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In Feinberg v. Katz, No. 01 CIV. 2739(CSH), 2007 WL 4562930 (S.D.N.Y. Dec. 21, 2007)(Haight, J.), an expert attempted to testify that specific "omissions from the financial statements are material and it is my opinion that had this information been available, many if not all of the creditors using these financial statements would not have issued credit to the Company."
Summary of this case from Sec. & Exch. Comm'n v. GoldstoneOpinion
01 Civ. 2739 (CSH).
December 21, 2007
MEMORANDUM OPINION AND ORDER
The strife between plaintiff Herbert Feinberg and defendants Norman and Stephen Katz (sometimes collectively "the Katzes") continues. This matter is before the Court on the defendants' motion in limine to preclude the testimony of plaintiff's proposed expert.
I. PROCEDURAL HISTORY
The factual background of this litigation has been recited in the Court's prior opinion, Feinberg v. Katz, No. 99 Civ 45, 2002 WL 1751135 (S.D.N.Y. July 26, 2002), familiarity with which is assumed. The Court restates the underlying facts to the extent necessary to comprehend defendants' motion to exclude expert testimony.
Feinberg and Norman were each 50% co-owners of an apparel manufacturer, I. Appel Corporation ("I. Appel"). Norman's son Stephen Katz ("Stephen") was employed by I. Appel as vice-president. Under a purchase agreement executed in 1996, Feinberg purchased Norman's 50% interest in I. Appel. An arbitration covering several disputes arising out of the purchase agreement took place. This Court issued a decision vacating the arbitration award in part and confirming it in part. See Katz v. Feinberg, 167 F. Supp. 2d 556 (S.D.N.Y. 2001), aff'd 290 F.3d 95 (2d Cir. 2002).
Feinberg, in different capacities, filed three complaints against the Katzes asserting various causes of action. At issue here is the amended complaint captioned 01 Civ 2739, which Feinberg, as the assignee of the claims of Alliance's creditors, filed against the Katzes. The amended complaint initially asserted claims for common law fraud, RICO, breach of fiduciary duty, constructive fraud and fraudulent conveyance, alleging in general terms that the Katzes disguised the company's true financial condition from its creditors. On November 3, 2005, I issued an opinion which narrowed the scope of Feinberg's complaint. I concluded that Feinberg's claim that I. Appel's financial statements were false because of inventory valuation was barred under the doctrine of collateral estoppel. I also dismissed Feinberg's RICO claim for lack of subject matter jurisdiction.
In April 1997, I. Appel filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York. The bankruptcy court approved the company's first amended plan of reorganization in May 1998. Under the terms of the plan, Alliance, the corporate successor of I. Appel, was entitled to assert all claims held by its creditors as of April 30, 1997. In June 2000, Alliance assigned the creditors' claims to Feinberg.
Subsequently, Feinberg revised his theory of fraud, alleging that the defendants failed to notify creditors of I. Appel's proposed or actual closings of domestic manufacturing plants closings and the financial loss associated with those closings, and of Stephen's alleged creation of fictitious invoices for "services" that were never performed in order to divert company assets for his personal use. Feinberg also claims that the financial statements the Katzes issued to creditors were false because the projections in the statements were overstated.
II. MOTION TO EXCLUDE PLAINTIFF'S EXPERT WITNESS
In support of his fraud claim, plaintiff filed the nine-page report of his designated expert Terry L. Ehrlich, a certified public account. Feinberg seeks to admit the testimony of Mr. Ehrlich to provide opinions on whether defendants' alleged omissions and misrepresentations were material and whether creditors would have relied on such information in extending credit to I. Appel. Mr. Ehrlich's report has been furnished to defendants' counsel as initial discovery under Federal Rules of Civil Procedure Rule 26(a)(2) and 26(b)(4). On the basis of that report, defendants move in limine to exclude the proposed testimony of Mr. Ehrlich, arguing that such testimony contravenes Federal Rules of Evidence 702 and 704.III. THE PROFFERED EXPERT TESTIMONY
In the report, Mr. Ehrlich states that he has "25 plus years of experience in the apparel industry." Ehrlich Report at 6. His education and career experience is detailed in his report. See id. at 8. He states that he is a certified public accountant and since 1980 has "handled many clients in the apparel industry." Id. He says that during this time he has issued, audited and reviewed financial statements and assisted in the preparation of projected financial statements. Id.
