Thomas B. McNamara, United States Bankruptcy Judge.
Unreliable and irrelevant expert testimony is inadmissible. That cardinal principle
This matter comes before the Court on: (1) the "Motion to Exclude Expert Testimony" (Docket No. 138,
In the Motion to Exclude, the Defendants requested that the Court exclude proposed expert testimony from Mark Dennis, an expert accounting witness whose testimony the Chapter 7 Trustee intends to offer at trial on the issue of the purported insolvency of the Debtor, Peter H. Blair, Sr. (the "Debtor"), as of May 7, 2011. In the Response, the Chapter 7 Trustee opposed exclusion of the testimony of Mr. Dennis and argued that the anticipated testimony would be reliable and relevant. Thereafter, the Court conducted an evidentiary Daubert hearing on the Motion to Exclude and Response.
Based upon the arguments in the Motion to Exclude and the Response, as well as the evidence submitted with the Motion to Exclude and Response and at the Daubert hearing, the Court determines that Mark Dennis qualifies as an expert in the area of accounting and insolvency by reason of his specialized knowledge, skill, experience, training, and education. Furthermore, in assessing the Debtor's solvency, Mr. Dennis purports to employ an accepted methodology: a fair value balance sheet approach. However, while paying lip-service to the fair value balance sheet method, Mr. Dennis does not have sufficient facts or data, as required by such method. Further, he fails to properly apply the method to the collected facts and data. As a result, Mark Dennis' expert opinion on the Debtor's solvency is unreliable. Furthermore, the proffered expert opinion is irrelevant because it does not assist the Court (as the trier of fact) to understand the evidence or to determine a fact in issue. Accordingly, the Court excludes the opinion testimony of Mark Dennis and will not consider such proffered testimony at trial.
The Debtor filed for protection under Chapter 11 of the Bankruptcy Code on May 7, 2015 in the case captioned: In re Peter H. Blair, Case No. 15-15008 TBM (Bankr. D. Colo.) (the "Bankruptcy Case"). Shortly after initiating the Bankruptcy Case, the Debtor died. (Docket No. 106 in Bankruptcy Case.) Thereafter, the Court converted the Bankruptcy Case from a Chapter 11 reorganization to a Chapter 7 liquidation. (Docket No. 141 in Bankruptcy Case.) On August 20, 2015, the United States Trustee appointed Jeffrey A. Weinman as the Chapter 7 Trustee for the Debtor's estate in the Bankruptcy Case. (Docket No. 143 in the Bankruptcy Case.)
After completion of the pleadings, the Court issued its "Scheduling Order under Fed. R. Civ. P. 16(b) and Fed. R. Bankr. P. 7016" (Docket No. 37, the "Scheduling Order"), pursuant to which the Court set the case for a three-day trial commencing on August 6, 2018. Subsequently, the parties engaged in numerous discovery skirmishes. But the discovery deadlines now have passed, and the Adversary Proceeding will be proceeding to trial in short order.
The Debtor's financial position (i.e., whether solvent or insolvent) at the time of the allegedly fraudulent transfers is a central issue in this Adversary Proceeding. See e.g., COLO. REV. STAT. § 38-8-105(2)(i) (consideration may be given to whether "the debtor was insolvent or became insolvent shortly after the transfer was made"). Accordingly, the Chapter 7 Trustee engaged Mark Dennis as an expert witness on solvency issues.
On April 16, 2018, Mr. Dennis issued a "Solvency Opinion" (the "Expert Report")
Thereafter, the Defendants filed the Motion to Exclude. The Defendants argue that Mark Dennis' expert testimony, as disclosed in the Expert Report, should be excluded as unreliable and irrelevant under Fed. R. Evid. 702, Daubert, 509 U.S. 579, 113 S.Ct. 2786, and Kumho, 526 U.S. 137, 119 S.Ct. 1167. In further support of the Motion to Exclude, the Defendants
Neither the Defendants nor the Chapter 7 Trustee requested an evidentiary Daubert hearing in the Motion to Exclude or Response. However, to protect the due process rights of the parties, and consistent with controlling precedent of the United States Court of Appeals for the Tenth Circuit, the Court afforded a further opportunity for the parties to request an evidentiary Daubert hearing. (Docket No. 164.) Subsequently, the Chapter 7 Trustee requested a Daubert hearing. (Docket No. 168.) The Court conducted a Daubert hearing on August 1, 2018, during which it received additional evidence including the testimony of Mark Dennis and a copy of a book offered by the Chapter 7 Trustee: Israel Shaked and Robert F. Reilly, A Practical Guide to Bankruptcy Valuation 239 (ABI, 2d ed., 2017) [hereinafter "Valuation Practical Guide"]. The parties also agreed that the Court should consider the other exhibits (including the Expert Report) submitted with the Motion to Exclude and Response.
