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denying motion to exclude expert testimony in a bench trial so that judgment on the weight, if any, to be given to that testimony could be made on a more complete record
Summary of this case from Cantor v. PerelmanOpinion
Civil Action No. 01-507 (KAJ)
March 4, 2004
Michael D. Goldman, Esq., Erica L. Niezgoda, Esq., Potter Anderson Corroon LLP, Wilmington, Delaware, for plaintiffs
Jami Wintz McKeon, Esq., John C. Goodchild, III, Gregory T. Parks, Esq., Morgan, Lewis, Bockius LLP, Philadelphia, Pennsylvania, for plaintiffs
Tood Schiltz, Esq., Wolf, Block, Schorr Solis-Cohen LLP, Wilmington, Delaware, for defendants
Jay A. Dubow, Esq., Wolf, Block, Schoor and Solis-Cohen LLP, Philadelphia, Pennsylvania, for defendants
MEMORANDUM OPINION
I. INTRODUCTION
Presently before me are several motions filed by plaintiffs Chase Manhattan Mortgage Corporation and Chase Home Mortgage Company of the Southeast (collectively, "Chase") and defendants Advanta Corp., Advanta National Bank USA, Advanta Bank Corp., Advanta Mortgage Holding Co., Advanta Mortgage Corp. USA, Advanta Residual Holding Corp., Advanta Mortgage Conduit Services Inc., Advanta Mortgage Corp. Midatlantic, Advanta Mortgage Corp. Northeast, Advanta Mortgage Receivables Inc., Advanta Finance Corp., Advanta Conduit Receivables, Inc. and Advanta Finance Residual Corporation (collectively, "Advanta"). Chase filed this action on July 26, 2001, alleging that Advanta engaged in (1) federal securities fraud, in violation of § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j; (2) Delaware securities fraud, in violation of 6 Del. C. § 7323(a)(2); (3) common law fraud; (4) negligent misrepresentation; and (5) breach of contract, arising out of a transaction in which Advanta sold certain mortgage assets to Chase. (Docket Item ["D.I."] 1.) Jurisdiction is proper under 15 U.S.C. § 78aa and 28 U.S.C. § 1331 and 1367.
Both parties filed Motions for Summary Judgment on September 22, 2003. (D.I. 331, 336.) Thereafter, on October 6, 2003, Chase filed a Motion to Exclude the Expert Testimony of W. Barefoot Bankhead (D.I. 342) and Advanta filed a Motion to Exclude the Expert Testimony of Bella Borg, Melanie Smith, and Brian Olasov (D.I. 345). The parties appeared before me to argue all of these Motions on December 12, 2003. (D.I. 380.) For the reasons that follow, the parties' Motions for Summary Judgment will be denied and the parties' Motions to Exclude Expert Testimony will be denied without prejudice.
II. BACKGROUND
The background information provided herein does not constitute findings of fact, and is culled largely from the allegations contained in Chase's complaint.
A. The Advanta Mortgage Assets
In May 2000, Advanta offered to sell certain mortgage assets to Chase. (D.I. 1 at ¶ 18; D.I. 331 at 7.) The parties were familiar with one another because, prior to the offer to sell, Advanta had serviced billions of dollars worth of Chase's mortgage loans. (Id.) Among the mortgage assets that Advanta was offering for sale were mortgage-backed securities consisting of residual interests in securitized mortgage pools. ( Id. at ¶ 19.) These mortgage pools consisted of subprime residential mortgage loans, which were the same type of loans Advanta had been servicing for Chase. ( Id.)
In some cases, the sponsor of a subprime securitization will retain a subordinated financial interest in the securitization, known as the residual interest. (D.I. 1 ¶ 3.) The residual interest holder is entitled to receive the overcollateralization in the trust (the principal balance of the loans in the trust that exceeds the principal amount of the certificates issued by the trust) and the excess spread (the difference between the average interest rate of the loans in the trust and the average interest rate of the certificates offered by the trust) in the securitization, to the extent those amounts are not required to pay the expenses of the trust and the certificateholders the amounts they are due. (D.I. 331 at 5.)
Subprime mortgage loans are loans to borrowers with sub-standard credit. (D.I. 331 at 3.)
From 1988 through 1999, Advanta sponsored subprime mortgage securitizations approximately four times each year. (D.I. 331 at 6.) Advanta was both the servicer and residual interest holder in the Trusts at issue and routinely assessed the value of its residual interests in those securitizations. ( Id.) The value of the residual interests is determined by projecting the future cash flow from the securitizations to the residual interest holder, discounted to present value. ( Id.)
A subprime mortgage securitization means that a number of loans are pooled together and sold into a trust, and interests in the trust are sold to investors, known as certificateholders. (D.I. 1 ¶ 1.)
Advanta maintained residual interest valuation materials, which consisted of valuation binders or books from each routine assessment. (D.I. 331 at 9.)
Certain assumptions are made in order to project the future cash flow, including the future losses that will be experienced by loans within the trusts, the voluntary prepayment rate for loans within the trusts, the time it will take for the securitizations to reach their overcollateralization targets and therefore allow cash to flow to the residual interest holder, and the discount rate to apply to the cash flow. (D.I. 331 at 6.)