As set forth in his report, Mr. Ehrlich's offers opinions on the issues of (1) "whether any financial information provided by defendants Norman Katz and Stephen Katz to trade creditors contained materially false information or omitted material information so as to make the financial information false and misleading; [and] (2) whether any materially false or omitted information would have been a factor in a trade creditor's decision to extend credit to I Appel during the period covering 1994, 1995 and through October 1996." Id. at 2
In reaching his conclusions, Mr. Ehrlich states that he reviewed certain documents generated by discovery. See Ehrlich Report 2-4. Mr. Ehrlich also states that his opinions are based on the assumption that:
Norman Katz and/or Stephen Katz were the parties who decided to eliminate and oversaw the elimination of the plant in Scotts Hill, Tennessee and supervised the establishment of Mexican manufacturing facilities; that Norman and/or Stephen Katz prepared various projections for I. Appel for 1996.Id. at 4. Mr. Ehrlich further states that he has "read testimony and related exhibits concerning defendant Stephen Katz's creation of dummy invoices for Guilford Mills and other matters relating to accounts which he controlled." Id. Mr. Ehrlich's observations and opinions are thereafter expressed in paragraph form. I will quote verbatim the paragraphs central to his proferred opinions.
Mr. Ehrlich first discusses a meeting during which the Katzes allegedly informed the Bank of New York of I. Appel's domestic plant closings:
On February 27, 1996 a meeting was held between Roy Walsh and Tim Griebert, who were executives with Bank of New York Factoring division (the factor), and Norman and Steven Katz who were representing I. Appel Corp. (Company). Notes taken at this meeting by Tim Griebert indicate that they were told that the Company would show a loss of between $3.5 and $3.7 million for the fiscal year ended December 31, 1995. They were also told that due to competition the Company closed two of its remaining three domestic manufacturing plants in November 1995. The notes indicate that the closing of these plants would result in an extraordinary loss of $3 million to be taken in 1995. Included in these losses were losses from an unforeseen settlement with the landlord for Wior Corp and severance pay from the closing of the last US plant in January 1996. Moving and startup expenses related to new facilities in Mexico were also anticipated. The notes also indicate that the Company expected a loss from operations of about $1 million.Id. at 5.
Mr. Ehrlich then observes that I. Appel's financial statements make no mention of the plant closings:
The financial statements issued by Mahoney Cohen Rashba Pokart, CPA, PC dated April 8, 1996 indicate a bottom line loss of $3.6 million. The loss from operations is $2.6 million. The other deductions of $1 million make no mention of the extraordinary losses expected by management at the February 27, 1996 meeting. The notes to the financial statements make no mention of extraordinary losses or any subsequent events related to these closings.
I have not had the opportunity to review the work papers related to this financial statement but it appears that management has made no reference to these closings or their financial impact on the Company because such losses would ordinarily be reported as extraordinary. Recent conversations with the former plant manager indicated that the last domestic plant was closed around May 1, 1996. Due to federal regulations I understand that management would have had to post a notice to the employees 60 days before the plant closing. This means that management knew the closing was about to happen before the December 31, 1995 financial statements were issued. This appears to be a material event and should have been mentioned in the subsequent event note. The financial statements do not mention anything about the move to Mexico, or its financial impact on the Company's financial statements.Id. at 5-6.
Mr. Ehrlich then expressed the following conclusions in his report regarding the plant closings:
• These omissions from the financial statements are material and it is my opinion that had this information been available, many if not all of the creditors using these financial statements would not have issued credit to the Company.
• Projections for the year ended December 31, 1996 were prepared and sent out in early 1996, these projections did not make any mention of costs associated with plant closings. Even after the projections were revised at mid year no mention is made about the plant closings.
• In my 25 plus years of experience in the apparel industry I have become aware of the importance that the credit company puts on these projections. An omission of a material expense, either operation or extraordinary can make the difference between the approval or denial of credit. It is my opinion that if the additional costs of closing down the domestic manufacturing operations were reported on the projected financial statements many if not all of the creditors would have denied additional credit to the Company.Id. at 6.
Next, Mr. Ehrlich voices the following conclusions in his report regarding Stephen Katz's alleged creation of fictitious invoices while he was employed with I. Appel:
• I have read testimony that Steven Katz had created dummy invoices indicating that the Company had made phantom purchases from Guilford Mills. The amounts paid were deposited in an account that only he had control over. The evidence suggests thefts from the Company. The amount of this theft is immaterial to the financial results. However this is an indication of lack of internal control and could be just a small piece of a larger scheme. It is my opinion that had this lack of internal control been reported to the credit community many if not all of the creditors would have denied additional credit to the company.Id. at 6-7.