Fed. R. Evid. 702 sets forth the general rule for admissibility of expert testimony and provides:
Fed. R. Evid. 702 was revised effective December 1, 2000 to conform with the United States Supreme Court's decisions in Daubert, 509 U.S. 579, 113 S.Ct. 2786, and Kumho, 526 U.S. 137, 119 S.Ct. 1167. See U.S. v. Crabbe, 556 F.Supp.2d 1217, 1220 (D. Colo. 2008) (explaining the evolution of Fed. R. Evid.702); see also Fed. R. Evid.702 Advisory Committee Notes to 2000 Amendment ("Rule 702 has been amended in response to Daubert ... and to the many cases applying Daubert, including Kumho....").
To safeguard the trial process, trial judges must act vigilantly in a "gatekeeping role" and ensure that proposed expert opinions meet the Fed. R. Evid. 702 standards of reliability and relevance. Daubert, 509 U.S. at 597, 113 S.Ct. 2786; see also Etherton v. Owners Ins. Co., 829 F.3d 1209, 1217 (10th Cir. 2016) ("Rule 702 imposes a gatekeeping function on district courts to ensure expert testimony is admitted only if it is relevant and reliable."); U.S. v. Nacchio, 555 F.3d 1234, 1251 (10th Cir. 2009) (trial court "was obligated to perform its gatekeeping function"); TBL Collectibles, Inc. v. Owners Ins. Co., 285 F.Supp.3d 1170,
In the first step, the Court must decide "whether the expert is qualified by `knowledge, skill, experience, training, or education' to render an opinion." 103 Investors, 470 F.3d at 990 (quoting Fed. R. Evid. 702). If the proposed expert passes muster in the first step, then the Court must take the second step and assess "whether the expert's opinion is reliable under the principles set forth in Daubert" and incorporated in Fed. R. Evid. 702. Id. The second step "focuses on the process or means by which the witness derived the opinion — this is referred to as methodology or application of principles." Crabbe, 556 F.Supp.2d at 1221. Put another way, "[t]he focus, of course, must be solely on principles and methodology, not on the conclusions that they generate." Daubert, 509 U.S. at 595, 113 S.Ct. 2786.
Parsing the second step of reliability even further and slightly rearranging Fed. R. Evid. 702, the three requirements are:
Crabbe, 556 F.Supp.2d at 1221. And, the proposed expert opinion ultimately can be admitted only if it would help the Court "understand the evidence or determine a fact in issue." Fed. R. Evid. 702. The foregoing "gatekeeping" function and analysis applies in bankruptcy court even though most bankruptcy proceedings are conducted without juries. Van Cott, Bagley, Cornwall & McCarthy v. Williams, 98 Fed. Appx. 726 (10th Cir. 2004) (unpublished) (confirming that bankruptcy court "`must, at the outset' assess the reasoning and methodology underlying the expert's opinion...."); Brickley v. Scattered Corp. (In re H & M Oil & Gas, LLC), 511 B.R. 408 (Bankr. N.D. Tex. 2014) (bankruptcy court excluded expert opinion testimony before trial based on Daubert analysis); Sharp v. Chase Manhattan Bank USA, N.A. (In re Commercial Fin. Serv., Inc.), 350 B.R. 520 (Bankr. N.D. Okla. 2005) (bankruptcy court admitted expert opinion testimony based upon Daubert analysis).