Chase alleges that when a mortgage loan is liquidated, the proceeds from the sale of the mortgaged property are typically used first to reimburse the servicer for any interest payments advanced by the servicer ("servicer advances") in respect of delinquent mortgage payments, and then to pay the remaining principal balance due on the mortgage. (D.I. 1 at ¶ 21.) According to Chase, when Advanta liquidated mortgage loans in mortgage pools it had securitized, it did not use the proceeds first to reimburse the servicer advances, as was common practice in the industry, but instead applied all the proceeds to the unpaid principal balance of the loan, leaving some or all of its interest advances unreimbursed. ( Id. at ¶ 23.) Chase asserts that, by using this procedure, Advanta reported smaller overall losses than it would have reported had it followed the procedures required by the terms of the underlying Servicing Agreements. ( Id.) Chase also alleges that Advanta maintained aged advances on its books relating to loans that had been liquidated, and carried those advances on its books as if they were still recoverable, thus benefitting from the appearance of lower losses. ( Id. at ¶ 23-25.) Chase claims that at the time Advanta proposed to sell its mortgage assets to Chase (the "Transaction" or the "Asset Purchase Transaction"), Chase wrongly believed that Advanta followed the common practice and the terms of the Servicing Agreements governing its trusts. ( Id. at ¶ 27.)
Loans that have been liquidated are referred to as "zero-balance" loans because, after liquidation, their outstanding balance is zero. (D.I. 1 at ¶ 23.)
Chase asserts that the Servicing Agreements typically provide that if the borrower on an underlying mortgage fails to make a scheduled monthly payment, the servicer of the pool, subject to certain exceptions, must advance the interest portion of the delinquent monthly payment to the trust's certificateholders. (D.I. 1 ¶ 20.)
B. Chase's Due Diligence
Chase conducted due diligence for approximately seven months prior to the Transaction. (D.I. 331 at 1.) On June 19, 2000, the parties executed a Confidentiality Agreement wherein Chase "acknowledge[d] that any and all information contained in the Evaluation Material is being provided [by Advanta] without any representation or warranty, express or implied, as to the accuracy or completeness of the Evaluation Material. . . ." ( Id. at 35, D.I. 333, Ex. 46 at 4.) Chase claims that from August 7 through 9, 2000, a team from its company visited one of Advanta's facilities in San Diego, California to look at certain information, including a detailed listing of receivables and advances on zero-balance loans or loans paid in full. (D.I. 1 at ¶ 33.)
Advanta notes that Chase also conducted on-site due diligence at one of Advanta's facilities in Fort Washington, Pennsylvania on July 26-27, 2000 and that, at each of Chase's on-site visits, Advanta provided Chase employees with access to documents, presentations regarding various aspects of Advanta's mortgage business, and the opportunity to interview and meet with Advanta employees. (D.I. 331 at 8.)
Michael Pocisk, Chase's Private Investor Reporting Manager, was responsible for Chase's due diligence review of Advanta's Investor Reporting Department. (D.I. 331 at 16.) In the course of that review, Mr. Pocisk met with various Advanta officials and took notes during each of those meetings. ( Id.) Before one of the meetings, Mr. Pocisk reviewed a copy of a Monthly Summary Report and Certification ("MSRC") for one of the trusts involved in this litigation, the so-called 1997-3 Trust. ( Id. at 18.) Mr. Pocisk's notes on the 1997-3 Trust contain a chart entitled "Summary of loan losses." ( Id., D.I. 333, Ex. 26.) The chart reflects that the total loss amount for the 1997-3 Trust was $19.4 million, which matches the total losses disclosed in Advanta's MSRC for the 1997-3 Trust. ( Id.) Mr. Pocisk drew a line to that total loss number and made the notation "wow" next to it. ( Id.) Mr. Pocisk testified that he wrote "wow" next to the total loss amount because "it was a realized loss that was greater than [he] had ever seen sustained at Chase." ( Id.; D.I. 334 (Pocisk Deposition at 112:6-10).)
C. The Purchase and Sale Agreement
After conducting due diligence, Chase submitted a bid for the assets of Advanta's mortgage business on September 19, 2000, which Advanta initially rejected. (D.I. 331 at 25.) Chase agreed to increase its bid by $25 million and submitted its final bid for Advanta's assets on October 13, 2000. ( Id.) On January 8, 2001, Chase and Advanta entered into a Purchase and Sale Agreement (the "Agreement") whereby Advanta agreed to sell Chase certain assets of Advanta's mortgage business, and Chase agreed to assume certain liabilities relating to the acquired assets. (D.I. 1 at ¶ 41.)