Lastly, Mr. Ehrlich opines as follows concerning the projections contained in I. Appel's financial statements:
• The factoring and credit community associated with the apparel industry rely greatly upon the financial statements and projections of companies to determine if that company is a good credit risk. When financial statements and projections are misleading or do not report all the facts the credit community will make decisions they might not have had they known all the facts. In most cases when a weak company issues a financial statement that has material differences it is done to induce creditors to issue credit when they are not in fact credit worthy.
• I Appel, Corp issued financial statements of December 31, 1995 and subsequent projections that did not indicate how financially weak they were. Thus many factors and other credit services as well as individual creditors issued credit to an entity that was not credit worthy. It is my opinion that had the credit community been presented the correct financial statements and projections they would not have issued credit to the company. This would have caused the Company to close its operation unless there was a significant influx of capital. This happened on or about April 1, 1997 when the company filed for protection under Chapter XI.Id. at 7.
IV. DISCUSSION
A. The Parties' Contentions
702
Additionally, defendants maintain that Mr. Ehrlich incorrectly assumes that the defendants failed to disclose I. Appel's domestic plant closings, and therefore any opinions proffered on the basis of this alleged false assumption should be excluded. But that issue is not germane to this motion to preclude, because the defendants' contention does not implicate the propriety of Mr. Ehrlich's opinions under Rule 702. Counsel routinely ask their expert witness to "assume" various facts as the basis for his opinion; and trial judges routinely instruct juries to disregard the expert's opinion if the jury finds that those assumptions were not established by or are contrary to the evidence. If Mr. Ehrlich's opinions pass muster under Rule 702, this additional question issue will be explored at trial. If they do not, the question does not arise.
In response to defendants' objections, Feinberg argues that Mr. Ehrlich's testimony creates the framework for the jury to properly understand the general accounting principles and custom and practice associated with extending credit in the apparel industry. In particular, he states that Mr. Ehrlich's testimony will assist the jury in understanding the importance creditors in the apparel industry place on financial statements and projections.
Plaintiff also disputes defendants' argument that only the creditors who extended credit to I. Appel may testify as to whether they relied or would have relied on the alleged misrepresentations and omissions at issue. Plaintiff argues that to the extent his common law fraud claim is based on defendants' omissions, proof of reliance is not required because New York law permits a presumption of reliance, once the materiality of the omission is proved
B. Governing Law 1. Fraud
"The elements of common law fraud are a material, false representation, an intent to defraud thereby, and reasonable reliance on the representation, causing damage to the plaintiff." Katara v. D.E. Jones Commodities, Inc., 835 F.2d 966 (2d Cir. 1987) (applying New York law) (citation omitted).
The alleged fraudulent acts discussed in Mr. Ehrlich's report are (1) defendants' failure to advise creditors that I. Appel intended to close its domestic manufacturing operations and that such closings would result in a financial loss to the company; (2) defendants' failure to advise creditors that the company's vice-president was engaged in fraudulent activities, including theft of company assets; and (3) defendants' submission of false financial statements: false because the projections do not reflect or account for the omissions. In sum, plaintiff's fraud theory is that defendants omitted to state material facts, not that they made untrue statements of material facts.
If this was an action under the federal Securities Exchange Act of 1934, "involving primarily a failure to disclose, positive proof of reliance is not a prerequisite to recovery. All that is necessary is that the facts withheld be material in the sense that a reasonable investor might have considered them important in the making of this decision." Affiliated Ute Citizens of the State of Utah v. United States, 406 U.S. 128, 153-54 (1972) (construing the oft-invoked antifraud provision in section 10(b) of the Securities Exchange Act of 1934 and its accompanying SEC rules).