Notably, the proponent of expert testimony bears the burden of proving, by the preponderance of the evidence, that the expert opinion is admissible under Fed. R. Evid. 702. Daubert, 509 U.S. at 592 n. 10, 113 S.Ct. 2786; TBL Collectibles, 285 F.Supp.3d at 1179; Crabbe, 556 F.Supp.2d at 1220-21. So, the proponent must establish sufficient qualifications, as well as reliability and relevance.
Mark Dennis' basic qualifications are set forth in Appendix XV of the Expert Report. Currently, Mr. Dennis is the President of Dennis & Co., P.C., a professional firm offering primarily accounting and tax services. In terms of education and training, Mr. Dennis earned a Bachelor of Arts degree in economics from Cornell University and a Master of Business Administration degree from the London Business School.
After completing his college training, Mark Dennis embarked upon a "20-year career in the derivatives industry, including
After exiting the derivatives industry, Mark Dennis joined Dennis & Co. in 2012. Id. A few years later, in 2015, he passed the Uniform Certified Public Accountant ("CPA") examination and obtained a Colorado CPA certificate. Id. Last year, he earned a Certified in Financial Forensics ("CFF") credential from the American Institute of Certified Public Accountants. Id.
Since he joined Dennis & Co. about 6 years ago, Mark Dennis has worked as a "tax and accounting practitioner." His biography describes his recent experience as follows:
Expert Report, App. XV. Recently, Mark Dennis authored three papers presented at continuing legal education seminars. All three of the publications deal with taxation in bankruptcy. Id. In the last couple years, he has issued an expert report, testified in a deposition, or testified in various courts a total of five times. His work in the five cases involved: a proposed sale of intangible property; economic damages; entity identification, classification, and tax compliance; and valuation. Id.
Notably, the record does not establish that Mark Dennis has ever issued an opinion on the solvency of any individual or entity. During the Daubert hearing, he testified that he performed work in about 500 bankruptcy cases and performed "valuations" in nine of such bankruptcy cases. He was unclear whether the "valuation" work included solvency analysis. In any event, there was no showing made by the Chapter 7 Trustee that Mr. Dennis has ever previously testified in any court as an expert on solvency. The Chapter 7 Trustee also did not establish that solvency analysis (as distinct from general "valuation") was part of Mark Dennis' education, training, or work. Instead, Mr. Dennis engaged in what appears to have been a high-profile international career in the derivates industry in which he traded futures and
Under Fed. R. Evid. 702, the Court must determine whether Mark Dennis' "knowledge, skill, experience, training, or education" qualify him as an expert entitled to offer the Expert Report on solvency. The Court assesses Mark Dennis' qualifications to issue a solvency opinion as rather weak. He appears to be a tax and general accounting practitioner with no specialized "knowledge, skill, experience, training, or education" about solvency analysis. However, in the Motion to Exclude, the Defendants did not contest Mark Dennis' qualifications. Accordingly, in the absence of any objections to his qualifications, the Court determines that Mark Dennis passes the qualifications step (but just barely) because he has some "knowledge, skill, experience, training, or education," generally in finance, economics, and accounting.
The initial judicial inquiry centers on identification of the methodology. See Crabbe, 556 F.Supp.2d at 1222. Then, the proponent of the expert testimony must establish that the methodology generally is deemed reliable in the field. Id.
In this case, Mark Dennis identified his main purported methodology in his Expert Report, Affidavit, and deposition. According to Mr. Dennis:
Dennis Aff. ¶ 7; see also Expert Report at 1. Furthermore, Mark Dennis clarified that he utilized "a balance sheet test for Mr. Blair as of May 7, 2011" [which was the date of at least one transfer]." Expert Report at 1; see also Dennis Dep. at 28:20-24 ("There is [sic] three different ways to value any asset. Discounted value, future cash flows ... and also a balance sheet test, which is the test that we've utilized here in the [Expert] report overall...."). At the Daubert hearing, Mr. Dennis again reconfirmed that he utilized a fair value balance sheet test.
