Last December, I reported here on NY Bankruptcy Judge Stan Bernstein’s "must read" opinion in Chartwell Litigation Trust v. Addus Healthcare, Inc. (In re Med Diversified, Inc.), 334 B.R. 89 (Bankr. E.D.N.Y. 2005) (pdf), in which he barred the defendants’ valuation expert, Scott Peltz, from testifying in a $7.5 million fraudulent transfer case, finding both that Mr. Peltz failed to qualify as a business valuation expert and that his testimony was unreliable "because he did not employ the same level of intellectual rigor that characterizes the practice of an expert in the field of business valuation."

With no one left to rebut the plaintiff’s proposed valuation expert, one would have expected that the post-confirmation litigation trust would be laughing all the way to the bank, but last week, in this written opinion, Judge Bernstein put a pox on the plaintiff’s house by equally ripping the plaintiff’s expert, Robert Cimasi, and finding that his testimony and report also were "fundamentally unreliable."  Chartwell Litigation Trust v. Addus Healthcare, Inc. (In re Med Diversified, Inc.), 2006 WL 2242288 (Bankr. E.D.N.Y. 8/2/06).  In reaching this conclusion, Judge Bernstein pulled no punches, writing:

The Court now turns to the defendants’ cross-motion in limine to deny admission of the expert report and testimony of Cimasi on the ground that in applying the standard methodologies for an enterprise valuation of Addus, he exhibited such a deliberate, manifest, pervasive, and systematic bias in selecting his data points, in adjusting the data points, and in assigning weights to the data points in order to drive his valuation opinion toward its lowest levels that his report and testimony have to be excluded as fundamentally unreliable.

After reviewing all of the evidence, the Court has determined to grant the defendants’ cross-motion in limine and exclude Cimasi’s expert testimony and report. As this memorandum amply attests, the deliberate, manifest, pervasive and systematic bias on Cimasi’s part in applying the standard methodologies for estimating the total enterprise value of Addus warrants disqualifying him and his report on the principal ground of unreliability. The Court has taken considerable pains to point out the myriad ways in which Cimasi deliberately drove his adjustments of the discount rate and other variables toward the lowest order of value in order to accomplish his client’s implicit bidding, notwithstanding his protestations of objectivity. Perhaps this memorandum of decision may assist other bankruptcy courts in framing their decisions on motions in limine under the evolving standards of disqualification of purported non-scientific expert witnesses under the United States Supreme Court’s Kumho decision with respect to financial matters….

This Court is not prepared to adopt the suggestion in the plaintiffs’ supplemental memorandum that it should either change the assigned weights or adopt the highest of the three values. Either the valuation is reliably prepared or it is not; this Court does not serve to control against the plaintiffs’ expert witness’ bias in order to save its case in chief. If a court of record cannot rely upon its "officers" to ensure it that their retained experts prepare valuation reports in as objective and unbiased manner as can reasonably be achieved under the current state of the appraisal art, then those officers will suffer the adverse consequences from an excess of vigorous advocacy that impairs the truth-seeking duties of the court. The whole point of experts is to assist the court in determining the relevant facts, not in adding to the court’s burden in having to redeem unreliable testimony by its own lights….

Plaintiffs’ counsel argues in its supplemental post-trial memorandum that this Court should undertake to redeem Cimasi’s report by substituting [another expert’s] computation of EBITDA and ignoring the negative adjustments to the discount rate and then running the substituted variables in the formula….  [I]t is not the function of this Court to fix the errors in an expert’s report in order to save it for purposes of admission. Either the expert properly applies the standard methodologies or he does not. If he does, the report may be admitted. If he does not, it cannot be admitted….

Under the totality of the circumstances, this Court does not believe that it falls within the sound exercise of its discretion to redo Cimasi’s patently unreliable report. This may be a stiff dose of medicine for the plaintiffs to swallow, but it should serve as a warning to other litigants in future constructive fraudulent transfer cases to make sure that their experts apply the standard methods correctly lest they find their experts’ reports denied admission. For if they do not heed this stricture, they may not have any evidence in the record to sustain their burden of proof to avoid the alleged constructive fraudulent transfers.

Judge Bernstein’s opinion methodically dissects Mr. Cimasi’s application of standard valuation methodologies (such as benchmarking, discounted cash flows, guideline company valuations, and direct comparable transactions) to the facts of the case, pointing out the perceived flaws in each opinion advanced.

In the end, regardless of whether one thinks Judge Bernstein went too far, all would agree that his two disqualification opinions in this litigation are "must reads" for every bankruptcy litigator.

Here are links to Mr. Cimasi’s expert report, to the defendants’ motion to exclude Mr. Cimasi, to the plaintiff’s memorandum in support of Mr. Cimasi, and to the hearing transcripts before Judge Bernstein on the motion to exclude Mr. Cimasi (Parts 1 (direct), 2 (direct), 3 (direct & cross), & 4 (wrap-up)).

Finally, for the sake of completeness, here are the links to the plaintiff’s motion to exclude Mr. Peltz (including Exhibit A-Peltz Deposition Excerpts, Exhibit B-Addus Financials, Exhibit C-Peltz expert report, and Exhibit D-Graph Applying Opinion to Facts), to the defendant’s response and supplemental response in support of Mr. Peltz, and to the hearing transcripts before Judge Bernstein on the motion to exclude Mr. Peltz (Parts 1 (direct), 2 (direct & cross), & 3 (cross & redirect)).

© Steve Jakubowski 2006