However, this is not a federal securities case. Plaintiff's claims sound in common law fraud, as delineated by the New York courts. It is doubtful that New York courts would apply to a common law fraud claim that presumption of reliance found in Affiliated Ute and other securities cases. In Securities Investment Protection Corp. v. BDO Seidman, LLP, 222 F.3d 63 (2d Cir. 2000), the Second Circuit, affirming the district court's dismissal of investors' New York law fraud claims against an auditor who filed false audit reports on behalf of a defunct broker-dealer, noted that "federal courts repeatedly have refused to apply the fraud on the market theory to state common law claims despite its wide acceptance in the federal securities fraud context," id. at 73 (citations omitted), added that "New York courts have also recognized this difference," id., and concluded:
Given that New York has not adopted even the well-recognized fraud on the market theory to allow a fraud on the market theory to allow a presumption of reliance in common-law fraud cases, we see no basis for applying the fraud on the regulatory process theory to achieve that end in this state-law case. Contrary to the plaintiffs' contention, therefore, we will not presume that Baron's customers [the investors] relied on Seidman's [the auditor's] misrepresentations. Rather, the plaintiffs must show that the customers "actually relied" on Seidman's certified statements to the SEC and the NASD regading Baron's [the broker-dealer's] financial health.Id.
Turning to New York cases, the court in Stellema v. Vantage Press, Inc., 470 N.Y.S.2d 507, 510 (N.Y.Sup.Ct. 1983), for example, stated that "while reliance need not be proved" in cases involving claims arising under the federal securities laws in view of Affiliated Ute, "the requirement of a showing of reliance has not been removed in common-law fraud cases." Similarly, in Strauss v. Long Island Sports, Inc., 401 N.Y.S.2d 233, 237 (N.Y.App.Div. 1978), the court noted that although the presumption of reliance is applicable to affirmative misrepresentations in federal 10b-5 securities cases, "10b-5 cases are very much distinguishable from common-law fraud cases."
On the other hand, Weinberg v. Hertz Corp., 499 N.Y.S.2d 693, 696 (N.Y.App.Div. 1986) held that "once it has been determined that the representations alleged are material and actionable . . . the issue of reliance may be presumed, subject to such proof as is required on the trial."
The parties' briefs do not discuss the presumption of reliance issue. I will assume without deciding that, following the greater weight of authority, New York common law fraud requires a plaintiff to show direct reliance by the victim with respect to both misrepresentatuions and omissions. As the analysis infra shows, that assumption is not essential to the Court's disposition of defendant's motion to preclude the proffered opinion evidence.
2. Admissibility of the Proferred Opinions
The admissibility of expert opinions at trial depends principally upon Rule 702 of the Federal Rules of Evidence, most recently amended in 2000. A witness qualified as an expert will be permitted to testify if his or her testimony "`will assist the trier of fact to understand the evidence or to determine a fact in issue.'" United States v. Lumpkin, 192 F.3d 280, 289 (2d Cir. 1999) (quoting Rule 702). To be admissible, expert testimony must be both relevant and reliable. Daubert v. Merrell Dow Pharms., Inc., 509 U.S. 579, 589 (1993). As the Court explained in Daubert, the trial judge's task is to "ensure that an expert's testimony both rests on a reliable foundation and is relevant to the task at hand." Id. at 597. In its later opinion in Kumho Tire Co. v. Carmichael, 526 U.S. 137, 141 (1999), the Court characterized this task as "the trial judge's general `gatekeeping' obligation." While Daubert set forth a non-exclusive checklist for trial courts to use in assessing the reliability of scientific expert testimony, Kumho held held that these factors might also be applicable in assessing the reliability of non-scientific testimony, depending upon "the particular circumstances of the particular case at issue." 526 U.S. at 150.
As the Advisory Committee's Notes to the 2000 Amendments to the Federal Rules of Evidence state, "Rule 702 has been amended in response to" the Supreme Court's decisions in Daubert and Kumho.
In discharging its gatekeeping obligation, the trial judge the court must first find that the proposed witness's "scientific, technical, or other specialized knowledge will assist the trier of fact to understand the evidence or to determine a fact in issue," Fed.R.Evid. 702. If the court makes this finding, then "a witness qualified as an expert by knowledge, skill, experience, training, or education, may testify in the form of an opinion, provided (1) the testimony is based upon sufficient facts or data, (2) the testimony is the product of reliable principles and methods, and (3) the witness has applied the principals and methods reliably to the facts of the case." Id.