So, is the fair value balance sheet approach to solvency deemed reliable in the field? To determine whether expert opinion testimony is reliable, the Daubert court suggested the consideration of "several nondispositive factors:"
103 Investors, 470 F.3d at 990 (citing Daubert, 509 U.S. at 593-94, 113 S.Ct. 2786). Such factors seem primarily targeted to scientific inquiry. But Fed. R. Evid. 702 requirements and Daubert principles apply "not only to testimony based on `scientific' knowledge, but also to testimony based on `technical' and `other specialized' knowledge." Kumho, 526 U.S. at 141, 119 S.Ct. 1167. In such "non-scientific" areas, the test of reliability is "flexible" and the Court has "broad latitude when it decides
The fair value balance sheet method proposed by Mark Dennis is not really scientific. But it is a method identified — even mandated — in law. Mark Dennis relied on the definition of the term "insolvent" contained in Section 101(32)(A) of the Bankruptcy Code.
Mark Dennis never explained why he relied on the Bankruptcy Code definition of "insolvent" for purposes of choosing a methodology. The Chapter 7 Trustee's fraudulent transfer claims in the Amended Complaint are based upon Colorado law. So, Colorado law (the CUFTA) provides the substantive law governing the solvency issues. But, fortunately for Mr. Dennis, the definition of "insolvent" under the Bankruptcy Code is very similar to the definition of "insolvent" under Colorado law. COLO. REV. STAT. § 38-8-103 states:
Furthermore, under COLO. REV. STAT. § 38-8-102(2)(b), an "asset" does not include "[p]roperty to the extent that it is generally exempt immediately prior to the time of transfer under nonbankruptcy law."
Thus, under both Colorado law and the Bankruptcy Code, the fair value balance sheet method is essentially mandated for individuals. See CB Richard Ellis, Inc. v. CLGP, LLC, 251 P.3d 523, 532-33 (Colo. Ct. App. 2010) (identifying the balance sheet method for determining solvency under Colorado law); Commercial Fin. Serv., 350 B.R. at 531 (accepting the fair value balance sheet method as the proper method for assessing solvency under the Bankruptcy Code). Put another way, the CUFTA method of determining insolvency "mirrors the balance sheet test for insolvency under the Bankruptcy Code." CB Richard Ellis, 251 P.3d at 532 (quoting Krol v. Unglaub (In re Unglaub), 332 B.R. 303, 317 (Bankr. N.D. Ill. 2005)). In fact, the CUFTA definition of the term "insolvent" is "derived from" the Bankruptcy Code. COLO. REV. STAT. § 38-8-103 Official Comment (1). Importantly, the balance sheet test for insolvency requires that the Court must determine "the fair value of [the debtor's] assets and the extent of
In any event, both the Defendants and the Chapter 7 Trustee appear to accept the general methodology. Motion to Exclude at 6-8 (citing the Colorado statutory definition and noting that the Colorado "balance sheet" test "mirrors" the Bankruptcy Code balance sheet test); Response at 6 (noting that Mark Dennis relied on insolvency method of Section 101(32)(A)). The authors of Valuation Practical Guide (a publication upon which the Chapter 7 Trustee relies) also endorse the fair value balance sheet method although they use slightly different terminology: the "asset-accumulation [AA] method" which is one of the methods used in the "asset-based approach" for valuing businesses. Valuation Practical Guide at 227-259. According to such source:
Id. at 247. Mark Dennis purports to have followed such method but modified slightly to exclude exempt assets of the Debtor.
The Court finds that the general methodology proposed by Mark Dennis for determining solvency (i.e., preparing a balance sheet of assets and liabilities (except exempt assets) for the Debtor and adjusting the balance sheet so that it reflects fair market value as of the date of the alleged transfers) is both appropriate and reliable under Fed. R. Evid. 702, Daubert, 509 U.S. 579, 113 S.Ct. 2786, Colorado law, and the Bankruptcy Code.
However, that is not the end of the story, the Chapter 7 Trustee must establish that Mark Dennis actually used "sufficient facts and data as required by the method" and that he "properly applied the method." So, the Court turns to those issues.
