Expert Witness Testimony In Federal Court

Here’s a case that’s a little dated (2012) but still post-worthy for its detailed discussion of punitive damages and the standards for expert testimony admissibility in Federal court.

In Baldonado v. Wyeth, 2012 WL 1520331, the Northern District partially granted a motion to bar plaintiff’s economics expert from testifying on plaintiff’s punitive damages and a defendant pharmaceutical company’s net worth in an injury suit involving one of defendant’s hormone replacement products.

In support of her case, the Plaintiff offered the  expert opinions of an economist who offered opinions on both the defendant’s net worth and the amount of punitive damages due the plaintiff.

In partially granting the defendant’s motion to bar the testimony, the court provides a nice gloss on the required showings for getting expert opinions into evidence in Federal courts.

Punitive Damages and Expert Testimony

– Under Federal Rule of Evidence 702, a witness who is qualified as an expert by knowledge, skill, experience, training, or education may testify in the form of an opinion or otherwise if: (1) the expert’s knowledge will help the trier of fact to understand the evidence or to determine a fact in issue; (2) the testimony is based on sufficient facts or data; (3) the testimony is the product of reliable principles and methods; and (4) the expert has reliably applied the principles and methods to the facts of the case;

– Federal district courts employ a three-part test before admitting expert testimony: (1) the expert must be qualified as an expert by knowledge, skill, experience, training, or education; (2) the expert’s reasoning or methodology underlying his testimony must be scientifically reliable; and (3) the expert’s testimony must assist the trier of fact in understanding the evidence or to determine a factual issue;

 – A damages expert should not give an opinion on the amount of punitive damages the jury should award;

 – a punitive damage amount is for the jury to decide based on the facts of this case and the applicable punitive damages law.

See FRE 702.

The court found that the Plaintiff’s economist improperly testified that the jury should assess punitive damages between $6.4 billion and $7.1 billion based on defendant’s daily profit rate for the drug in question and his review of SEC guidelines for punitive damages in antitrust cases.

Since it was improper for the expert to opine on the specific punitive damages to be awarded as well as what damages calculation formula to apply, the court granted the motion to bar the expert from testifying on the proper measure for punitive damages.

Punitive Damages and ‘Net Worth’ Testimony

The court next addressed whether plaintiff’s expert could opine that the defendant pharmaceutical giant was worth about $62 billion.  In the context of punitive damages and in the accounting realm, “net worth” means the excess of a company’s total assets minus total liabilities.

In Illinois, a plaintiff can present evidence of a corporate defendant’s net worth where punitive damages are at issue.  A defendant’s profits or net worth is relevant where a plaintiff alleges a claim that may merit punitive damages.

But because of their penal nature, punitive damages are disfavored and courts cautiously avoid assessing punitives unless clearly they are clearly warranted.  While the amount of punitive damages is a question for the jury, the threshold decision of whether the facts of a particular case justify the imposition of punitive damages is for the judge to decide.

The Court ultimately ruled that a further hearing was necessary to probe the basis for the expert’s net worth finding.  Since the expert appeared to substitute a “market capitalization” (number of outstanding shares times share value) analysis instead of a straight assets-minus-liabilities one to measure the defendant’s net worth, the expert’s underlying methodology wasn’t sound enough to get his report into evidence without an additional hearing.

Afterwords:

1/ Where an expert offers damages and net worth testimony, especially for a global corporate defendant, his predicate methodology must be based on sound data for his testimony to be admissible;

2/ While a defendant’s net worth is relevant to the punitive damages question, a court must still make a threshold decision that a given case warrants punitive damages;

3/ The plaintiff who seeks a punitive damages award has the burden of showing how he or she arrived at the ultimate net worth valuation for a defendant.

 

LLC Members Not Liable to Deceased Member’s Estate; Partnership’s Assets Become LLC’s Upon Conversion

The First District recently examined the nature of a limited liability company (LLC) member’s personal liability and the requirements for converting a general partnership to an LLC.

In Daniel v. Ripoli, 2015 IL App (1st) 122607, a case with a labyrinthine fact pattern, an LLC member’s estate sued an accounting company LLC to recover distributions the estate claimed was owed the deceased member under the LLC operating agreement.

The LLC defended by asserting that the deceased’s distribution amount was permanently reduced before he died by an amendment to the operating agreement.  The trial court entered a money judgment of about $200,000 for the plaintiff and the LLC appealed.

Held: reversed.  The operating agreement’s amendment lessened the deceased member’s distribution amounts from the amendment date forward.

Rules/Reasons:

1/ In Illinois a contract can be modified by express agreement or by conduct.  A contractual modification that’s not expressly agreed to can be ratified by acquiescence in a course of conduct consistent with recognizing the modification;

2/ An LLC provides more insulation from liability for its members than does a corporation for its shareholders;

3/ Under Section 10-10(a) of Illinois’ LLC Act, 805 ILCS 180/10-10(a), LLC members aren’t liable for debts of the LLC unless (1) the articles of organization provide for personal liability; and (2) the member has consented in writing to the adoption of a personal liability provision;

3/ The failure of an LLC to observe usual corporate formalities in connection with the operation of its business is not a basis for imposing personal liability on LLC members or managers;

4/ When a general partnership converts to an LLC, all that’s required is each partner vote for the conversion.  The partnership does not need to also transfer all of its assets to the newly formed LLC;

5/ Once the conversion from partnership to LLC is complete, all debts and assets of the partnership automatically become those of the LLC;

7/ An LLC member can sue the LLC or another member for legal or equitable relief with or without an accounting to enforce the member’s rights under the LLC Act, the operating agreement or any other rights of the member;

8/ The death of an LLC member results in the member’s disassociation from the LLC;

9/ The LLC Act does not allow for a deceased member’s estate to sue the LLC or other LLC members on the deceased member’s behalf;

805 ILCS 180/10-10(a), (c), 180/15-20.

The court held that here, once the accounting general partnership converted to an LLC, the LLC members (who were the erstwhile partners) had no liability to non-members like the plaintiff.