Rule 702 is intended to ensure that the expert testimony at issue is "helpful to the jury in comprehending and deciding issues beyond the understanding of a layperson." DiBella v. Hopkins, 403 F.3d 102, 121 (2d Cir. 2005). But two principles of opinion preclusion are well established and antedate Daubert, Kumho, and the 2000 amendments to Rule 702. An expert witness's opinion may not "merely tell the jury what result to reach," and it may not "usurp the trial judge's function of instructing the jury on the law." Kidder, Peabody Co., Inc. v. IAG International Acceptance Group N.V., 14 F.Supp.2d 391, 398 (S.D.N.Y. 1998) (collecting Second Circuit cases). In one of those cases, United States v. Duncan, 42 F.3d 97, 101 (2d Cir. 1994), the court of appeals said:
Generally, the use of expert testimony is not permitted if it will "usurp either the role of the trial judge in instructing the jury as to the applicable law or the role of the jury in applying that law to the facts before it." When an expert undertakes to tell the jury what result to reach, this does not aid the jury in making a decision, but rather attempts to substitute the expert's judgment for the jury's. When this occurs, the expert acts outside his limited role of providing the groundwork in the form of an opinion to enable the jury to make its own informed determination. In evaluating the admissibility of expert testimony, this Court requires the exclusion of testimony which states a legal conclusion.
In Duncan, the Second Circuit (1) held admissible the testimony of an IRS agent investigating a complicated land and tax fraud scheme with respect to certain factual conclusions, but who had not "expressed an opinion as to whether Duncan was guilty of the offense charged" and (2) distinguished its prior opinion in United States v. Scop, 846 F.2d 135, modified, 856 F.2d 5 (2d Cir. 1988); Kidder Peabody, 14 F. Supp. 2d at 399 (citations omitted).
In Scop, a securities fraud case, the Second Circuit found reversible error in the trial court's permitting an SEC investigator with no personal knowledge of the facts to characterize the defendant's conduct as "fraudulent" in language that tracked the governing statute. In particular, the Court "found the SEC investigator's testimony particularly objectionable because his stated conclusions were not based on personal knowledge, but on his assessment of the testimony and credibility of other witnesses." Duncan, 42 F.3d at 101. Furthermore, the Court "found that the investigator encroached on the exclusive province of the jury in weighing witness veracity." Id.
In allowing the expert testimony, the Duncan court also distinguished Hygh v. Jacobs, 961 F.2d 359 (2d Cir. 1992), a civil rights action brought against a police officer which alleged excessive use of force. In Hygh the expert went beyond making factual conclusions and instead asserted conclusory condemnations (that the defendant's conduct constituted deadly force and was not justified under the circumstances), which in effect "merely told the jury what result to reach." Id. at 364 (citations omitted).
In United States v. Bilzerian, 926 F.2d 1285 (2d Cir. 1991), another securities fraud case cited in Duncan, the court restated the general rule that "although an expert may opine on an issue of fact within the jury's province, he may not give testimony stating ultimate legal conclusions based on those facts." Id. at 1294. The Bilzerian court concluded that the district court did not abuse its discretion in admitting the expert testimony of a professor who provided general background information on federal securities regulations and on the filing requirements of Schedule 13D (a document filed with the SEC which discloses the acquisition of a significant amount of stock in a publicly traded company). Id. The court also held that the district court properly limited the testimony of defendant's expert witness, which "related directly to the issue of whether [the defendant's] actual 13D disclosures complied with the legal requirements." The court reasoned that:
Although testimony concerning the ordinary practices in the securities industry may be received to enable the jury to evaluate a defendant's conduct against the standards of accepted practice, . . . testimony encompassing an ultimate legal conclusion based upon the facts of the case is not admissible, and may not be made so simply because it is presented in terms of industry practice.Id. at 129 (citing Marx Co. v. Diners' Club, Inc., 550 F.2d 505, 509 (2d Cir. 1977)).
Applying these principles to the proferred opinions of Mr. Ehrlich, a number of problems present themselves.
First, if one assumes that common law fraud under the New York cases requires direct evidence of reliance by victims of the fraud upon the misrepresentations or omissions in question, the Ehrlich opinions fail to satisfy that element. Mr. Ehrlich was not a creditor of I. Appel. He did not examine the company's financial statements with a view toward deciding whether or not to extend credit to the company. Instead, he opines generally (and not surprisingly) that "[t]he factoring and credit community associated with the apparel industry rely greatly upon the financial statements and projections of companies to determine if that company is a good credit risk," and that if the allegedly omitted information had been included in the statements, "many if not all of the creditors using these financial statements would not have issued credit to the Company." These are not admissible opinions under the New York law of fraud as I have assumed it to be. If plaintiff goes to trial without calling a single real, live creditor to testify that he read the financial statements and would not have extended credit to I. Appel if they had included this particular omitted information, there will be under New York law a fatal deficiency of proof on the element of reliance.