The terms of the Agreement were heavily negotiated between the parties. Section 4.16 of the Agreement contains a provision stating that, "[e]xcept as otherwise set forth in this Agreement, . . the Company [Advanta]. . .[does not] make any representation or warranty whatsoever, express or implied, as to the Assets or the Business. . . ." (D.I. 333, Ex. 48 at 43.) Section 6.24 of the Agreement contains a covenant pursuant to which Advanta agreed to "take such actions as are necessary to insure that, as of the Closing Date, there are no investor cash shortages, no non-recoverable advances of principal and interest, no non-recoverable advances on zero balance loans, and no outstanding checks greater than 180 days." (D.I. 337 at 6; D.I. 333, Ex. 48 at 71.) Section 11.03 of the Agreement contains an integration clause, which states that the "Agreement (including the Disclosure Schedules and the Ancillary Agreements) . . . constitutes the entire agreement among the parties with respect to the subject matter hereof and supersedes all other prior disclosures, agreements and understandings, both written and oral . . . among the parties or any of them with respect to the subject matter hereof. . . ." (D.I. 331 at 27; D.I. 333, Ex. 48 at 84.)
D. The Fallout
The sale of Advanta's mortgage assets closed on February 28, 2001 for a cash price in excess of $1 billion (the "Closing"). (D.I. 1 at ¶ 43.) After the Closing, Chase asserts that it received Advanta's mortgage assets and discovered that Advanta provided misleading information regarding the existence of non-recoverable advances on zero-balance loans and the amount of historic losses suffered by the mortgage pools underlying the residual interest securities. ( Id. at ¶ 49.) Chase further alleges that it learned that Advanta's method of reporting realized losses understated the amount of loss on each mortgage securitization pool. ( Id. at ¶ 52.) Chase claims that Advanta was intentionally deceiving Chase because Advanta knew that it had nonrecoverable advances on zero-balance loans ( id.; at ¶ 55) and knew that it had engaged in practices that were inconsistent with industry custom ( id. at ¶ 71). Chase also claims that Advanta knew Chase would use the inaccurate loss figures to value the residual securities ( id. at ¶ 80) and that Chase had been deceived during the Transaction ( id. at ¶ 92). Chase claims that it has suffered millions of dollars in damages as a result of the alleged misconduct by Advanta. ( Id. at ¶ 95.)
III. STANDARD OF REVIEW
Pursuant to Federal Rule of Civil Procedure 56(c), a party is entitled to summary judgment if a court determines from its examination of "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any," that there are no genuine issues of material fact and that the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c) (2003). In determining whether there is a triable dispute of material fact, a court must review all of the evidence and construe all inferences in the light most favorable to the non-moving party. Goodman v. Mead Johnson Co., 534 F.2d 566, 573 (3d Cir. 1976). However, a court should not make credibility determinations or weigh the evidence. Reeves v. Sanderson Plumbing Prods., Inc., 530 U.S. 133, 150 (2000).
To defeat a motion for summary judgment, Rule 56(c) requires the non-moving party to
do more than simply show that there is some metaphysical doubt as to the material facts . . . In the language of the Rule, the non-moving party must come forward with "specific facts showing that there is a genuine issue for trial." . . . Where the record taken as a whole could not lead a rational trier of fact to find for the non-moving party, there is "no genuine issue for trial."Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586-87 (1986). Accordingly, a mere scintilla of evidence in support of the non-moving party is insufficient for a court to deny summary judgment. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252 (1986).
IV. DISCUSSION
A. Chase's Motion for Summary Judgment
1. Chase's claim that Advanta breached § 6.24 of the Purchase and Sale Agreement
Chase argues that it is entitled to summary judgment on its claim that Advanta breached § 6.24 of the Agreement. (D.I. 337 at 16.) Chase states that, pursuant to § 6.24, Advanta promised that at the time of the Closing there would be no non-recoverable advances on zero balance loans. ( Id.) Chase argues that Advanta had approximately $17.5 million in outstanding advances on zero balance loans at the time of the Closing, constituting a breach of § 6.24. ( Id.)
In response, Advanta asserts that throughout the negotiations concerning § 6.24 of the Agreement, Chase repeatedly "sought a representation from Advanta that there would be no advances on zero balance loans as of the Closing." (D.I. 358 at 6 (emphasis in original).) Advanta states that it never made such a representation, and ultimately agreed that it would take "such actions as were necessary so as to insure that, as of the Closing, there would be `nonon-recoverable advances' on zero balance loans." ( Id.) Advanta claims that its employees understood "non-recoverable advance" to mean "advances that are not capable of being recovered from any source at any time," and that this understanding was communicated to Chase. ( Id. at 7.) Advanta asserts that the $17.5 million in advances at issue were capable of being recovered according to this definition ( id. at 30), an assertion which Chase disputes (D.I. 369 at 6, 8).