The proponent of expert testimony must show that "the witness gathered `sufficient facts and data' to formulate the opinion." Crabbe, 556 F.Supp.2d at 1223. Stated differently, to be reliable, expert testimony must be "based on actual knowledge, and not mere subjective belief or unsupported speculation [divorced from facts].'" Pioneer Centres Holding Co. Employee Stock Ownership Plan and Trust v. Alerus Fin., N.A., 858 F.3d 1324, 1341-42 (10th Cir. 2017) (quoting Mitchell v. Gencorp., Inc., 165 F.3d 778, 780 (10th Cir. 1999)). The assessment of the "sufficien[cy] of the facts and data relied upon by the witness is a quantitative, not a qualitative, analysis." Fed. R. Evid. 702, Advisory Committee Notes to 2000 Amendments; Crabbe, 556 F.Supp.2d at 1223 (emphasis in the original). In performing its gatekeeping function under this part of the Daubert test, the Court need not assess whether the facts are accurate. Instead, the focus is on "whether the witness obtained the amount of data that the methodology itself demands."
The fair value balance sheet methodology proposed by Mark Dennis required him to go back in time about seven years — to May 7, 2011.
Mark Dennis started his analysis by trying to identify the Debtor's assets as of May 7, 2011. The balance sheet prepared by Mark Dennis contained 4 categories of assets: "Cash on Hand"; "Household Goods and Furnishings"; "Contingent and Noncontingent Interests in Decedent Estate"; and "Investments." Expert Report, App. I.
With respect to the "Cash on Hand" category, Mark Dennis identified 13 financial accounts. He states that five of the accounts were opened after May 7, 2011. For the Wells Fargo account (Account No. X3363), he relied on balances from 2011 bank statements showing cash of $12,955. For two other financial accounts (Pagoda QPRT and Treetops Trust QPRT), Mark Dennis listed specific amounts ($2,060 and $2,744). The Court understands that such amounts were derived from either account statements or "Quicken" records located on a computer. So far, so good. But that left five more active financial accounts of the Debtor as of May 7, 2011: "UBS X3623"; "Capital One Bank"; "Chase Credit Card"; "KeyBank Portland"; and "Gorham Savings Bank." Next to each of these financial accounts on the balance sheet, Mark Dennis noted: "No data available." In the body of the Expert Report, Mark Dennis wrote:
Expert Report at 3. To his credit, Mark Dennis asked the Chapter 7 Trustee's counsel for data on the missing bank accounts. Dennis Dep. at 19:1-21:16. However, the Chapter 7 Trustee's counsel told him that the data was not available and instructed him "to proceed based on what I had." Id. at 19:25-20:5. So, what did Mark Dennis do in the absence of the bank account information? He simply concluded that all five of the financial accounts with no data should be valued at "$ 0." This was rank speculation. Mark Dennis just as easily could have guessed that such financial accounts had $5, $5,000, $500,000, or more. But it is undisputed that he simply had no facts or data about the five bank accounts.
In the "Investments" category of the Expert Report, Mark Dennis listed two other assets of the Debtor: (1) his equity interest in Blair Oil Investments, LLC ("BOI"); and (2) his equity interest in BPI Partners LLC ("BPI Partners"). Expert Report at 3-4. With respect to the Debtor's
Id. at 61:21-62:4; see also Id. at 66:16-67:12 (Mark Dennis stated that he "used a balance sheet approach [for BOI] to make my judgment" but "didn't pursue trying to obtain" data on the market value of BOI's assets because "obtaining additional information in the context of this project was going to be very difficult").
With insufficient information, what did Mark Dennis do? First, he created a balance sheet for BOI based on book values, rather than fair market values for assets. He did this even though he acknowledged that at least "sometimes" book values bear little relationship with fair market values. Dennis Dep. at 59:25.
In terms of other valuation methods for BOI, Mark Dennis agreed that other possible methodologies might include the "market approach" (sales of comparable companies) and a discounted cash flow analysis. Dennis Dep. at 62:19-64:17. But, at the Daubert hearing, Mr. Dennis acknowledged repeatedly that he did not have sufficient information to perform an analysis under such other methodologies either. See also Dennis Dep. at 62:19-64:17. Thus, Mark Dennis lacked sufficient information to satisfy the valuation methodology he himself identified for BOI and didn't pursue the other generally accepted methods of valuation because the exercise was "not worthwhile." Dennis Dep. at 64:10-17.