Even if that assumption on New York law is wrong, Mr. Ehrlich's opinions fail to pass muster under the general principles of preclusion discussed supra. One of Mr. Ehrlich's professed opinions illustrates the problem vividly. As we have seen he opines:
These omissions from the financial statements are material and it is my opinion that had this information been available, many if not all of the creditors using these financial statements would not have issued credit to the Company.
For a misrepresentation or omission to be actionable in fraud, it must be material. In TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 450 (1976), the Supreme Court considered the concept of materiality:
The issue of materiality may be characterized as a mixed question of law and fact, involving as it does the application of a legal standard to a particular set of facts. In considering whether summary judgment on the issue is appropriate, we must bear in mind that the underlying objective facts, which will often be free from dispute, aremerely the starting point for the ultimate determination of materiality. The determination requires delicate assessments of the inferences a reasonable shareholder would draw from a given set of facts and the significance of those inferences to him, and these assessments are peculiarly ones for the trier of fact. Only if the established omissions are so obviously important to an investor, that reasonable minds cannot differ on the question of materiality is the ultimate issue of materiality appropriately resolved as a matter of law by summary judgment.
(citations and internal quotation marks omitted) (emphasis added).
While TSC Industries involved investors rather than creditors, the concept of materiality is the same, and the Court's analysis is equally instructive. Unlike TSC Industries, the issue of materiality arises not on a motion for summary judgment, but on the in limine determination of the admissibility of Mr. Ehrlich's opinions. And his last-quoted opinion on materiality, that mixed question of law and fact, manages in a single sentence to both usurp the trial judge's function of instructing the jury on the law and tell the jury what result to reach on the facts: a breathtaking tour de force of inadmissibility.
This does not mean that Mr. Ehrlich has no useful and admissible opinion testimony to offer to a jury. In Marx, the Second Circuit observed that a witness qualified as an expert in securities regulation was "competent to explain to the jury the step-by-step practices ordinarily followed by lawyers and corporations in shepherding a registration statement through the SEC." 550 F.2d at 508-509. However, the court of appeals held that the district court erred in permitting the witness to give "his opinion on the legal standards which he believed to be derived from the contract at issue and which should have governed the defendant's conduct." Id. at 510.
In the case at bar, an expert witness could conceivably help the jury in understanding the practices ordinarily followed by creditors in determining whether to extend credit to an apparel manufacturer or any unfamiliar terms and concepts involved in such a decision, see Bilzerian, 926 F.2d at 1294. However, it is apparent, from Mr. Ehrlich's report in its present form, that testimony derived from it would merely tell the jury what decision to reach and therefore exceeds the scope of permissible opinion testimony under the Federal Rules of Evidence.
While Mr. Ehrlich's proffered opinions offer some generalized insights into the financial information creditors focus upon in evaluating the creditworthiness of a company, for the most part his report opinions simply accept as true the alleged facts forming the basis of Feinberg's fraud claim, opines impermissibly that the omitted information was material, and offers the equally impermissible factual conclusion that creditors would have denied credit to I. Appel if they had been furnished with the information.
Mr. Ehrlich's report and opinions offer no explanation as to how an apparel manufacturer's domestic plant closings factor into a creditor's decision to extend credit to that company or why such information would be important to a creditor, instead he simply concludes that the failure to disclose the plant closings on the company's financial statements is "material":
These omissions [the closing of domestic manufacturing operations and the costs associated with such closings] from the financial statements are material, and it is my opinion that had this information been available, many if not all of the creditors using these financial statements would not have issued credit to the company.
Ehrlich Report at 6. At trial, the Court, and not a witness, will instruct the jury on the law of materiality.
Mr. Ehrlich also states that he read testimony which discussed Stephen Katz's alleged creation of "dummy invoices indicating that [I. Appel] had made phantom purchases from Guilford Mills." On the basis of that testimony, Mr. Ehrlich opines that "this is an indication of lack of internal control" and "had this lack of internal control been reported to the credit community many if not all of the creditors would have denied additional credit to the company." Ehrlich Report at 7. Mr. Ehrlich further opines that:
I Appel Corp. issued financial statements of December 31, 1995 and subsequent projections that did not indicate how financially weak they were. Thus many factors and other credit services as well as individual creditors issued credit to an entity that was not credit worthy. It is my opinion that had the credit community been presented the correct financial statements and projections they would not have issued credit to the company.Id.