I find that Chase is not entitled to summary judgment on its claim that Advanta breached § 6.24 of the Agreement. While there apparently is no dispute that there were approximately $17.5 million in advances on Advanta's zero-balance loans, there is a dispute as to whether those advances were non-recoverable at the time of the Closing. There are genuine issues of material fact as to whether Advanta's understanding of the term "non-recoverable advance" was communicated to Chase during the course of due diligence and negotiations. The parties' arguments require me to look at documentary evidence from the negotiations surrounding the Agreement and, ultimately, to make credibility determinations and speculate as to what the principals involved in negotiating the Agreement were thinking at the time, which is inappropriate at the summary judgment stage. The definition of "recoverable" as it is used in the Agreement is a matter of contract interpretation. However, the issues of fact pertaining to the parties' negotiations may impact the appropriate construction of "recoverable" as it is used in the Agreement, including whether the advances can properly be viewed as "recoverable" if the only source of recovery is money that Chase was entitled to receive anyway as the residual holder. For these reasons, Chase's Motion for Summary Judgment that Advanta breached § 6.24 of the Agreement will be denied.
2. Chase's request for an order pursuant to Federal Rule of Civil Procedure 56(d)
Chase argues that it is entitled to an order, pursuant to Federal Rule of Civil Procedure 56(d), stating that "the undisputed facts establish that Advanta knowingly provided Chase with materially false and misleading information," thereby establishing, for purposes of trial, two of the elements (namely, misrepresentation and scienter) Chase must prove to sustain a cause of action for federal securities fraud and common law fraud. (D.I. 337 at 20.) Specifically, Chase asserts that Advanta's Statements to Certificateholders (the "Statements") under-reported Advanta's historical losses and that Advanta made a misrepresentation of material fact when it gave or directed Chase to them as a source for historical loss information. ( Id. at 22.) Chase further asserts that Advanta made misrepresentations by omission when it "failed continuously throughout the due diligence and negotiation period to tell Chase that the information on the Statements was false." ( Id.)
Federal Rule of Civil Procedure 56(d) provides, in relevant part, that a court "shall if practicable ascertain what material facts exist without substantial controversy . . . [and] make an order specifying the facts that appear without substantial controversy . . . Upon trial of the action the facts so specified shall be deemed established, and the trial shall be conducted accordingly." Fed.R.Civ.P. 56(d) (2003).
In response, Advanta asserts that, for all of the Trusts formed before 1997, "the Statements have a section entitled `Realized Losses Tracking,' which contains complete loss information, including principal and interest losses, experienced by the loans in the Trusts." (D.I. 358 at 14.) Advanta states that the 1997 Trusts show principal losses in a section of the report called, "Mortgage Loan Principal Reduction Information," and show losses relating to interest and servicing advances in other sections of the Statements. ( Id. at 17.) Advanta further asserts that most of the Statements for the 1998 Trusts report the current month's losses, and the Statements for the 1999 and 2000 Trusts report principal losses in a section labeled "Total Realized Loss of Principal." ( Id. at 19.) Finally, Advanta argues that the Statements were produced together with information that was responsive to "literally hundreds of different requests for information," and not specifically in response to Chase's request for loss information, and that the Statements were not false or misleading. ( Id. at 21, 26.)
Based upon this evidence, it is clear that the material facts pertaining to the allegations regarding Advanta's misrepresentation and scienter are in substantial controversy, see Fed.R.Civ.P. 56(d), and, therefore, Chase's request for an order pursuant to Federal Rule of Civil Procedure 56(d) will be denied.
B. Advanta's Motion for Summary Judgment
ln support of it Motion for Summary Judgment, Advanta argues that Chase's common law fraud and negligent misrepresentation claims are barred because, due to the non-reliance and integration clauses contained in the Agreement, Chase cannot establish that it reasonably relied on any allegedly false or misleading information. (D.I. 331 at 35, 36.) Advanta further argues that, to the extent Chase claims that false or misleading information was incorporated into the Agreement, Chase's tort-based claims are barred by the "economic loss" and "gist of the action" doctrines recognized under Pennsylvania law. ( Id. at 37.) Advanta further argues that, if Chase's tort-based claims are not barred, Advanta is entitled to summary judgment in its favor on those claims because the information Advanta provided to Chase was not false or misleading, nor did Advanta intend to defraud Chase. ( Id. at 38) Advanta also argues that it is entitled to summary judgment on Chase's claims that Advanta breached sections 4.11, 4.40, 6.24, 4.04, 4.08, 4.19, 4.22, 4.27, 4.28, 6.26, 4.29 and 6.01 of the Agreement. ( Id. at 47-58). Finally, Advanta argues that it is entitled to summary judgment on its counterclaim that Chase breached certain terms of the Agreement by failing to release over $900,000 from a document holdback that was due to Advanta within two weeks after the Closing. ( Id. at 58.)
Advanta also argues that it is entitled to judgment as a matter of law on Chase's Delaware securities law claim because "Delaware securities law is not applicable where the primary nexus between Delaware and the transaction is the incorporation of one or more parties in the state." (D.I. 331 at 34 (citing 6 Del. C. § 7323 (notes); Singer v. Magnavox Co., 380 A.2d 969, 981 (Del. 1977), overruled on other grounds by Weinberger v. UOP, Inc., 457 A.2d 701, 715 (Del. 1983)).) The fact that Advanta is incorporated in Delaware is not the primary nexus between Delaware and the Transaction at issue. In this case, the parties explicitly agreed, by way of a choice of law provision in § 11.06 of the Agreement, that the "Agreement shall be governed by and construed in accordance with the laws of the State of Delaware. . . ." (D.I. 333, Ex. 48 at 86.) Therefore, Advanta is not entitled to summary judgment as a matter of law on Chase's Delaware securities law claim.