With respect to BPI Partners, Mark Dennis was required to value the Debtor's equity in the entity as of May 7, 2011. But he had only two scraps of data about BPI Partners. First, the Debtor valued his equity interest in BPI Partners at $156,164 in 2015 (i.e., about 4 years after the May 7, 2011 valuation date). Second, the Debtor showed no income or loss for the entity on his 2011 tax return. Mr. Dennis confirmed that "no other information is available about this investment." Expert Report at 4. Again, Mark Dennis lacked the data required to perform the fair market balance sheet method he himself espoused. He also did not utilize any other generally accepted methodology for valuing BPI Partners. So, in the absence of sufficient information, he just used a number supplied by the Debtor four years later.
After Mark Dennis purported to identify and value assets, he did the same for the Debtor's liabilities. In the Expert Report, he indicated that the Debtor's principal liability was $2,298,346 based upon the "ARB Trust Judgment." The other liabilities identified by Mark Dennis paled in comparison to the "ARB Trust Judgment." The ARB Trust Judgment is a judgment entered on March 27, 2015 by the Probate Court for the City and County of Denver, Colorado in the probate proceeding: In the Matter of The Audrey R. Blair Revocable Trust, GST-Exempt Marital Trust, and Non-Exempt Marital Trust, Case No. 12-PR-2227. Expert Report at 1. In his analysis, Mr. Dennis used the ARB Trust Judgment and listed the following as liabilities on the adjusted fair value balance sheet that he created for the Debtor:
In other words, to identify the Debtor's liabilities as of May 7, 2011, Mark Dennis relied on a judicial decision issued about four years later in a case that had not even been filed as of the May 7, 2011 valuation date. He conceded that as of May 7, 2011, the Debtor's liability was a "contingent liability" (i.e., the judgment had not entered). Dennis Dep. at 121:8-121:20. Furthermore, he confirmed that the proper approach to value a contingent liability was as follows:
Id. at 121:21-122:6. He testified the same way at the Daubert hearing. See also, Valuation Practical Guide at 239 (confirming that for contingent liabilities such as litigation claims, the analyst must consider the "probabilities associated with the debtor company's future contingent liability payments.") Ignoring these general principles, Mark Dennis just assumed that the amount of a judgment issued four years after the May 7, 2011 date used in his Expert Report should be inserted as a liability. Why did he do so? Perhaps because Mark Dennis lacked sufficient data
Dennis Dep. at 140:20-25. So, he had no information with which to perform the normal method of valuing the contingent liability as of May 7, 2011. Mark Dennis reconfirmed the foregoing lack of information in his Affidavit where he stated:
Dennis Aff. ¶ 10.
As demonstrated by the foregoing examples concerning assets and liabilities, Mark Dennis simply did not have adequate information or data to reach a conclusion using his fair value balance sheet method for either assets or liabilities. During the Daubert hearing, he acknowledged the lack of information problem. He testified:
Bottom line: the entire Expert Report and proffered balance sheet for the Debtor are unreliable. Neither Rule 702 nor Daubert "requires a district court to admit opinion evidence that is connected to existing data only by the ipse dixit of the expert. A court may conclude that there is simply too great an analytical gap between the data and the opinion proffered." Etherton, 829 F.3d at 1218 (quoting Gen. Elec. Co. v. Joiner, 522 U.S. 136, 146, 118 S.Ct. 512, 139 L.Ed.2d 508 (1997)).
Admissibility of the Expert Report also depends on whether the Chapter 7 Trustee satisfied his burden to show that the proffered expert reliably applied the asserted methodology to the facts and data obtained. Crabbe, 556 F.Supp.2d at 1223. After carefully considering the Expert Report, the Affidavit, Mark Dennis' deposition, and Mark Dennis' testimony at the Daubert hearing, the Court concludes that Mr. Dennis failed in numerous ways to reliably apply the facts and data in accordance with his own selected methodology. At least in part, the shortcomings of the Expert Report can be traced to the lack of facts and data.
As noted previously, Mark Dennis purported to use a fair market value balance sheet methodology for determining the Debtor's solvency as of May 7, 2011. While such methodology is entirely proper, Mark Dennis failed to follow it.
With respect to "Cash on Hand," Mark Dennis identified five financial accounts of the Debtor (open as of May 7, 2011) for which there was no data. He asked for data and was told that it was not available.