As defendants' brief correctly points out, Mr. Ehrlich's testimony does nothing more than express his judgment on the extent to which creditors would have relied on certain information had it been given to them. The proffered testimony encompasses a legal conclusion — concluding that the reliance element of plaintiff's fraud claim has been established — based upon the facts of the case. But these issues are for the jury. Marx, 550 F.2d at 510 ("It is for the jury to evaluate the facts in light of the applicable rule of law, and it is therefore erroneous for a witness to state his opinion on the law of the forum."). The proposed testimony in Mr. Ehlrich's report is in sharp contrast to the expert professor's testimony in Bilzerian, which did not reach any legal conclusions, but instead furnished the jury with background information "concerning the meaning of terms, the procedures which are followed [in filing a Schedule 13D form] and his opinion as to the reason for these procedures." 926 F.2d at 1295.
In support of his argument that Mr. Ehrlich's testimony does not encroach upon the province of the jury, plaintiff points to Duncan. As discussed supra, in that case the court admitted the expert testimony over the plaintiff's objection, in part because the witness "did not couch his opinions in terms that derived their definitions from judicial interpretation," 42 F.3d at 101, a claim that the Erhrlich opinions cannot make. Duncan is distinguishable from the case at bar because, unlike the witness in that case, it is clear from Mr. Ehrlich's report (stating that the alleged omissions and misrepresentations at issue are "material" and that creditors would have declined to extend credit to the company had they received the information) that he is applying legal principles to the facts of the case. This type of expert testimony must be precluded, as it has crossed the line between a permissible conclusion as to an ultimate issue of fact and an impermissible legal conclusion.
Kidder, Peabody, 14 F.Supp.2d at 391, is closely analogous. Defendant IAG counterclaimed against plaintiff Kidder, Peabody for malicious prosecution and abuse of process (Kidder having attached IAG's property when filing its complaint). Plaintiff responded that it had relied upon the advice of outside counsel in procuring the attachment. The case turned upon "the reasonableness of a client relying upon the advice of an attorney retained to render such advice and whether the client did so in good faith after making full disclosure." Id. at 394. Kidder sought to call as an expert witness the formidable Professor Arthur Miller of Harvard Law School to express his opinion that Kidder and its outside counsel both "reasonably believed" that Kidder's claim against IAG for breach of contract justified the attachment. In the course of my opinion precluding Professor Miller from testifying, I said:
To the extent that Professor Miller would seek to opine before the jury that Kidder acted reasonably and in good faith — as he argues at length in his written report — the overwhelming weight of Second Circuit authority precludes expert testimony about these issues. Whether a party acted with objective reasonableness is a quintessential common law jury question.Id. at 404.
So too in the case at bar: the jury will decide whether an objectively reasonable creditor of I. Apel would have refused credit to the company if the company had included in its financial statements the nformation plaintiff aserts was fraudulently omitted. What a reasonable creditor would have done in that circumstance is equally "a quintessential common law jury question." Moreover, the core question — "if a creditor had known that, would he have loaned the company money?" — does not take jurors into esoteric areas beyond their common experience. It is likely that most jurors, disregarding Polonius's advice to Laertes, have at some time in their lives loaned or borrowed money to or from someone else. It is for the jury to find, and not for an expert to opine, whether an objectively reasonable creditor would have loaned money to I. Apel if the creditor had known the omitted information.
"Neither a borrower, nor a lender be." William Shakespeare, Hamlet act 1, sc. 3.
V. CONCLUSION
For the foregoing reasons, the opinions of Mr. Ehrlich as expressed in his report are inadmissible. The defendants' motion to preclude them is granted.
The Court's holding makes it unnecessary to consider defendants' contentions that Mr. Ehrlich's testimony is based on faulty assumptions. I note, however, that the factual basis of an expert's opinion goes to the credibility of the testimony, not the admissibility. It is up to opposing counsel to examine the factual basis for the opinion in cross examination. As the Supreme Court has explained, "vigorous cross-examination, presentation of contrary evidence, and careful instruction on the burden of proof are the traditional and appropriate means of attacking shaky but admissible evidence." Daubert, 509 U.S. at 596.
It is SO ORDERED.