In its Motion for Summary Judgment, Advanta raised the issue that Chase's common law fraud and negligent misrepresentation claims are subject to a choice of law analysis, and that Pennsylvania substantive law should apply to these claims. (D.I. 331 at 34.) In its opposition, Chase argues that there is no true conflict between Pennsylvania and Delaware law with respect to the elements of a fraud claim, and that I need not address the choice of law issues raised by Advanta. (D.I. 348 at 10.)
As Advanta itself recognizes (D.I. 331 at 38), the elements of federal securities fraud, Pennsylvania common law fraud, and Delaware common law fraud are virtually identical in this context. The plaintiff must show that the defendant (1) made a misstatement or omission of material fact (2) with scienter (3) in connection with the purchase or sale of a security (4) upon which the plaintiff reasonably relied and (5) that the plaintiff's reliance was the proximate cause of his or her injury. See AES Corp. v. Dow Chemical Co., 325 F.3d 174, 178 (3d Cir. 2003) (federal securities claim under Rule 10b-5); David Pflumm Paving Excavating, Inc. v. Foundation Services Co., 816 A.2d 1164, 1171 (Pa.Super. 2003) (Pennsylvania common law fraud); Stephenson v. Capano Development, Inc., 462 A.2d 1069, 1074 (Del. 1983) (Delaware common law fraud). Finding no meaningful distinction between Delaware law on fraud and Pennsylvania law on fraud, no conflict of law analysis is required on this point.
Nor is a conflict of law analysis implicated by Advanta's argument that Chase's "tort-based [fraud] claims are barred by the `economic loss' and `gist of the action' doctrines" recognized under Pennsylvania law "because Chase's claims sound in contract." (D.I. 331 at 37.) Any claims that sound in contract in this case are governed by Delaware law by the express terms of the Agreement, see supra n. 10.
Apart from repeating many of the arguments advanced in its own Motion for Summary Judgment, Chase responds by arguing that the non-reliance and integration clauses in the Purchase and Sale Agreement do not preclude Chase's fraud claims under the applicable Third Circuit law. (D.I. 348 at 28.) Chase also argues that Advanta is not entitled to summary judgment on Chase's breach of contract claims because they all raise disputed issues of fact. ( Id. at 55.) Finally, Chase argues that Advanta is not entitled to summary judgment on its counterclaim because there is a genuine dispute of material fact over how many "starting exceptions" existed as of February 28, 2001 upon which to calculate the amount of money that Chase should have released from a document holdback. ( Id. at 58.)
1. The effect of the non-reliance and integration clauses in the Agreement
It is undisputed that § 4.16 of the Agreement contains a non-reliance clause and § 11.03 of the Agreement contains an integration clause. Advanta argues that, due to these clauses in the Agreement, Chase's alleged reliance on misrepresentations was unreasonable as a matter of law. Chase, on the other hand, argues that the presence of a non-reliance or integration clause in the Agreement does not establish, per se, that its reliance was unreasonable.
The "reasonable reliance" element of a Rule 10b-5 claim for federal securities fraud requires a showing of a causal nexus between the misrepresentation and the plaintiff's injury, as well as a demonstration that the plaintiff exercised the diligence that a reasonable person under all of the circumstances would have exercised to protect his own interests. AES Corp. v. Dow Chemical Co., 325 F.3d 174, 178 (3d Cir. 2003) (citing Semerenko v. Cendant Corp., 223 F.3d 165, 174 (3d Cir. 2000)). Reliance is an essential element of a Rule 10b-5 claim. Id. at 180. The existence of a non-reliance clause is but one factor to consider in determining the reasonableness of a party's reliance. Id. at 180, 183.
A sophisticated investor will have to "show more to justify its reliance" in the face of a non-reliance clause. Id. at 180. Though "cases involving a non-reliance clause in a negotiated contract between sophisticated parties will often be appropriate candidates for resolution at the summary judgment stage," the Third Circuit has been "unwilling . . . to hold that the extraction of a non-reliance clause, even from a sophisticated buyer, will always provide immunity from Rule 10b-5 liability." Id.
Both Chase and Advanta are undeniably sophisticated investors. Chase argues that it conducted a diligent and thorough investigation into Advanta's assets and reasonably relied on Advanta's representations, discovering no reason to suspect that Advanta was intentionally providing Chase with false or misleading information. See AES, 325 F.3d at 180 (quoting Straub v. Vaisman Co., 540 F.2d 591, 598 (3d Cir. 1976)) ("a sophisticated investor is not barred [from] reliance upon the honestly of those with whom he deals in the absence of knowledge that the trust is misplaced"). Chase's papers describe, in great detail, the due diligence that it conducted prior to entering into the Transaction and executing the Agreement with Advanta. While judgment for Advanta may be appropriate at some point, I decline to "give controlling significance to the existence of a non-reliance clause in a vacuum." See id. at 182. Advanta is not entitled to summary judgment on Chase's federal securities claim simply because Chase is a sophisticated investor and the Agreement contains a non-reliance clause. See id. ("[T]o hold that a buyer is barred from relief under Rule 10b-5 solely by virtue of his contractual commitment not to rely would be fundamentally inconsistent with § 29(a) [of the Securities Exchange Act, which forecloses anticipatory waivers of compliance with the duties imposed by Rule 10b-5]."); see also In re: Daimler Chrysler AG Sec. Litig., 294 F. Supp.2d 616, 622 (D. Del. 2003) (denying summary judgment that plaintiff was precluded from establishing reasonable reliance where plaintiff was "clearly a sophisticated investor involved in a complex transaction" and many factors weighed in favor of finding that plaintiff's reliance was reasonable).