Additionally, the parties’ conduct indicated a mutual recognition that the deceased’s distributions were reduced by the deceased member accepting lesser distributions for several years before he died.  The court then reversed the judgment against the LLC.

Afterwords:

A former LLC member’s estate has no standing to sue an LLC absent legislative decision to the contrary;

A partnership’s assets and liabilities become those of an LLC upon conversion to the LLC form;

Basic contract formation principles apply when determining LLC members’ rights and duties under an operating agreement.

 

 

Assigning A Breach of Contract Claim In Illinois and The Available Defenses

Contract rights are assigned fairly often, especially in the mortgage loan and credit card contexts.  In the former mortgage scenario, it’s common for a promissory note to be assigned multiple times during the note’s lifespan.  When there’s eventually a note default, it becomes a challenge for the noteholder to trace how it came into the note’s possession.  Repeated note assignments also provide the note maker (person who signed the note) a ready-made defense to a lawsuit based on the note.  The noteholder plaintiff then has the burden of proving to the court that it has the right to sue on the note.

Because assignments are so prevalent and confusion often results as to who can enforce contract rights, it’s important from both plaintiff and defense sides to have a working knowledge of what claims can be assigned and what defenses are available to a a defendant sued by an assignee of a contract claim.

The basics: a person that has a claim against another has a “chose in action.”  Classic examples of a chose in action include a claim for money owed on a debt, a right to stock shares or a claim for damages in tort.  Black’s Law Dictionary 258 (8th ed. 2004)

Choses in action are generally assignable. An assignment transfers title to the chose in action to the assignee, who becomes the real party in interest.  The assignee of the chose in action may then sue on the claim in his or her own name.

An action brought by an assignee is subject to any defense or set-off existing before notice of the assignment is given to the defendant.  735 ILCS 5/2–403(a).  But the set-off or defense must relate specifically to the assigned claim.  It can’t pertain to something extraneous to that claim.

Example, if Company X assigns its 2015 breach of contract claim against Person Y to me and I sue Person Y, Person Y can’t raise as a defense a $1,000 claim Person Y has against Company X from a 2013 contract.  The two contracts are different and involve different underlying facts. Person Y can only defend based on the same 2015 contract Company X assigned.

Puritan Finance Corp. v. Bechstein Const. Corp. 2012 IL App(1st) 112261 illustrates what defenses a defendant has versus a contract claim assignee under the common law and under Article 9 of the UCC.

The plaintiff was the assignee of a bankrupt trucking company (the Assignor) that had previously done business with the defendant.  The Assignor was owed monies by the defendant and assigned its claim to the plaintiff, a secured creditor of the Assignor.

After the plaintiff sued, the defendant asserted defenses based on an unrelated claim it had against the Assignor before the plaintiff’s involvement.  The court granted judgment for the plaintiff after a bench trial for the full amount of its claim (about $22,000) and the defendant appealed.

Affirming the judgment for the assignee, the court first rejected the defendant’s set-off claim under Code Section 2-403(a).  Since the defendant’s set-off involved a contract that was separate from the one being sued on, the defendant couldn’t use this separate contract as a defense to the assignee’s lawsuit.

The defendant’s Article 9 defense was a closer call.  UCC Article 9 governs security interests in personal property as collateral to secure a debt.  Section 9-404(a) of the UCC (810 ILCS 5/9-404) provides that an account debtor can assert against the assignee (1) any defense he (the debtor) had against the assignor “arising from the transaction” giving rise to the assignee’s claim; and (2) any other defense the debtor has against the assignor that accrues before the debtor received notice of the assignment.

Here, the defendant argued that under paragraph (2) of 9-404, it could assert defenses that related to a separate contract between it (the defendant) and the Assignor.  The court disagreed and gave a narrow reading to Section 9-404.

It held that since the defendant didn’t and couldn’t yet file suit against the Assignor before the assignment of the contract to the assignee/plaintiff, the defendant’s claim hadn’t “accrued” within the meaning of Section 9-404.  As a result, judgment for the plaintiff was affirmed.

Afterwords:

– Where a defendant is sued by an assignee of a contract claim, it will be difficult to challenge the claim unless the defendant has claims or defenses against the assignor that are transactionally related to the assigned claim.  If the defendant’s defense relates to a separate, unrelated transaction, the defense or set-off will likely fail;

– Under Section 9-404, a defense “accrues” where the defendant actually has a viable cause of action against the assignor, such as where there has been a default in assignor’s payment obligations, instead of just a bare claim that a defendant is owed money on an unpaid invoice.