The liabilities side of the Expert Report is every bit as suspect, and probably more so. Mark Dennis' own proposed methodology required him to identify liabilities as of May 7, 2011. See CB Richard Ellis, 251 P.3d at 534 (in order to apply the balance sheet test, the court must determine the value of assets and liabilities "at the time of each contested transfer"). The only significant liability Mr. Dennis identified was the ARB Trust Judgment that was issued four years later. The lawsuit against the Debtor was filed in 2012 (more than a year after the May 7, 2011 valuation date). Response Ex. 2. Mark Dennis conceded that the claims against the Debtor, even on an informal basis, were first made after May 7, 2011. Dennis Dep. at 44:8-12 (Mr. Dennis' "best information" was that "claims with dollar amounts on them" were not made until after May 7, 2011). So, at best, there was an unasserted contingent liability. Mark Dennis agreed that the liability was contingent in 2011 and that the generally accepted approach is that such contingent liabilities must be valued by applying a probability of success factor to the amount of the claim. Id. at 121:21-122:6; See also Valuation Practical Guide at 239.
Colorado law on insolvency follows the generally accepted methodology for valuing contingent liabilities. Under Colorado law, contingent liabilities (such as pending litigation that has not been reduced to judgment) must be discounted by the probability of the contingency's becoming non-contingent (i.e., by the likelihood that a judgment will actually enter) as of the
CB Richard Ellis, 251 P.3d at 533-34. Again, Mark Dennis, acknowledged that the method endorsed by CB Richard Ellis, 251 P.3d 523, is the right way to do the solvency analysis job. But, as explained previously, Mr. Dennis had no information with which to perform such analysis. Dennis. Dep. at 140:20-25. As a result, he did not apply his own methodology.
So, Mark Dennis engaged in some hindsight time travel to assume that the 2015 ARB Trust Judgment should be applied in full as a liability in 2011. However, neither the Chapter 7 Trustee nor Mr. Dennis was able to provide any support for such hindsight assumption and failure to follow standard protocol from the accounting or solvency fields. Mr. Dennis' own primary solvency source is to the contrary. Valuation Practical Guide at 50 ("The analyst's
What Mr. Dennis did with respect to the ARB Trust Judgment is not an application of methodology to facts. Instead, it is just an improper hindsight assumption that makes Mark Dennis' expert conclusions inadmissible. See Paloian v. LaSalle Bank, N.A., 619 F.3d 688, 693 (7th Cir. 2010) ("Hindsight is wonderfully clear, but in determining the [debtor's] solvency in mid-1997 it was necessary to determine the expected value of this liability as of mid-1997, not the actual value as of 1999 or 2000. Hindsight bias is to be fought rather than embraced."); Mellon Bank, N.A. v. Official Comm. of Unsecured Creditors of R.M.L. (In re R.M.L., Inc.), 92 F.3d 139, 155 (3rd Cir. 1996); Valuation Practical Guide at 50.
In the Expert Report, Mark Dennis also added a short "Cash Flow Insolvency" analysis "to supplement a balance sheet test for determining insolvency." Expert Report at 1 and 6. It is somewhat unclear if Mark Dennis intended to present his cash flow insolvency test as some sort of independent or alternative method of proving insolvency. Mr. Dennis did not mention the "Cash Flow Insolvency" portion of the Expert Report at the Daubert hearing. But, if he really is advancing such position, Mr. Dennis has presented no basis for such methodology nor has he shown that such methodology is reliable. Furthermore, Mr. Dennis did not have sufficient facts to complete such analysis. Finally, he did not apply the methodology but instead invented a new approach. So, Mark Dennis' "Cash Flow Insolvency" method and conclusions are rejected as inadmissible.
The fair value balance sheet approach is the only methodology for determining insolvency of the Debtor in this case under both the governing CUFTA and the similar provisions of the Bankruptcy Code. COLO. REV. STAT. § 38-8-103; 11 U.S.C. § 101(32). As explained earlier, COLO. REV. STAT. § 38-8-103 states:
Mark Dennis seems not to have accepted the statutory mandate and instead proposed an alternative "Cash Flow Insolvency" analysis.