For the same reasons, I am not persuaded that this case can be resolved in the context of a summary judgment motion with respect to the integration clause in the Agreement, particularly because the integration clause is not as explicit with respect to the issue of reliance as is the non-reliance clause in the Agreement. See In re: DaimlerChrysler Sec. Litig., 294 F. Supp.2d 616, 623 (D. Del. 2003).
2. Advanta's argument that it is entitled to summary judgment on Chase's fraud-based claims and breach of contract claims
Advanta argues that there are no genuine issues of material fact with respect to Chase's fraud claims because Advanta did not knowingly provide Chase with false or misleading information prior to the parties executing the Agreement. However, as discussed supra, I have already determined that there is a substantial controversy between the parties as to the material facts pertaining to Advanta's alleged misrepresentation and scienter, and thus, Advanta is not entitled to summary judgment on Chase's fraud claims. As to the contract claims, Chase has answered each of Advanta's arguments pertaining to those claims by pointing out disputed issues of material fact. (D.I. 348 at 55-58.) Thus, Advanta is not entitled to summary judgment on Chase's breach of contract claims.
For example, Advanta says that it fully disclosed all advances on zero balance loans in the disclosure schedule and, as such, did not breach § 4.40 of the Agreement. (D.I. 331 at 49.) In response, Chase says that one of its witnesses will testify that he was given a one-page schedule showing "a credit balance of $767,618 on advances on zero balance loans and was told that this was `all advances' on zero balance loans," when in fact there were $17.5 million in advances outstanding on zero balance loans, thus creating a genuine issue of material fact as to whether Advanta fully disclosed all advances on zero balance loans. (D.I. 348 at 56.) Advanta also claims that it did not breach § 4.27 of the Agreement because "none of the documents [it] submitted to the SEC containe[d] any material misstatement or omission." (D.I. 331 at 56.) Chase says it has evidence sufficient to prove that Advanta submitted the allegedly false Statements to Certificateholders to the SEC, in violation of federal law, creating yet another genuine issue of material fact. (D.I. 348 at 57.) This colloquy repeats in much the same manner for each of the contractual provisions upon which Advanta has moved for summary judgment.
3. Advanta's argument that it is entitled to summary judgment on its counterclaim
Advanta argues that it is entitled to summary judgment on its counterclaim that Chase breached certain terms contained in a "Post-Closing Letter" executed on February 28, 2001. (D.I. 333, Ex. 66.) Section 1.08(m) of the Agreement states that the parties would place certain funds in a Document Holdback Account to protect Chase from losses relating to missing or defective documents in various loan files. (D.I. 333, Ex. 48 at 12.) Since the parties had not completed the audit of those loan files by the Closing, they agreed to place an amount in the Document Holdback Account that would cover any of the losses. (D.I. 331 at 58.)
At Closing, $1,270,020 was placed in the Document Holdback Account. (D.I. 333, Ex. 67 at 2.) The Holdback Amount at Closing was $346,830, which was calculated using a Holdback Agreement per Document of $55.00. ( Id.) Advanta argues that the terms of the Post-Closing Letter required that "[w]ithin two weeks after the date hereof, Buyer [Chase] shall release any funds in the Document Holdback Account in excess of the amount that would have been the amount of the Document Holdback at closing, computed in accordance with the provisions of the Agreement." (D.I. 333, Ex. 66.) Advanta claims that Chase owes it the difference between the amount placed in the Document Holdback Account and the Holdback Amount at Closing (in excess of $900,000).
In response, Chase disputes the evidence provided by Advanta to support its calculations, claiming that it lists 6,305 document exceptions and that "[t]here is other evidence . . . that there were 23,091 `starting exceptions' (i.e., the exceptions as of the Closing Date)." (D.I. 348 at 58-59.) Chase also questions the source and reliability of the evidence. Chase then argues that, using its evidence, "$55 per exception equals $1,270,005 — $5 more than was placed in the holdback." However, Advanta's chart reflects that $1, 270,020 was placed in the holdback. (D.I. 333, Ex. 67.)
