in Daubert: (1) Whether a theory or technique can be or has been tested; (2) whether it has been subjected to peer review and publication; (3) whether the particular technique has a high known or potential rate of error and whether there are standards controlling its operation; and (4) whether the theory or technique is generally accepted in the relevant scientific community. Kumho, 526 U.S. at 147-49 (holding that the factors set forth in Daubert apply to "technical" and "specialized" knowledge, not just "scientific" knowledge); Amorgianos v. Nat'l Railroad Passenger Corp., 303 F.3d 256, 266 (2d Cir. 2002). The reliability inquiry is context-specific, and the question before the Court is "not the reasonablenss [of the expert's methodology] in general," but rather "the reasonableness of using such an approach to draw a conclusion regarding the particular matter to which the expert testimony was directly relevant." Id. at 153-54; accord RFMAS, Inc. v. So, 748 F.Supp.2d 244, 250 (S.D.N.Y. 2010). Regardless of context, however, it is well settled that speculative or conjectural expert testimony is properly excluded on a motion for summary judgment. See, e.g., Salvino, 542 F.3d at 311.
Here, the methodology Hoffman employs is unreliable both in light of the dispositive issue in this case and on the face of the Daubert factors. The question presented by the Complaint is whether Weiser exercised due care given the commonly accepted professional standards in the industry. Accordingly, Hoffman's total failure to engage with those standards either in her own appraisal or in her assessment of Weiser's report makes her approach particularly unreasonable. See Kumho, 526 U.S. at 153-54; RFMAS, Inc., 748 F. Supp. 2d at 250. Hoffman's technique also runs afoul of the Daubert factors, which recognize "whether there are standards controlling [the technique's] operation" and "whether the theory or technique is generally accepted in the relevant scientific community" as bearing on the reliability of expert testimony. See, e.g., Kumho, 526 U.S. at 147-49.
At her deposition, Hoffman was unable to identify any professional standards on which she had relied in preparing her reports, despite being asked repeatedly to do so. (Id. at 25:10-30:15.) She admitted that she had not even considered whether Weiser's appraisal departed from the professional standards, and, indeed, conceded that she did not even know what the standards were. (Id. at 54:23-57:17.) She also failed to cite any professional literature in support of her position. (Id. at 53:5-17.)
Instead, Hoffman testified that her methodology of calculating the value of the leasehold interest to the landlord (see id. at 85:23-86:2) (which used Weiser's cash flow data as a starting point) was based on "the idea" of one of her partners, derived from his personal experience owning a large number of properties in the Manhattan area. (Id. at 19:8-20:16.) That idea — in addition to departing from the USPAP standards, which Hoffman admitted (see id. at 34:22-35:9; see also Kelly Decl. Ex. D) — was also speculative, based on her conjecture that the landlord in September 2005 might potentially have sold or refinanced the Grace Building (see Kelly Decl. Ex. F at 7, 11).
Summary judgment is proper only "if the evidence, viewed in the light most favorable to the party against whom it is entered l demonstrates that there are no genuine sues of material fact and that the judgment [is] warranted as a matter of law." Barkley v. Penn Yan Central School Dist., No. 09-3975-cv, 2011 WL 3890442, at *1 (2d Cir. Sep. 6, 2011) (internal quotation marks omitted). "Although the burden is upon the moving party to demonstrate that no genuine issue respecting any material fact exists, the non-moving party nonetheless must come forward with specific facts showing that there a genuine issue of material fact for trial." Id. (internal citation and quotation marks omitted); accord Caracciola v. City of New York, No 95 Civ. 3896 CSH, 1999 WL 144481, at *3 (S.D.N.Y. Mar. 17, 1999) ("the non-movant must offer `concrete evidence from which a reasonable juror could return a verdict in his favor'" (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256 (1986))). It is well-settled that conjecture and speculation are insufficient to create a genuine issue of fact. See, e.g., Barkley, 2011 WL 3890442, at *1. Moreover, not every disputed fact is material. "'Only disputes over facts that might affect the outcome of the suit under the governing law will properly preclude summary judgment.'" Matthews v. Malkus, 377 F.Supp.2d 350, 355-56 (S.D.N.Y. 2005) (quoting Anderson, 477 U.S. at 248).
It is well known that a district court should not resolve genuine and material factual disputes on a motion for summary judgment. Where, as here, however, the non-movant has failed to put forth any admissible evidence creating a material question of fact, summary judgment is appropriate.