Dennis Dep. at 166:19-167:5.
What Mark Dennis seems to have done is to misapprehend the meaning of the Colorado statute. COLO. REV. STAT. § 38-8-103(1) establishes the fair value balance sheet methodology for determining insolvency. On the other hand, COLO. REV. STAT. § 38-8-103(2) provides for a presumption that arises if a party proves that the debtor "is generally not paying his debts" as of the date of an alleged fraudulent transfer. The statutory Official Comment is instructive. COLO. REV. STAT. § 38-8-103(2):
COLO. REV. STAT. § 38-8-103 Official Comment (2).
The COLO. REV. STAT. § 38-8-103(2) presumption appears to be based only on a simple factual inquiry: At the time of the alleged fraudulent transfers, was the Debtor paying his debts as they became due, or not? It is a factual question and not really the province for an expert analysis. No expert "knowledge, skill, experience, training, or education" seems needed to ascertain whether someone is paying their debts.
As a result, there is no real expert methodology that bears on the issue. And Mark Dennis has not suggested any specific expert methodology except "our experience as a firm." But, again, even if an expert analysis were required to ascertain whether someone was paying their debts, that simply is not the mandatory statutory insolvency test under Colorado law or the Bankruptcy Code.
Mark Dennis did not have sufficient data to determine whether the Debtor was "generally not paying his debts as they became due" on May 7, 2011. In his Expert Report, he stated: "An analysis of Mr. Blair's primary bank account statements for the months of January through July of 2011 was carried out and summarized in Appendix XII." Expert Report at 6. Mr. Dennis then generated a graph showing the Debtor's income and expenses from January 2011 to May 2011. Id. Notably, the entire analysis is based on only one of the Debtor's bank accounts (Wells Fargo
If the issue is whether the Debtor "generally was paying his debts as they became due" as of May 7, 2011, Mark Dennis conceded that the Debtor was. He testified:
Dennis Dep. at 173:4-10. So, that would seem to be the end of the inquiry on the "paying his debts as they become due" presumption.
But Mark Dennis departed from this rather simple exercise and manufactured an entirely novel framework. The odd idea seems to be that even though the Debtor actually paid all his bills on time in 2011, none of that should count because some of the Debtor's income was not regular (such as a monthly pay check), some of the Debtor's income might have been derived from exempt assets, and Mark Dennis did not have data on the source of some of the income. For example, some of the Debtor's non-regular income during the time period (about $117,702) was from distributions from a trust which might have been an exempt asset. And there were three other deposits for which Mark Dennis had insufficient information so he just subtracted them too: $40,400 (from "an unidentified generic `deposit'"); $12,748 (from "Aud Rock"); and $255,000 (from a source "not known [to Mark Dennis]").
This is the worst sort of made up "expert" analysis and has no place in an insolvency determination. Such approach is not supported by either generally accepted accounting principles or law. All Mr. Dennis' approach really does is serve to discredit Mark Dennis as an expert. But for purposes of admissibility, the central point is that Mark Dennis did not apply a generally accepted methodology to known facts. Instead, he is apparently proposing a "generally paying his debts as they become due" methodology for insolvency that runs contrary to the applicable Colorado statute. Then, after conceding that the Debtor actually was paying his debts as they became due, he manufactured the
The base-line for admissibility is whether the proposed expert testimony would assist the Court in any meaningful way. The Expert Report proffered by Mark Dennis and the Chapter 7 does not. It is unreliable, irrelevant, and inadmissible.
For the reasons set forth above, the Court determines that the Chapter 7 Trustee failed to meet his burden to establish grounds for admission of Mark Dennis' expert opinion under Fed. R. Evid. 702, Daubert, 509 U.S. 579, 113 S.Ct. 2786, and Kumho, 526 U.S. 137, 119 S.Ct. 1167. Thus, the Court GRANTS the Motion to Exclude.
Dennis. Dep. at 64:10-17. In the end, the Court wonders whether Mr. Dennis himself knows what methodology he used. However, to be most charitable to him, it seems that Mr. Dennis tried to use the fair value balance sheet method for valuing the Debtor' equity in BOI but was forced to abandon the method because he did not have sufficient facts and data to perform the required analysis.