In response, Advanta states that documentary evidence was provided to it by Bankers Trust, the custodian of the loan files, "on the day of Closing for the specific purpose of determining the number of outstanding document exceptions at the time of closing." (D.I. 372 at 19.) Advanta argues that Chase does not explain the source of the documentary evidence it cites to rebut Advanta's calculations. ( Id.) Advanta then states that, on the basis of Chase's evidence, Chase was required to release $1,179,800 to Advanta from the Document Holdback Account by March 2002 at the latest. ( Id.)
On this issue too, there are genuine issues of material fact. How much money, if any, Chase was required to release to Advanta from the Document Holdback Account cannot be answered on the present record, as the parties themselves appear to have changed their calculations numerous times in the course of briefing this issue and seem to be confused (or at least confusing) about the documentary evidence upon which they each rely. Summary judgment for Advanta on its counterclaim will therefore be denied.
C. The Parties' Motions to Exclude Certain Expert Testimony
On October 6, 2003, Chase filed a motion to exclude the expert testimony of W. Barefoot Bankhead. (D.I. 342.) That same day, Advanta filed a motion to exclude the expert testimony of Bella Borg, Melanie Smith and Brian Olasov. (D.I. 345.)
Advanta offered W. Barefoot Bankhead as an expert regarding the residual interests in Advanta's subprime mortgage securitizations and to rebut Chase's valuation of the residual interests at issue and to opine on the adequacy of Chase's due diligence. (D.I. 343 at 3, 4.) Chase argues that Mr. Bankhead is incapable, as a matter of law, to proffer opinions because he has "never before valued assets of this nature [subprime mortgage securitizations] and never performed due diligence for an acquisition like [the one involved in this litigation]." ( Id. at 5.)
Chase retained Bella S. Borg to "formulate opinions concerning industry standards with respect to application of liquidation proceeds and reporting of losses due to loan foreclosures within a securitization." (D.I. 347 at A1.) Advanta argues that Ms. Borg's opinions are "unsupported and unreliable" and "precisely the type of testimony barred by Rule 702 and Daubert." (D.I. 346 at 4.) Advanta further argues that Ms. Borg's experience has been limited to the prime mortgage industry and commercial loans, as opposed to the subprime residential loans at issue in this case. ( Id. at 5.) Finally, Advanta argues for the exclusion of Ms. Borg's opinions that there is a standard definition within the industry for "realized loss" and that Advanta did not comply with the industry standards for reporting realized loss. ( Id.) Advanta says those opinions should be excluded because Ms. Borg employed no methodology in reaching her conclusion. ( Id. at 8.)
Chase offered Melanie Smith as an expert to opine on whether Schedule 4.40 of the Agreement in this case contained an adequate disclosure of advances on zero balance loans. (D.I. 347 at A108.) Advanta argues that Ms. Smith's testimony should be excluded at trial because it is "based on an incomplete and limited set of facts" and "offers no assistance to this Court." (D.I. 346 at 19.)
Finally, Chase offered Peter Olasov as an expert to "express opinions as to the reliance Chase placed on various materials in pricing and consummating its acquisition of various assets and operations related to Advanta's sub-prime business along with the impact to value associated with changes to various assumptions Chase made in acquiring these assets." (D.I. 347 at A201.) Advanta argues that Mr. Olasov's report and testimony contain "speculative and unsupported assumptions that cannot form the basis of an expert opinion." (D.I. 346 at 26.)
Federal Rule of Evidence 702 obligates judges to ensure that any scientific testimony or evidence admitted is relevant and reliable. See Daubert v. Merrell Dow Pharms., Inc., 509 U.S. 579, 589 (1993). The Rule provides that "if scientific, technical, or other specialized knowledge will assist the trier of fact to understand the evidence or to determine a fact in issue, a witness qualified as an expert by knowledge, skill, experience, training or education, may testify thereto in the form of an opinion or otherwise." Fed.R.Civ.P. 702 (2003). The party offering the expert has the burden of proving admissibility. Daubert, 509 U.S. at 592 n. 10. The subject of an expert's testimony must be grounded in the methods and procedures of science and based on more than a subjective belief or speculation. Id. at 589-590. Further, Federal Rule of Civil Procedure 702 requires that expert testimony assist the trier of fact, in other words, it must "fit" the issues in the case by having a "valid scientific connection to the pertinent inquiry." Id. at 591-92.
In determining "whether the expert is proposing to testify to (1) scientific knowledge that (2) will assist the trier of fact," the court must assess whether the methodology underlying the testimony is scientifically valid and whether it can properly be applied to the facts in issue. Id. at 592-93. Furthermore, the court must examine the expert's conclusions in order to determine whether they can reliably follow from the facts known to the expert and the methodology used. Heller v. Shaw Indus., Inc., 167 F.3d 146, 153 (3d Cir. 1999).
A party cannot qualify a person as an expert generally by showing that the expert has specialized knowledge or training which would qualify him or her to opine on some other issue. Redman v. John D. Brush and Co., 111 F.3d 1174, 1179 (4th Cir. 1997); Barrett v. Atl. Richfield Co., 95 F.3d 375, 382 (5th Cir. 1996). Moreover, testimony of an expert that constitutes mere personal belief as to the weight of the evidence invades the province of the fact-finder. McGowan v. Cooper Indus., Inc., 863 F.2d 1266, 1273 (6th Cir. 1987); STX, Inc. v. Brine, Inc., 37 F. Supp.2d 740, 768 (D. Md. 1999) (quotation omitted), aff'd, 211 F.3d 588 (Fed. Cir. 2000); Sec. and Exch. Comm'n v. Lipson, 46 F. Supp.2d 758, 763 (N.D. III. 1998).