The Court has reviewed the parties' Rule 56.1 Statement and Counterstatement and the accompanying record. With respect to critical factual propositions put forth by defendants (including regarding Weiser's methodology, the applicable professional standards and whether Weiser departed from them), plaintiff simply "punts" — i.e. it neither admits nor denies the facts, but instead states that they are not supported by admissible evidence or are immaterial to plaintiff's claim. (See 56.1 Response Nos. 5, 7-8, 11-15, 22 24, 26-30.)
While it is certainly true that Local Rule 56.1 requires proposed uncontested facts to be supported by admissible evidence, defendants have met that burden. Defendants rely on Weiser's description of its appraisal methodology in its report as evidence of the methodology Weiser actually used. (See 56.1 Statement Nos. 5, 7-8, 11-15, 24; see also Defs.' Mem. Summary Judgment at 4-6.) Plaintiff responds that Weiser's report is inadmissible for that purpose. (See 56.1 Response Nos. 5, 7-8, 11-15, 24.) Such a response is inapposite, however, because for all intents and purposes the Complaint incorporates and adopts the methodology stated in the report as truthful. The premise of plaintiff's claim is that Weiser did what it said it did in its report, but that what it did was negligent. (See Compl. at ¶¶ 61-66, 76-79.) Put another way, plaintiff does not dispute in the Complaint — nor has it disputed at any point during the prosecution of its case
Nor can plaintiff convince the Court that evidence offered by defendants and their expert regarding the applicable professional standards and Weiser's adherence to them are immaterial to plaintiff's claim. (See 56.1 Response Nos. 22-24, 26-30.) While the single claim in the Complaint is characterized as one for "Negligent Appraisal," the supporting allegations state a professional negligence cause of action. (See Compl. at ¶¶ 75 ("By virtue of the contract between Coudert and Weiser and/or the Code of Professional Ethics of the Appraisal Institute, Defendants owed Coudert a duty to perform the appraisal with due care and to give correct information to Coudert."), 76 ("Defendants failed to perform the appraisal with due care."))
The law is clear that "[a] claim of professional negligence requires proof that there was a departure from the accepted standards of practice and that the departure was a proximate cause of the injury." Matthews, 377 F. Supp. 2d at 356. The same elements apply to a claim for professional malpractice. See VTech Holdings Ltd. v. Pricewaterhouse Coopers LLP, 348 F.Supp.2d 255, 262 (S.D.N.Y. 2004). Consistent with the Complaint, plaintiff's counsel has previously instructed the Court that it is those elements that apply in this case, stating on the record at a pre-trial conference:
(Decl. of William J. Kelly in Further Support of Mot. for Summary Judgment Ex. A at 6.) Thus, regardless of how plaintiff now characterizes this action, the issue raised by plaintiff's Complaint and counsel, and addressed by defendants in their motions, is whether Weiser performed its appraisal with due care in light of the commonly accepted professional standards.
Defendants having put forth admissible evidence regarding the appraisal methodology they employed and that methodology's adherence to commonly accepted professional standards, it was therefore up to plaintiff to put forth specific facts creating a genuine dispute on the determinative issue. It has not done so. Plaintiff's motions papers do not even attempt to raise a triable issue of fact, instead attempting to reframe this action as one not about professional negligence (which attempt, as already discussed, is unsuccessful).
Accordingly, summary judgment is appropriate.
For the foregoing reasons, defendants' motions to exclude and for summary judgment are granted, and plaintiff's Complaint is dismissed with prejudice. The Clerk of the Court is directed to terminate the pending motions (Docket Numbers 26 and 27) and close this case.
SO ORDERED
It is also worth noting other indicia of unreliability in Hoffman's reports: Her appraisal of the leasehold interest is $5 to 8 million more in her second report a difference she admits at her deposition is not attributable to her review of any new materials or information. (Kelly Decl. Exs. F, G, H at 46:2 47:19.) She also conceded that she had not taken any steps to withdraw her first report or advise anyone that her later report was "the more accurate one." (Kelly Decl. Ex. H at 119:18 120:16.)
Additionally, her calculation of the additional cash flows generated over a 40-50 year period as a result of her revised assumption that larger spaces would demand higher rents is plainly flawed given the reality of Coudert's fixed-term lease, on which fewer than 8 years remained. (Id. at 92:13-20; Kelly Decl. Ex. G at 2.)