This case is currently scheduled for a one-week bench trial to begin on April 26, 2004. At oral argument, I asked counsel for both parties whether l was obligated to carry out the "gatekeeping" function of Daubert in a bench trial in the same manner as I am obligated to in a jury trial. (D.I. 380 at 13:19-25.) Counsel candidly and correctly pointed out that the leading cases in the Third Circuit do not carve out any exception for applying Daubert differently in a bench trial than in a jury trial, nor does the case law indicate whether I must decide to exclude expert testimony prior or subsequent to a bench trial. ( Id. at 16:17-25 through 17:1-11.)
The parties' main argument was that, if I ruled on their Daubert motions before trial, it would streamline their trial preparations and perhaps prevent them from spending the time allocated to them at trial to examine expert witnesses whose testimony may ultimately be excluded. However, given the parties' briefing, the qualifications of the experts at issue, and the experts' reports and deposition testimony, I will not say at this point and on this record that the experts' opinions are so poor a fit with the evidence and so inadequate in their foundation as to be irrelevant or unreliable, and I therefore decline to exclude the proposed expert testimony at this time. If this were a jury trial, I might view the balancing differently, however, in the present context I will allow Mr. Bankhead, Ms. Borg, Ms. Smith, and Mr. Olasov to testify at trial. Both Chase's and Advanta's motions to exclude expert testimony will be denied without prejudice to their arguing about what weight, if any, the expert testimony should be given.
While I am mindful of the costs associated with preparing expert witnesses for trial, I believe that my ultimate judgment on the weight to be given to expert testimony is best made on a more complete record than presently exists.
Advanta also argues that the opinions contained in Ms. Smith's and Mr. Olasov's supplemental reports should be excluded because they were submitted six weeks after the deadline for expert reports, and that Advanta was prejudiced as a result of their untimely submission. (D.I. 346 at 25, 33.) In response, Chase states that the supplemental reports of Ms. Smith and Mr. Olasov should not be excluded because Mr. Olasov's initial report stated that he would be submitting a supplemental report; both supplemental reports were submitted only a few weeks after the deadline; Advanta had ample opportunity to depose both Ms. Smith and Mr. Olasov about their supplemental reports; and the trial was not set to begin until over seven months after the supplemental reports were submitted. (D.I. 362 at 27.)
The touchstone for determining whether to exclude untimely expert reports is whether the party opposing their admission is prejudiced. In re Paoli R.R. Yard PCB Litig., 35 F.3d 717, 791 (3d Cir. 1994) (citation omitted). Advanta has not pointed to any prejudice that it suffered as a result of the late supplemental reports proffered by Ms. Smith and Mr. Olasov. Ms. Smith's supplemental report was served upon Advanta eight days prior to her deposition, and Mr. Olasov's supplemental report was served upon Advanta two days prior to his deposition. (D.I. 366 at 16.) Thus, Advanta had the opportunity to question both of these experts on the opinions expressed in their respective supplemental reports and could have rescheduled those depositions if it believed it needed additional time.
Advanta's only argument for excluding the supplemental reports is that they were late. While that is obviously a highly important factor, it is not alone determinative. If Advanta truly thought it was prejudiced by these supplemental reports, it should have raised the issue back in September of 2003. That Ms. Smith's and Mr. Olasov's supplemental reports were delivered prior to their depositions, albeit a few weeks late, coupled with the fact that Advanta has not articulated any prejudice that it has suffered as a result of their late submission, leads to the conclusion that they should not be excluded. In re Paoli R.R., 35 F.3d at 792 (reversing district court's decision to exclude evidence as untimely where "prejudice to defendants was extremely minimal").
V. CONCLUSION
For the reasons set forth, Chase's Motion for Summary Judgment (D.I. 336) will be denied and its request for an order pursuant to Federal Rule of Civil Procedure 56(d) will be denied. Advanta's Motion for Summary Judgment (D.I. 329) will be denied. Both Chase's and Advanta's Motions to Exclude Expert Testimony (D.I. 342, 345) will be denied without prejudice to their arguing about what weight, if any, the expert testimony should be given.
An appropriate order will issue.
ORDER
In accordance with the Memorandum Opinion issued today, it is hereby ORDERED that
1. Chase's Motion for Summary Judgment (D.I. 336) is DENIED;
2. Chase's request for an order pursuant to Federal Rule of Civil Procedure 56(d) is DENIED;
3. Advanta's Motion for Summary Judgment (D.I. 329) is DENIED;
4. Both Chase's and Advanta's Motions to Exclude Expert Testimony (D.I. 342, 345) are DENIED WITHOUT PREJUDICE to their arguing about what weight, if any, the expert testimony should be given.